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Mumbai University · FY LLB · Sem II
Capital Money Ltd. (CML) had a wholly owned subsidiary Mount Wealth Ltd. which incurred huge losses. This would affect t
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Capital Money Ltd. (CML) had a wholly owned subsidiary Mount Wealth Ltd. which incurred huge losses. This would affect the balance sheet of CML. Mr. Suryaa Joy, MD of CML shared this UPSI to his wife, who accordingly sold off all her and her mother-in-law's holdings in CML, including all other shares held by them in other group companies, before this UPSI became public. After the disclosure of financial statements, there was fall in share price of CML, due to which general investors incurred losses. (i) Who is an Insider? (ii) Did Insider Trading happen in the given case and state the case law. (iii) What is the penalty for Insider Trading?
Q3Answer the following by giving reasonAttempt Any Two • 6 marks each • Total: 12 marks2023
(c)Capital Money Ltd. (CML) had a wholly owned subsidiary Mount Wealth Ltd. which incurred huge losses. This would affect the balance sheet of CML. Mr. Suryaa Joy, MD of CML shared this UPSI to his wife, who accordingly sold off all her and her mother-in-law's holdings in CML, including all other shares held by them in other group companies, before this UPSI became public. After the disclosure of financial statements, there was fall in share price of CML, due to which general investors incurred losses. (i) Who is an Insider? (ii) Did Insider Trading happen in the given case and state the case law. (iii) What is the penalty for Insider Trading?
Facts

Mr. Suryaa Joy (MD of CML) shared Unpublished Price Sensitive Information (UPSI) about CML's subsidiary's losses with his wife, who sold her and her mother-in-law's shares before the information was made public, thereby avoiding losses when the share price fell.

(i) Who is an Insider?

Under Section 195 of the Companies Act, 2013 and the SEBI (Prohibition of Insider Trading) Regulations, 2015 (Regulation 2(g)), an Insider means any person who:

  • Is a connected person — i.e., any person who is, or has been, associated with the company directly or indirectly, including as a director, KMP, employee, or persons holding more than 10% shareholding; or
  • Is in possession of or has access to Unpublished Price Sensitive Information (UPSI).

A Connected Person under Regulation 2(d) includes the company's MD, directors, promoters, employees, auditors, bankers, legal advisors, and also their immediate relatives (spouse, parents, siblings, children). Mr. Suryaa Joy (MD) is a primary insider. His wife is a connected person by virtue of being an immediate relative, and once she received the UPSI from Mr. Joy, she became an insider under Regulation 2(g)(ii) — a person in possession of UPSI.

(ii) Did Insider Trading Happen in this Case?

Yes. Insider Trading clearly occurred. The essential elements are satisfied:

  • UPSI existed — the information about Mount Wealth Ltd.'s huge losses and its impact on CML's balance sheet was unpublished and price sensitive (it materially affected CML's share price once disclosed).
  • Connected person in possession of UPSI — Mr. Suryaa Joy (MD) had access to this UPSI by virtue of his position; he is a primary insider.
  • Communication of UPSI — Mr. Joy shared the UPSI with his wife, which itself constitutes a violation of the duty to maintain confidentiality.
  • Trading on the basis of UPSI — the wife and her mother-in-law sold their holdings based on the UPSI before it became public, thereby obtaining an unfair advantage over general investors.
Hindustan Lever Limited v. SEBI (1998) — SEBI held that HLL purchasing shares of Brooke Bond knowing about a forthcoming merger (UPSI) constituted insider trading. The case established that trading by persons in possession of UPSI violates the principle of equal access to information and harms market integrity.
Samir C. Arora v. SEBI (2004) SAT — The Securities Appellate Tribunal clarified that mere possession of UPSI at the time of trading raises a rebuttable presumption of insider trading; the burden shifts to the accused to prove that UPSI was not the basis for the trade.

(iii) Penalties for Insider Trading

Under the SEBI (Prohibition of Insider Trading) Regulations, 2015 and Section 15G and Section 24 of the SEBI Act, 1992:

  • Civil/Administrative penalty: SEBI may impose a monetary penalty up to ₹25 crore or three times the profit made / loss avoided, whichever is higher, for each violation.
  • Criminal penalty: imprisonment up to 10 years or a fine up to ₹25 crore or both.
  • Disgorgement: the illegal profits earned or losses avoided must be disgorged (returned) along with applicable interest.
  • Debarment: SEBI may debar the insider from accessing the securities market for a specified period.

In this case, Mr. Suryaa Joy (for communicating UPSI), his wife, and her mother-in-law (for trading on UPSI) are all liable to the above penalties.