SEBI Watch: RIL insider trading case highlights need for clarity in norms

21 Jun 2022

The insider trading regulations of the Securities and Exchange Board of India are one of the key pillars of investor protection.

It ensures that, on a continuous basis, price sensitive information within a company is brewing it is kept under tight wraps till it is made public and all those in the know-how of such information, including deemed insiders, do not trade and profit from it.

Secondly, when the information is required to be made public under the listing and disclosure norms then it is made public for all and not selectively.

These principles were in full play in the order by SEBI on Monday against Reliance Industries Ltd imposing a penalty of 3 mln rupees on the company for not clarifying, on a suo moto basis, upon media reports claiming that Facebook was close to signing a preliminary agreement to buy a multi-billion dollar stake in Reliance Jio.

The information revealed in the news report, without an ensuing suo moto clarification by the company, was clearly price sensitive in nature and its revelation amounted to leakage of unpublished price sensitive information that was known only to select company officials and non-company persons who are considered as deemed insiders under the norms.

Although the company made a formal announcement of the deal a month later SEBI held it accountable for abdicating its responsibility to issue a timely clarification.

The company protested that the stock exchanges did not seek a clarification from it as covered in the listing and disclosure norms and that suo moto clarification provision in the norms was voluntary and not mandatory.

This is indeed the case when it comes to specific clauses in the norms. Reliance Industries had also said, in its response to SEBI’s show cause notice in the case, that there was “constant speculation in the media and on social media platforms about RIL's (Reliance Industries Ltd’s) business and operations, and it would be impossible for RIL to track every news report and confirm or deny the same suo moto.”

SEBI, in its order, was right in applying the overarching principles of the insider trading norms and its connected provisions in the listing and disclosure norms.

But it must address the strong counter made by Reliance Industries that specific clauses in the norms did not cast a mandatory obligation on a listed company to clarify on any and all media reports.

There is clearly a grey area in the regulations and SEBI would do well to amend it to remove the ambiguity.

Reliance Industries also contended strongly that at the time of the initial media reportage the due diligence process was still going on and there were only tentative agreements on valuations. It told SEBI that no credible and concrete information had got created and so there was no obligation on it to clarify.

Listed companies are frequently in talks with entities for striking agreements or deals, and the stage of finality is reached only when the board of the company and the other entity approve it.

Most of the time the talks do not conclude in legally-binding deals.

But SEBI was right in dismissing this point on the ground that any information that is price sensitive, including a listed company’s ongoing talks with other entities for striking deals, came under the scope of unpublished price sensitive information and consequently attracted the application of insider trading norms.

The provisions of the insider trading norms and its connected provisions in the listing and disclosure norms have evolved over the years but there are still some grey areas that need to be tackled.