The bagging of the lowest price bid by the Company for execution of new projects is not in the ordinary course of business and would be deemed to be a price sensitive information.

[Case Brief] Mr. G. Bala Reddy and Ors. vs Securities and Exchange Board of India

Case name Mr. G. Bala Reddy and Ors. vs Securities and Exchange Board of India 
Case number Appeal No. 509 of 2015
Court Securities Appellate Tribunal 
Coram  Justice Tarun Agarwala, Presiding Officer
Dr. C.K.G. Nair, Member
Justice M.T. Joshi, Judicial Member
Decided on  July 12, 2019 
Relevant Act/Sections Regulation 2(ha) read with Regulation 2(k) of SEBI (Prohibition of Insider Trading (“PIT”)) Regulations, 1992,  Regulations 3 and 4 of the PIT Regulations, 1992
Author of the case brief Shubhi Maheshwari

BRIEF FACTS AND PROCEDURAL HISTORY

On March 18, 2009, ICSA (India) Limited made a corporate announcement at NSE and BSE to the effect that the company had secured work orders for a total contract value of Rupees 464.17 Crore.

Investigation made by SEBI indicated that certain entities bought a large number of shares in February 2009 a few days prior to the announcement made by the company and that all the appellants were somehow related in one way or the other and indulged in insider trading based on the unpublished price sensitive information (“UPSI”). Accordingly, a show cause notice was issued indicating that the appellants gave misleading information with regard to the relationship between the appellants. The notice further indicated that the appellants gave misleading information with regard to the relationship amongst the appellants. Moreover, some of the appellants did not declare the shares pledged by them.

The Adjudicating Officer (“AO”) after considering the evidence had found that the appellants were connected persons and were a homogeneous group. The AO further found that the company’s lowest price bid was a price sensitive information as per Regulation 2(ha)(iv) of the PIT Regulations, 1992 and Regulation 2(a) of the PIT Regulations, 1992.

ISSUE

  1. Whether being the lowest bidder of a contract is the usual course of business and whether the lowest bid amounts to a UPSI.
  2. Whether persons who are not promoters of the company neither are part of the promoter group of the company have to disclose the shares pledged by them as collateral for the loans availed by them under Regulation 8A of the Takeover Regulations, 1997.

ARGUMENTS OF APPELLANT

The appellants have not violated the provisions of the PIT Regulations, 1992 read with section 12A of the SEBI Act since the work orders which the company had procured was in the ordinary course of business and, in any case, when the shares were purchased, the company had not bagged the contract and was only found to be the lowest price bidder (“L1”).

It was thus contended, that being the lowest price bidder did not mean that the contract was issued in favour of the company. The appellants did not dispute that they were connected persons. What was contested was, that being the lowest bidder of a contract in the usual course of business does not amount to a price sensitive information. Further, the lowest price bid being in the public domain cannot be an unpublished price sensitive information under the PIT Regulations, 1992.

The shares pledged as collateral for the loans by the persons not being the promoters of the company and neither is a part of the promoter group of the company could not have been disclosed under Regulation 8A of the Takeover Regulations, 1997. It was contended that the requirement of disclosure under Regulation 8A of the Takeover Regulations, 1997 is on the promoter or the promoter group. Therefore, the imposition of a penalty for non-disclosure under Regulation 8A was wholly illegal and without any authority of law.

DECISION

A perusal of Regulation 2(ha) defining price sensitive information indicates that any information which relates directly or indirectly to a company and which if published is likely to affect the price of the securities then such information would be deemed to be a price sensitive information. Further clause (iv) of the Explanation to Regulation 2(ha) of the PIT Regulations, 1992 provides that execution of new projects would be deemed to be a price sensitive information.

The definition of “unpublished” as defined under Regulation 2(k) has a definite connotation to mean information which has not been published by the company or its agent and is not specific in nature. Therefore, the bagging of the contract was announced by the company only on the stock exchange platform on March 18, 2019. Prior to that the company had not published nor made any corporate announcements of this information. The opening of the bids by a third party does not amount to information being published by the company or its agent under Regulation 2(k). Thus, the contention that the opening of the bids in which the company was found to be the lowest bidder came in the public domain was held to be incorrect and it could not be construed as being published.

It was further held that the Appellant had specific information about the company’s bid being the lowest. Being L1, the company through the Appellant was called for further negotiation. In two out of three contracts, the Board approved the L1 after negotiation around the time when the shares were purchased. Thus, being L1 coupled with the fact that the bids were approved by the Board was a price sensitive information.

The Appellant purchased the shares through a circuitous measure by funding the amount to Appellant Nos. 3 and 4 from the Appellant Nos. 5 and 6 in which he was a Promoter. Appellant No. 1 eventually benefitted from the sale of these shares.

It was further noted that the Appellant was an insider and it was incumbent upon him not to deal in the scrip of the company, whether directly or directly so long as the information about the contract remained unpublished. Thus, even though the contract was not awarded nor the letter of intent was given at the time of purchase of the shares, nonetheless, being L1, the same was a price sensitive information in so far as the Appellant was concerned. Therefore the appellant was held to be guilty of insider trading since he traded in the scrips of the Company through other persons.

Further, Regulation 8A specifically requires a promoter or every person forming part of the promoter group of the company to disclose the details of the pledging of their shares of the company. It was therefore held that the persons who are not promoters of the company nor are part of the promoter group, they cannot be held liable for violation of Regulation 8A of the Takeover Regulations. Thus, the bagging of the lowest price bid by the Company for the execution of new projects is not in the ordinary course of business and would be deemed to be a price sensitive information.

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