The Adjudicating Officer (AO), SEBI issued an order dated December 02, 2016 in respect of Mr. Sanjay Gala (Noticee) in the matter of Navneet Publication India Ltd, holding that the Noticee was not guilty of insider trading under the SEBI (Prohibition of Insider Trading) Regulations, 1992. Regulation 3 prohibited an insider from dealing in securities of a company listed on a stock exchange when in possession of unpublished price sensitive information (UPSI) and Regulation 4 stated that any insider who dealt with securities in contravention of Regulation 3 would be guilty of insider trading.

In this case, the managing director and other members of the promoter family had a discussion regarding issue of bonus shares by the company, before the formal announcement by the company, which amounted to UPSI. The Noticee, a person connected to the promoters, had traded during the UPSI period. If an insider trades in securities of a listed company, it would be presumed that he traded on the basis of the UPSI in his possession, unless he establishes to the contrary. In this case, the Noticee discharged the burden and proved that he was not a part of the deliberations, that he had invested in the scrip as a genuine investor and that he had no access to UPSI. The AO held that the prohibition in Regulation 3 applies only when the insider trades on the basis of UPSI and not otherwise, and concluded that in the instant case the trades were not induced by UPSI.

This case highlights and reiterates the position that a grave charge such as insider trading requires a higher degree of preponderance of probabilities. Further, although the standard of prohibition under the 1992 Regulations was ‘in possession of’, both SAT and SEBI have been reading it to mean a standard of ‘on the basis of’. This standard appears to have been read into the PIT Regulations from Section 15G of the SEBI Act, 1992, which penalises an insider that deals in securities of a listed company on the basis of any UPSI. In other words, for insider trading to have taken place, the trades in question should have been motivated by the UPSI in possession of the insider. This would help protect insiders who, although in possession of UPSI, may execute trades to meet genuine emergencies.