Insider Trading: Information On Winning A Contract Is 'Material', Says SAT
Being aware that the tender of a company is the lowest and it's likely to win the bid will be considered "material information" in insider trading cases, according to the Securities Appellate Tribunal.
The appellate tribunal was hearing an appeal against the order of the Securities and Exchange Board of India. The market regulator had asked the managing director and promoter of Deep Industries Ltd., an oil and gas production and drilling company, to disgorge around Rs 1.74 crore for purchasing shares while in possession of information about contracts likely to be awarded to the company.
The Contracts In Question
The SEBI order was passed after an investigation of three contracts handed to the company by Oil and Natural Gas Corp. Ltd.:
A Rs 86.03 crore contract executed in September 2015.
A Rs 2.72 crore contract awarded in August 2015.
A Rs 90.33 crore contract awarded in October 2015.
The managing director of Deep Industries purchased shares of the company once in August 2015 and twice in September 2015.
The SEBI investigation found that details about the contracts were unpublished price-sensitive information between July 2015 and October 2015, when the L1 (the lowest bid) was declared.
The market regulator found the official guilty of insider trading and directed him to return wrongful gains of around Rs 1.74 crore. SEBI also barred the MD from accessing the securities market for six months.
He filed an appeal with the Securities Appellate Tribunal.
Information Relating To Contract Is Material: SAT
SEBI regulations define an insider as someone who is a "connected person" or someone in possession of unpublished price-sensitive information.
The appellate tribunal noted that a managing director and promoter who purchased shares in a company will be an insider. He had personal information that the tender given by the company was the lowest and, in all probability, the contracts would be awarded, said the appellate tribunal.
The appellate tribunal order also referred to Schedule III of SEBI (Listing Obligations and Disclosure Requirements). These require every listed entity to make disclosure of any information which the board considers as material.
Part B of Schedule III indicates that awarding or bagging of a contract is a material event, the tribunal said.
Once the company has taken a position to hold that bagging of contract is a material event, it does not lie in the mouth of the appellant to contend that the disclosure of a contract on the stock exchange platform was not a material event.Order by the Securities Appellate Tribunal
The SAT order found that Deep Industries’ MD purchased 1,79,510 shares of the company during the period when the information was considered to be unpublished price-sensitive information.
The tribunal found it a gross violation of Regulation 4 of the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015, that bars insiders from trading in securities when in possession of price-sensitive information.
Information likely to materially affect the price of securities will include information relating to a contract, the appellate tribunal held. According to SAT, the MD was aware that the company’s tender was found to be the lowest, and this information was price-sensitive.
The SAT did not delve on the petitioners' argument regarding the value of the contract and whether it had any bearing with the annual turnover, which could have led to an inference that such information was price-sensitive.
The appellate tribunal upheld the SEBI order and dismissed the appeal.