In order to boost investor confidence and foster transparency in the securities market, the Securities Exchange Board of India (“SEBI”) established the foundation for insider trading regime by notifying SEBI (Prohibition of Insider Trading) Regulations, 2015 (“PIT Regulations”). Since then, the market regulator has actively sought to bring in objectivity and consistency in the regulations through substantial amendments in 2018 and 2020. Primarily, the changes introduced in 2018 enhanced the definitional scope of unpublished price sensitive information (“UPSI”), connected person and insider. Consequently, the latest amendments introduced in 2020 seeks to enhance digital structure database for storing UPSI, modifies disclosure mandates with respect to violations of PIT and introduced additional transactional mechanism as an exception to trading window restrictions. Our previous posts on insider trading regulations can be accessed here, here and here. This post discusses the key principles of insider trading propounded by SEBI in the matter of Future Retail Limited.
On February 3, 2021, SEBI barred the Future Group CEO, Mr. Kishore Biyani and his brother Mr. Anil Biyani from accessing the securities market for a year after investigating insider trading in shares of its retail firm Future Retail Limited (“FRL”) in 2017. The market regulator in its order held that both Mr. Kishore Biyani and Mr. Anil Biyani traded in shares of FRL through a group company on the basis of UPSI before demerger of its home retail business into a separate entity called Praxis Home Retail Private Limited, which was initially operated through Future group’s HomeTown Stores. According to SEBI’s order, the demerger was expected to have a positive impact on FRL’s share price.
Primarily, the order broadly revolves around one question- when did UPSI come into existence and whether the information was “price sensitive” in nature. SEBI has carved out detailed explanations to the definition of “insider” and “connected person” under the PIT Regulations. Further, it also emphasises on disclosure mandates under SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR”).
The key issues and principles discussed in the order are as follows:
Definition of Insider
Section 12 A(d) of SEBI Act r/w regulation 4(1) of PIT Regulations prohibits a person from directly or indirectly engaging into insider trading or trading in securities that are listed or proposed to be listed on a stock exchange when in possession of unpublished price sensitive information. In this regard, SEBI propounded that the word used “indulge” in section 12A (d) of SEBI Act is of wide import. The clause seeks to prohibit any assistance or aiding of insider trading, by any person either directly or indirectly. Moreover, regulation 4(2) provides that if the “insider”, as envisaged under regulation 4(1), is a connected person then the onus of establishing that he was not in possession of UPSI, shall be on such connected persons and in other cases, the onus would be on SEBI. The corresponding note to regulation 4(1) clarifies that when a person trades in securities when in possession of UPSI, his trades would be presumed to have been motivated by the knowledge and awareness of such UPSI in his possession.
Determination of UPSI
Regulation 2(1)(n) of PIT Regulations defines UPSI. FRL contended that restructuring of HomeTown business (de-merger) does not qualify as UPSI as the information was widely published and generally available. Moreover, it was also disclosed on the website of BSE and NSE, nonetheless the information was considered to be UPSI before its disclosure. FRL also submitted that information was not price sensitive as HomeTown’s business constituted a significantly small portion of FRL’s overall business. In this regard, SEBI held that in terms of regulation 2(1)(n)(iv) of PIT Regulations, 2015 information relating to mergers, de-mergers, acquisitions, delistings, disposals and expansion of business and such other transactions, is per se treated as UPSI.
Interpretation of “generally available information”
In extension to definition of UPSI, SEBI analysed what would constitute of “generally available information”. A perusal of the definition of “generally available information” (Regulation 2(1)(e) of PIT) shows that an information which is accessible to the public on non-discriminatory basis, is termed as “generally available information”. The note to Regulation 2(1)(e), provides that information published on the website of a stock exchange would ordinarily be considered as generally available information. In this regard, due consideration has been given to disclosure mandates of a listed company. Regulation 30 of LODR also requires making of prompt disclosure of material events as specified in Schedule III of LODR. Events mentioned in the said Schedule III includes many price sensitive events as well. In fact, the definition of UPSI, as given under Regulation 2(1)(n) of PIT Regulations, 2015, at the relevant time (back in 2017), also enumerates “material events in accordance with the listing agreement” as one of the event, information pertaining to which would constitute UPSI. A perusal of Regulation 30 shows that the disclosures mandated thereunder are required to be made by the listed company to the stock exchange.
