A Board Note, a Dinner Rumour and 50,000 Shares
The board of Nirmaya Pharma Ltd approves, on 20 January, the sale of its injectables division - 35% of consolidated turnover - to a global buyer. The letter of intent was signed by the managing director on 8 January, and the price was agreed on 17 January. The announcement is made on 22 January before market hours, and the stock rises 13.6% that day. On 21 January, 50,000 Nirmaya shares are bought at ₹412 in the demat account of the mother of the company's Deputy Company Secretary, who had drafted the board note; they are sold on 23 January at ₹468. The buyer is a friend of the Deputy Company Secretary, who says he heard at a dinner on 19 January that "a pharma company is being sold" but did not know it was Nirmaya. Nirmaya maintains no structured digital database, and its compliance officer permitted trading between 1 and 22 January on the view that "no price-sensitive event had crystallised".
1. When did the information become unpublished price-sensitive information, and is the compliance officer's view defensible?
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The three limbs. Information is unpublished price-sensitive information when it is precise, not generally available, and likely to affect price on disclosure. A division worth 35% of turnover is plainly material.
Precision arrived before the board meeting. The managing director signed the letter of intent on 8 January and the price was agreed on 17 January, which is specific enough to enable a conclusion about the effect on price. A board resolution is not a precondition: negotiation-stage information becomes unpublished price-sensitive information once it is precise, and here that is at the latest 17 January.
Consequences. The trading window should have been closed from that point, and in any event from the end of the quarter. The compliance officer's reasoning is wrong, and permitting trading on that basis breaches the code of conduct under the PIT Regulations.
The dinner rumour. Market gossip does not make information "generally available"; that requires dissemination through a recognised channel and adequate time for the market to absorb it. The 21 January trade therefore occurred in a closed window and while the information was unpublished price-sensitive information.
2. The friend is not an employee, director or connected person of Nirmaya. Is he liable, and how does his claim of ignorance of the company's identity affect the analysis?
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He is an insider. Under the PIT Regulations an insider is any person who is in possession of unpublished price-sensitive information, and communication of such information is separately prohibited except in the ordinary course of business. If the Deputy Company Secretary passed the information on, two contraventions arise: communicating the information, and trading while in possession of it.
Possession, not source, is the test. The friend's claim that he did not know the company's name does not help if he received the same information and traded on it; the regulation turns on possession, not on attribution of the source.
Proof in adjudication. SEBI proceeds on a preponderance of probability and will build a circumstantial chain: the family account, the interval between the board note and the trade, the trade size against past patterns, and the 13.6% move. The person must then bring himself within a permitted defence. "I did not verify the name" is not one.
The mother's account. She is a relative of a connected person, so her trades attract the presumption that they were motivated by knowledge of the information.
3. Assume both trades are found to be in violation. How should the penalty be computed, and what separate exposure does Nirmaya face for the missing structured digital database?
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Profit. 50,000 × (₹468 − ₹412) = ₹28,00,000.
Insider trading penalty. Under s.15G of the SEBI Act the penalty is not less than ₹10 lakh and not more than the higher of ₹25 crore or three times the profit. Three times ₹28 lakh is ₹84 lakh, far below ₹25 crore, so the ceiling is ₹25 crore. The point of the provision is that the penalty is not scaled to the profit made; the small trader and the large trader face the same outer limit, and even a modest profit exposes the wrongdoer to a penalty many times its size.
Other reliefs. SEBI will typically also order disgorgement of the ₹28 lakh under s.11B and restrain the persons from the securities market.
The company. Failure to maintain a structured digital database and failure to close the trading window breach the PIT Regulations and attract a penalty under s.15HB (₹1 lakh to ₹1 crore for each failure). The compliance officer and designated persons face personal exposure, and the missing database also deprives the company of the evidence it would need to show the information was not shared.