Insider-trading disgorgement may include notional gains on shares retained by the trader.

SEBI investigated trading in the scrip of Kushal Limited for the period 1 January 2016 to 12 July 2018 following a complaint against the company.

The company announced on 5 December 2017 that its Board would meet on 14 December 2017 to consider the second interim dividend and unaudited financial results for the quarter and half-year ended 30 September 2017; the trading window was closed from 5 to 16 December 2017.

The appellants were members of the promoter-family group: Sandeep was the Managing Director, Manoj the Executive Director, and the remaining appellants were their close relatives.

Namrata, Sandeep, Sudha and Pushpadevi purchased substantial quantities of Kushal Limited shares between 22 November and 4 December 2017.

SEBI alleged that the purchases were made while the information concerning the company’s financial results and interim dividend remained unpublished, and that Sandeep and Manoj communicated the unpublished price sensitive information (“UPSI”) to the other appellants.

The Whole-Time Member of SEBI directed disgorgement of the notional gains, imposed monetary penalties, prohibited the appellants from accessing the securities market for one year, and restrained them from dealing in Kushal Limited’s scrip for two years.

The appellants challenged that order under Section 15T of the Securities and Exchange Board of India Act, 1992.

Whether the appellants’ purchases between 22 November and 4 December 2017 were made during a period when information relating to the company’s financial results and interim dividend constituted UPSI under the PIT Regulations?

Whether the appellants were connected persons or immediate relatives presumed to have possessed or received UPSI, and whether the communication of UPSI among them was established?

Whether SEBI correctly calculated disgorgement on the basis of notional gains by valuing the shares at the closing price on 15 December 2017?

Whether the penalties and market-access restrictions imposed by SEBI were proportionate and legally sustainable?

The Tribunal applied Regulation 2(1)(n) of the SEBI (Prohibition of Insider Trading) Regulations, 2015, under which UPSI means information relating directly or indirectly to a company or its securities that is not generally available and is likely materially to affect the securities’ price upon becoming generally available; financial results and dividends are expressly included.

Regulation 33(3)(a) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 requires quarterly financial results to be submitted within 45 days, which in this case expired on 14 November 2017.

The Tribunal also applied the definitions of “connected person” and “immediate relative” under Regulations 2(1)(d)(i) and 2(1)(d)(ii) of the PIT Regulations.

For penalty, Section 15J of the SEBI Act requires consideration of disproportionate gain or unfair advantage, loss caused to investors, and the repetitive nature of the default.

On disgorgement, the Tribunal relied on Dushyant N. Dalal v. SEBI and Top Class Capital Markets Private Limited v. SEBI , which recognise that disgorgement may be calculated on the basis of notional gains and that such equitable calculation is permissible even where the securities have not been sold.

The Tribunal rejected the appellants’ submission that the UPSI began only on 5 December 2017.

Although the company did not maintain a precise chronology of the preparation and finalisation of its financial results, it admitted that the relevant activities occurred seven to ten days before the respective Board meetings.

The minutes of the 13 November 2017 Board meeting recorded the Chairman’s statement that the company expected good profits and the declaration of the first interim dividend, demonstrating that the management possessed material information concerning the company’s financial performance by that date.

Since the appellants purchased shares after 13 November and before the disclosure of the second interim dividend on 14 December 2017, the Tribunal held that the UPSI period ran from 13 November to 14 December 2017.

The purchasers were the Managing Director, his wife, his mother and his brother’s dependent wife; the fund transfers from Manoj and Mahendra to the purchasing relatives further supported the finding of communication and coordinated trading.

The Tribunal therefore upheld SEBI’s finding that the trades occurred during the UPSI period.

It also upheld the notional-gain computation using the 15 December 2017 closing price of ₹143.05, since the second interim dividend was disclosed after market hours on 14 December and the price rose when the market opened the next day.

For penalties, the Tribunal noted that the appellants’ disproportionate gain was quantifiable, while no specific investor loss or repetitive default had been established; nevertheless, given the communication of UPSI and the coordinated family transactions, it found no error in the penalties imposed.

The one-year market-access debarment and two-year restraint from dealing in Kushal Limited’s scrip were likewise sustained.

It held that the UPSI period commenced on 13 November 2017 and ended on 14 December 2017, and that the purchases made during this period by the appellants’ close family members were insider trades based on communicated UPSI.

The disgorgement based on notional gains, the monetary penalties, the one-year prohibition on accessing the securities market, and the two-year restraint on dealing in Kushal Limited’s scrip were upheld.

All six appeals were dismissed; pending interlocutory applications, if any, were disposed of, with no order as to costs.