Insider is either a 'connected person' or person having access to UPSI: Insider Trading Regulations 2015

Insider is either a 'connected person' or person having access to UPSI: Insider Trading Regulations 2015

In the present case, it was found that the Noticee was in possession of the UPSI when he traded in the scrip of Divi's on July 10, 2017 at 9:15 am before it was disclosed to stock exchanges on July 10, 2017 at 11:50 am and became public.

In the matter of Divis Laboratories Ltd., the Noticee namely Mr. Srinivas Maddineni has been restrained from accessing the securities market and further prohibited from buying, selling or otherwise dealing in securities, directly or indirectly, or being associated with the securities market in any manner, whatsoever, for a period of 1 year, from the date of this order.

In this matter, SEBI had conducted an investigation into suspected insider trading activities of certain entities in the scrip of Divi's Laboratories Limited (Divi's / the Company)for the period July 07, 2017 to July 10, 2017(Investigation Period)to ascertain whether certain entities had traded in the scrip on the basis of unpublished price sensitive information ('UPSI') in contravention of the provisions of the Securities and Exchange Board of India Act, 1992 (SEBI Act, 1992) read with SEBI (Prohibition of Insider Trading) Regulations, 2015 (Insider Trading Regulations, 2015).

A Show Cause Notice(SCN) was issued to Mr. Srinivas Maddineni (Noticee), for the alleged violation of-(i) Section 12A(d) & 12A(e) of the SEBI Act, 1992 read with Regulation 4(1) of the Insider Trading Regulations, 2015;(ii) Clause 6 of the Minimum Standards for Code of Conduct to Regulate, Monitor and Report Trading by Insiders as specified in Schedule B read with Regulation 9(1) of the Insider Trading Regulations, 2015; and(iii) Regulation 7(2)(a) of the Insider Trading Regulations, 2015.

The key contention put forth by the Noticee was that there was no internal communication or information regarding UPSI through any means. As per the Noticee, the trades were executed by him without knowing about the UPSI. Thus trade was a purely co-incidental one and not because of knowing the UPSI and pre-clearance was not taken and disclosure was not submitted to the Company. It was stated that this act would never be repeated in future and he would fully abide by the Code of Conduct.

It was observed by the Whole Time Member that information relating to the "USFDA to Lift Import Alert 99-32 on the company's Unit-II at Visakhapatnam" was disclosed by Divi's to the stock exchange on July 10, 2017, as part of its obligation under Regulation30 of the SEBI (LODR) Regulations, 2015.

It was found that the aforesaid announcement was related to material event as it was disclosed under Regulation 30 of the SEBI (LODR) Regulations, 2015 and thus, in terms of Regulation 2(1)(n)(vi) of the Insider Trading Regulations, 2015, where material event in accordance with the listing agreement(now substantially replaced by SEBI (LODR) Regulations, 2015), comes under the definition of UPSI, the aforesaid information before becoming generally available was UPSI.

It is clear that a presumption is created in law that the trading done by an 'insider' was motivated by the UPSI in its possession. However, such a presumption is rebuttable. In the present case, it was found that the Noticee was in possession of the UPSI when he traded in the scrip of Divi's on July 10, 2017 at 9:15 am before it was disclosed to stock exchanges on July 10, 2017 at 11:50 am and became public.

The Noticee had not presented a reliable explanation supported by cogent evidence as to why he had traded in the scrip of Divi's on July 10, 2017when he was in possession of UPSI. Therefore, on the basis of the presumption envisaged in the explanatory note to Regulation 4(1) of the Insider Trading Regulations, 2015 and in the absence of a satisfactory explanation from the Noticee to successfully rebut the presumption, it was held that the impugned trades made by the Noticee were motivated by the UPSI.

It was noted that the Noticee had not disputed the findings of investigation contained the SCN with regard to identification of UPSI as the information relating to "USFDA to Lift Import Alert 99-32 on the company's Unit-II at Visakhapatnam".

It was also noted that this information about the Company was also of the nature that after becoming generally available, it was likely to materially affect the price of the scrip of Divi's, hence, also in terms of Regulation2(1)(n)of the Insider Trading Regulations, 2015, the aforesaid information was 'unpublished price sensitive information'.

The Noticee in the present matter was found to have indulged in the act of 'insider trading' in violation of Regulation4(1) of the Insider Trading Regulations, 2015 and Sections 12A(d) and 12A(e) of the SEBI Act, 1992. The Noticee was also found to have made a wrongful gain of Rs.1,83,000/- and to have failed in making the appropriate disclosures in violation of Regulation7(2)(a) of Insider Trading Regulations, 2015.

In view of the above, the Noticee was liable for issue of appropriate directions for debarment from accessing the securities market and dealing in securities and for disgorgement of unlawful gains with interest thereon under Section 11B(1) of the SEBI Act, 1992 and imposition of appropriate penalty under Section 11B(2) read with Section 15A(b) and Section 15G of the SEBI Act, 1992.