Mumbai: The Securities and Exchange Board of India’s Friday order revoking penalties and trading restrictions on seven people accused in a case of insider trading in the stock of Multi Commodity Exchange Ltd (MCX) has an interesting side note: The markets regulator considered a news article published in a business daily to classify the information as public thereby ruling that the seven people did not trade on the basis of inside information. Lawyers fear that this wide definition of public information could set a bad precedence.
On 2 August, Sebi had passed an interim order against former and current MCX and Financial Technologies India Ltd (FTIL) employees alleging that they traded in the stocks of FTIL and MCX based on inside information and averted losses of Rs85 crore. The order said that the unpublished price sensitive information was a department of consumer affairs showcause notice issued to National Spot Exchange Ltd on 27 April 2012 threatening its suspension.
The department further issued an order on 31 July 2013 suspending all spot contracts. It turned out to be a Rs5,574 crore payments scam that busted an exchange for the first time in India. It led to losses for 13,000 investors. The interim order ruled that the 27 April 2012 showcause notice to NSEL was insider information.
However, in its final order, Sebi considered an article published in the Economic Times on 3 October 2012 detailing the showcause notice as public information.
A reader of that article could have “deduced the implication" of the showcause notice, wrote Madhabi Puri Buch, whole time member, Sebi in the 58 page order.
“In my view, the newspaper article was not speculative in nature as it published precise facts relating to the issuance of SCN (showcause notice) and also brought out specific contents of the SCN summarizing the allegations levelled against NSEL and the possible consequences thereof," she wrote.
“The order takes note of the specific facts of the case to correctly conclude that the charge made out by Sebi earlier was not sustainable. Sebi’s stance earlier had been that the issuance and implications of a showcause notice was price-sensitive. This was belied by the fact that full information about the notice was well published and available in the public domain, which meant that the information did not remain unpublished," said Somasekhar Sundaresan, counsel or Paras Ajmera (one of the acquitted ex-MCX official).
However, Sumit Agrawal of Suvan Law Advisors says that published information should ideally be on the stock exchange platform.
“The legal principle would be the sanctity of the platform of stock exchange versus another platform like a newspaper or an internet blog," said Agrawal, partner at Suvan Law and an ex-Sebi official.
Another insider trading “which is pending in Supreme Court, has the same issue," said Agarwal.
The Supreme Court is yet to pass an order whether speculative news reports in case of the Hindustan Lever Ltd and Brooke Bond Lipton India Ltd should be considered as published information.
“The Securities Appellate Tribunal and ministry of finance held that for information to be generally known, it is not required to be confirmed or authenticated by the company as it would otherwise fall under the category of information published by the company," said Agrawal.
Agrawal is referring to a two decade old case involving HLLs purchase of 8 lakh shares of BBLIL two weeks prior to the public announcement of the merger of the two companies (HLL and BBLIL) in 1997. In March 1998 ,Sebi passed an order charging HLL with insider trading.
Subsequently, a parallel hearing happened at ministry of finance and the Appellate. The Appellate ruled that there was no insider trading and cited press reports that indicated “prior market knowledge of the merger." The Appellate had cited 21 news reports to support the contention that the prospect of a merger between HLL and BBLIL was widely known.
According to Agrawal a blanket approach would set a dangerous precedence.
“There was one case at Sebi where promoters of a large listed NBFC (non-banking financial company) before the formal receipt of letter of their cancellation of licence sold their shares after planting a newspaper article in a vernacular newspaper. In those cases, it should not be considered published and a blanket interpretation would lead to misuse," Agrawal explained.