[Shreyansh is an incoming Associate at Cyril Amarchand Mangaldas and Pranav is a student at Hidayatullah National Law University.]
The recent ruling of the Securities Appellate Tribunal (SAT) in the case of Kunal Kashyap v. SEBI marks a critical development in the regulatory landscape of insider trading. By upholding the 2021 order of the Securities and Exchange Board of India (SEBI) against Kunal Kashyap (appellant), the regulator has significantly broadened the definition of 'connected persons' under Regulation 2(1)(d)(i) of SEBI (Prohibition of Insider Trading) Regulations 2015 (PIT Regulations). Through this blog, the authors have tried to critically analyze the SAT ruling while delving into the potential future implications for professionals engaged in securities transactions.
Background
M/s Biocon Limited (Biocon) entered into two collaborations that became central to SEBI’s investigation. The first was with Sandoz, for co-developing and manufacturing next-gen Biosimilars for global markets which was announced on 18 January 2018. The deal had a substantial potential to impact Biocon’s stock price due to the scale of the collaboration. The other collaboration was with CIMAB for global commercialization in manufacturing a novel biologic drug. The CIMAB deal involved Biocon securing rights to develop and market products which had implications for its revenue streams.
The appellant advised Biocon on the CIMAB transaction and was in frequent communication with Biocon’s CEO and CFO prior to the Sandoz deal announcement. He was one of the directors of Mazumdar Shah Medical Foundation, a not-for-profit entity of Biocon promoters. Moreover, his company, Allegro Capital Private Limited (Allegro Capital) provided broking services to Biocon’s senior executives. These considerations led SEBI to classify him as a ‘connected person’ under Regulation 2(1)(d)(i) of PIT Regulations and in turn consider him as an insider within Regulation 2(1)(g)(i) of PIT Regulations. It was assumed that the appellant and Allegro Capital traded shares of Biocon on the basis of unpublished price sensitive information (UPSI) during the UPSI period on the basis of UPSI. Taking all the factors into consideration, SEBI passed an order against the appellant under Regulation 4(1) of the PIT Regulations holding that he had engaged in insider trading by executing trades in Biocon shares while in possession of UPSI. Following this order, the appellant appealed before the SAT.
Critical Analysis of the SAT Ruling
Expansion of the definition of insider and connected persons
The SAT ruling has extensively broadened the contours of connected persons and consequently can have huge ramifications for insider trading. The SAT based its reasoning of insider on the primary basis that the appellant was in frequent communication with the CEO and the CFO and these KMPs had access about all the deals. The tribunal considered frequent communication and business associations without direct proof of UPSI transmission to label the appellant as a connected person. Such an interpretation significantly lowers the evidentiary threshold for insider trading cases and significantly impact the standard applied to determine insider status.
This approach contrasts the position laid down by the Supreme Court in Balram Garg v. SEBI where the court categorically emphasized that mere association with a company does not automatically translate to access to UPSI. The court ruled that trading patterns and timing of trade alone cannot conclusively establish insider trading without evidence of UPSI communication. It categorically stated that cogent materials like emails, letters or witnesses need to be presented to actually prove insider trading and proximity between the parties would not just suffice.
The fact that needs to be taken into account is that KMPs of any company are naturally aware about all major transactions and deals that are being structured presently or happen to be in the pipeline for the future. Their executive role allows access to crucial business information, and it would be impractical and arbitrary to label one as a 'connected person' due to communication with them. Such a position would create an unrealistic threshold wherein several professionals having no knowledge or involvement in the misuse of UPSI would be vulnerable to allegations of insider trading.
Standard of evidence
The SAT’s reliance on scattered circumstantial evidence without any direct proof of communication or usage of UPSI is another problematic aspect of this ruling. While SEBI has historically used circumstantial evidence in insider trading cases, the Supreme Court ruling in Balram Gupta has altered the position significantly. The charges cannot be proved only on the basis of circumstantial evidence without any direct proof of communication. The SAT ruling extends the reliance on circumstantial evidence to an unprecedented level. It assumes that because the appellant was in communication with Biocon’s senior executives and worked on another deal, he must have had access to UPSI regarding the Biocon-Sandoz collaboration. This presumption ignores the lack of documentary evidence or corroborated testimony indicating actual transmission of price-sensitive information. This ruling effectively increases the compliance burden on individuals who interact with insiders at listed companies. If professional relationships alone are enough to establish liability, it may discourage advisors, consultants, and financial service providers from engaging with publicly traded firms out of fear of legal consequences.
Selective scrutiny
Lastly, the SAT ruling is selective in its enforcement of insider trading regulations. While the appellant was penalized, no action was taken against the Biocon executives who may have communicated the UPSI. This creates a precarious situation wherein the recipient of UPSI are being penalized but the primary sources of leaks go unpunished. The ruling points to lapses in Biocon’s internal governance, as the company failed to implement adequate safeguards to prevent unauthorized disclosure of UPSI. This highlights the broader issue of corporate responsibility in insider trading cases. SEBI’s enforcement should focus not only on individual actors but also on ensuring that companies enforce stringent governance measures to prevent insider trading at an organizational level.
Implications of the SAT Order
The appellant’s classification as a connected person was based on (a) his directorship in Mazumdar Shaw Foundation, associated with Biocon’s promoters, and (b) his advisory role in Biocon’s CIMAB negotiations, which ran concurrently with the Biocon-Sandoz deal. The appellant was neither an employee nor a designated person of Biocon. Despite no direct evidence of information leakage, SAT presumed his possession of UPSI due to these associations. This significantly expands the definition of connected persons, potentially exposing professionals working with listed companies to regulatory liability merely based on proximity rather than direct wrongdoing.
This would lead to an unnecessary burden for financial professionals interacting with insiders at listed entities. This is simply attributable to the fact any securities transaction involving frequent communication with insiders could attract scrutiny, potentially impacting legitimate market activity as well. The tribunal’s reliance on trading patterns and circumstantial evidence, listed companies and market participants must adopt stringent compliance practices. This can be tackled by the formulation of a well-defined code of conduct which would ideally include mandatory disclosures, record-keeping of communication with insiders, and restrictions on trading after engagements with company executives.
Conclusion
The SAT ruling in Kunal Kashyap v. SEBI sets a concerning precedent, where individuals can be held liable for insider trading based on associations rather than definitive proof of UPSI communication. While regulatory vigilance is essential, enforcement must balance market integrity with practical corporate interactions. The appellant and his company were certainly in touch with the company’s officials but there is lack of a conclusive proof of any UPSI communication. As SEBI refines its approach to insider trading enforcement, regulatory bodies must ensure that liability remains rooted in concrete evidence rather than presumptive associations.
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