Price sensitivity
The disclosure was made by FRL to the stock exchanges on April 20, 2017 after crystallisation of same in the form of the decision of the board of FRL. An information can be termed as UPSI if it is generally available in the form along with material particulars in which it was disclosed to stock exchanges. To explain it further, price sensitivity of information pertaining to an event may change as the event proceeds to advance stages of consummation. Therefore, the ultimate objective may be the same, however, at each stage of development a degree of price sensitivity may be added to it by the information relating to its development. Thus, in order to contend that a particular price sensitive information was “generally available” and thus, it is not UPSI, it has to be proven that it was generally available in a non-discriminatory manner, in the same form along with all material particulars, in which it has been disclosed to stock exchange as UPSI, in terms of either PIT Regulations, 2015 or LODR Regulations. Regulation 30(7) of LODR mandates disclosure for each stage of material development of an event. The logic behind the same is that each stage has an element of price sensitivity attached to it. This logic contemplated under Regulation 30(7) for mandating post announcement material development also applies to pre-announcement developments from the date of coming into existence of UPSI and till its actual disclosure to the stock exchanges.
Interpretation of the term “ordinary” in the definition of UPSI
The word “ordinary” can be interpreted to mean that only those events which by virtue of inclusive nature of the definition of UPSI as given under Regulation 2(1)(n) of the PIT Regulations, get included in the said definition, are open to attack on the ground of “general availability” as well as “price sensitivity” and not the events which are enlisted in the said definition as per se UPSI. Thus, as per the definition, information pertaining to specific events enumerated in the definition of UPSI, are not open to attack on the ground that such an information is not price sensitive and that it is only likelihood of material effect on the price and not the actual effect which is relevant to determine price sensitivity of an information.
Connected persons
It is noteworthy to mention that the manner of association mentioned in Regulation 2(1)(d)(i) are only illustrative and not exhaustive of the manner of association, as the word used in Regulation 2(1)(d)(i) is inclusive. Association with the company that allows or is reasonably expected to allow access to UPSI, is the underlying fundamental principle, under Regulation 2(1)(d)(i), for terming a person as connected person. Once a person is found to be a “connected person” then by virtue of Regulation 2(1)(g)(i) such person becomes “insider”. When a connected person is charged with violation of Regulation 4(1) of PIT Regulations i.e. trading by insider when in possession of UPSI, then by virtue of Regulation 4(2) of PIT Regulations, there is a presumption against such connected person that he has traded when in possession of UPSI and the burden of proving that such connected person was not in possession of UPSI at the time of his trades, is on such connected person. The underlying fundamental principle under the definition of connected person, as given under Regulation 2(1)(d)(i), is the direct or indirect association with the company in the ways mentioned therein like frequent communication with the officers of the company.
Immediate Relative
In terms of Regulation 2(1)(f), mere existence of relationship is not sufficient to term a person as “immediate relative” unless there is financial dependence and/or consultation in financial matters.
Reporting Matrix
A Trust was set up by FRL to administer the ESOP plan – as a means to provide an incentive to attract, retain and reward employees performing services for FRL and for motivating such employees to contribute to the growth and profitability. The decision makers of the trust were the company secretary and CFO of FRL. Both of them were KMP of FRL and would report and work under supervision of Mr. Kishore Biyani. Hence, owing to the reporting matrix it was held that the Trust was indirectly a connected person within the meaning of PIT Regulations.
Non-Individual Insiders
FRL and the Trust are non-individual insiders. A company being a juristic person is answerable for its act. However, the PIT Regulations itself provides that in case of non-individual insiders, with respect to an allegation of violation of Regulation 4(1), a defence can be taken by such insiders that persons who took trading decisions and the person who were in possession of UPSI, were the different persons. In the instant case, Mr. Kishore Biyani and Mr. Anil Biyani were holding 32% and 15% beneficial interests respectively in FRL and were taking decisions for the trades on behalf of FRL. Similarly, with respect to the Trust, the decision to undertake trade was taken by Company Secretary and CFO under the instructions of Mr. Kishore Biyani. Hence, there was an indirect control of Mr. Kishore Biyani over trading undertaken by the Trust and it was based on his procurement of UPSI.
Creeping Acquisition under SAST is no defence to contravene PIT Regulations
A particular acquisition is within the creeping acquisition limit provided under Regulation 3(2) of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“SAST”) exempts the acquisition from making of public announcement to acquire further shares in the target company from the public shareholders of the target company. It does not exonerate the acquirer who is an insider from the liability for violation of Regulation 4(1) of PIT Regulations if the acquisition of shares was made by the acquirer when in possession of the UPSI.
Lifting of Corporate Veil
Based on the order passed by Hon’ble SAT in Amalendu Mukherjee v. SEBI, it was upheld that corporate veil can be lifted to find out the decision maker behind a juristic person. In the instant case, Mr. Kishore Biyani and Mr. Anil Biyani authorised transfer of funds to Indiabulls for purchase of shares of FRL in the name of the company itself.
SEBI has relied on circumstantial evidence to show that there has been flow of UPSI among connected persons which resulted into trades of the company’s securities.
As per public sources, Future Group is most likely to prefer an appeal against the order passed by the market regulator on account of being untenable in law. It will be interesting to see if SEBI’s painstaking work of four years will yield fruition.
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