Recently, the Supreme Court of India acquitted Abhijit Rajan, former chairman of Gammon India, of any wrongdoing in an insider trading case filed by SEBI. The facts of the case show SEBI in a rather poor light and some market watchers have called it “overreach”.
Rajan was chairman of Gammon Infrastructure, a subsidiary of Gammon India, in August 2013. Due to a corporate debt restructuring exercise in the parent company, some shares in the subsidiary had to be sold.
Unfortunately for Rajan, the sale of 14.4 million shares took place just before another announcement (relating to a restructuring in a joint venture of Gammon Infrastructure with Simplex). After the announcement, the share price of Gammon Infrastructure went up, which meant that Rajan made no profit on the sale.
Yet SEBI charged him with insider trading purely on the technical grounds that the sale of shares was made just before ‘unpublished price-sensitive information’. It said that the fact that Rajan did not benefit from the share sale was immaterial and that the act of selling itself was wrong.
Worse, SEBI asked for disgorgement, even though Rajan made no gain or avoided any loss. Rajan sold the shares on August 22, 2013. SEBI’s stand was that the market prices of the shares on September 3, 2013, were lower than the prices at which Rajan sold, meaning there was a profit.
After the Securities Appellate Tribunal rejected SEBI’s stand, the regulator went to the Supreme Court. The apex court observed: “This is a case where a man of ordinary prudence would have expected the price of the shares to go up, after the information became public.”
The court also rejected SEBI’s basis for demanding disgorgement. “It so happened in this case that, according to SEBI, the closing price of the stock on 03.09.2013 showed favourable position for the respondent (Rajan) and SEBI was able to calculate as though the respondent made a profit.”
The court held that Rajan’s selling of the shares “would not fall within the mischief of insider trading”.
SEBI has similarly lost other insider trading cases — such as those of Balram Garg and Udayant Malhoutra.
Rajan may not be guilty, but it is equally true that others who are do escape through technical cracks, because proving insider trading is extremely difficult.
Amit Jaju, Senior Managing Director of Mumbai-based Ankura Consulting, suggests that SEBI should use advanced analytics. Writing in Mondaq, Jaju said SEBI should create a big-data framework that links individuals within the company, its external service providers who have access to price-sensitive information, and linking all relevant individuals with the trading accounts of family members, extended family members and friends, based on advanced link analysis. This will identify a network of trading accounts associated with one individual, who may be managing these accounts directly or indirectly.
It will also use pattern matching techniques by using data points such as mobile numbers, landline numbers, addresses, email, IP addresses, bank account details, social media, geolocation and advanced techniques such as artificial neural networks.