Is Kishore Biyani’s Appeal Against SEBI Order Likely To Hold Up?

It’s been a mixed last few days for Future Group promoter Kishore Biyani.

The scheme of arrangement of his flagship company Future Retail Ltd. has been allowed to move forward by the Delhi High Court. But for another three-year-old scheme involving Future Retail, Biyani is facing insider trading allegations.

Market regulator SEBI has found that Kishore Biyani and his brother Anil Biyani authorised trades based on unpublished price sensitive information. Both the Biyanis and the entities which carried out the trades have contested the Securities and Exchange Board of India’s conclusion that the information was UPSI.

In the coming weeks, the Securities Appellate Tribunal will have to determine if speculative media reports and coverage in reports of equity research houses impact the existence of unpublished price sensitive information.

If the facts are as established by the regulator, it’s hard to argue with the order, Umakanth Varottil, associate professor of Law at the National University of Singapore, said. “But the point of law this case has thrown up is whether UPSI can be disclosed only on the stock exchanges or via other means as well under the insider trading regulations.”

SEBI’s Case

SEBI’s order pertains to trading in Future Retail’s shares prior to a scheme of arrangement announcement on April 20, 2017. The scheme of arrangement was between Future Retail, Bluerock eServices, Praxis Home Retail and their respective shareholders. It resulted in demerger of certain business from Future Retail. It was expected to have a positive impact on Future Retail’s share price, according to the order.

As per the order:

Feb. 28, 2017: The Economic Times reported Future Group’s plan to sell home furnishings business HomeTown, shut sportswear arm Planet Sports and merge stores of electronics chain E-zone with supermarket Big Bazaar.
March 7, 2017: Future Retail told the stock exchanges that its board had given in-principle authority for considering various options with regards to HomeTown format but no final understanding has been arrived at.
March 10, 2017: Preliminary discussion for the scheme was carried out.
March 14, 2017: Future Retail created a team to work on the scheme.
April 20, 2017: Scheme was announced to the stock exchanges.

Based on this timeline, the period of UPSI was identified as March 10-April 20, 2017 by SEBI.

According to the regulator’s order, Kishore Biyani and his brother Anil Biyani, while in possession of UPSI, had authorised Future Corporate Resources and FCRL Employee Welfare Trust to trade in Future Retail’s shares during this period.

Both the Biyanis and Future Corporate have been directed to jointly disgorge an amount of Rs 17.78 crore, along with interest. An additional disgorgement of Rs 2.75 crore is to be jointly paid by Future Corporate Resources and FCRL Employee Welfare Trust.

Case Hinges On When UPSI Came Into Existence

Biyanis and others have countered SEBI’s allegations in the order saying the information did not qualify as UPSI as it was widely published and generally available. They’ve stated:

Most of the news coverage on the transaction emanated from Kishore Biyani’s interviews and statements.
Information was fairly specific, in that they had references to the HomeTown business, including specific references to demerging the FabFurnish and HomeTown business into a new listed company.
The likelihood of the transaction was also widely covered in reports issued by various equity research houses.

But SEBI has dismissed these arguments saying the information was very fluid and nebulous as it was bereft of specific details as to how this restructuring will ultimately be executed. Also, one of the most important detail to determine price sensitivity of the information, that is, consideration to be received by Future Retail’s shareholders and in what proportion of their existing shareholding, was not available in these interviews or news reports.

It might be difficult to sustain the argument that the information was published, especially since on March 7 Future Retail told the stock exchanges that the transaction is still under discussion, Varottil said.

But the regulator has also indicated in its order that the disclosure can be made only through stock exchanges, that is probably not the case, he said.

The insider trading regulations say it has to “ordinarily” be via stock exchanges but that is not the only way. The second point is — what is the extent of the disclosure, and whether that includes material information? If in several media interviews, the transaction and its details are disclosed, the information should cease to be UPSI.

Umakanth Varottil, Associate Professor of Law, National University of Singapore

In this particular case, Varottil said, the disclosures were inconsistent and there’s nothing wrong with that since these conversations are dynamic. “But it’s the trading on the basis of this information that is not permitted.”

Satish Kishanchandani, managing partner at Pioneer Legal, agreed but also pointed to an observation in the regulator’s order as problematic.

SEBI’s observation that the developments in relation to the scheme of arrangement came into existence on March 10, 2017 is worrisome since on this date, nothing was concrete or reasonably certain, Kishanchandani said.

In its order, SEBI has observed that, “The logic behind mandating disclosure under LODR regulations, for each stage of material development of an event, is that each stage of material development has price sensitivity attached to it. This logic for mandating post announcement material development also applies to preannouncement developments from the date of coming into existence of UPSI and till its actual disclosure to the stock exchanges.”

Listed companies generally do not make disclosures at a preliminary stage since this only involves certain discussions around those events and may not lead to a material event which will require disclosure under SEBI regulations.

Satish Kishanchandani, Managing Partner, Pioneer Legal

In the current case, if the disclosure was made on March 10, 2017 and the scheme hadn’t gone through, it would have led to a price fluctuation in the share prices of the company, Kishanchandani added.

The Carve-Out: Future-Reliance Retail Deal

Biyani and others have been restrained from accessing the securities market for a year and from trading in Future Retail’s shares for two years. But SEBI has specified that its order will not impede the proposed scheme of arrangement between several Future Group entities, led by Future Retail with Reliance Retail Ventures Ltd.

The carve out for the scheme of arrangement seems a bit obvious considering the Future Retail-Reliance Retail deal, Kishanchandani said. It appears like the regulator is thinking that it would be fair to treat the company and its promoter shareholder separately for the purposes of the impending deal with Reliance, he added.

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