The SEBI Insider Trading Regulations prohibit trading in securities whilst in possession of unpublished price sensitive information (UPSI). It also states that when a person holds UPSI and trades in securities, his trades would be ‘presumed’ to have been motivated by the knowledge and awareness of such information in his possession.

Given that the burden of proof is on the insider to establish that his trade was not motivated by awareness of such information, the Regulations to provide statutory defences for the insider to prove his innocence. The stated defences, which are illustrative in nature, however, do not include a circumstance where a person has received UPSI and relied on it to make a trade under the assumption that it is publicly available information. The ‘innocent recipient’ was proposed as a statutory defence in the NK Sodhi High Level Committee Report, but did not find its way into the final form of the amended regulations. This defence was meant to be available if the recipient had no reason to believe that the information in his possession was UPSI or the person who communicated it to him violated any law or confidentiality obligation. As per the report, the insider would need to prove that he did everything reasonably in his power to confirm that the information in his possession was not UPSI (i.e. exercise of diligence expected of a reasonable man) and that he traded bona fide.

Interestingly, this aspect of innocent tippee liability was addressed in recent Adjudication Orders of SEBI in the matters of Aditya Birla Sunlife AMC Limited, SBI Mutual Fund and Kotak Mahindra Life Insurance Company (Noticees) relating to investigation of alleged selective disclosure of UPSI by Mannapuram Finance Limited (MFL).

The above-mentioned cases relate to the investigation of alleged selective disclosure of UPSI by MFL to Ambit Capital Pvt Limited. The order deals with whether the trading activities of the Noticees were motivated by alleged UPSI contained in a research report by Ambit Capital; and if the recipients of the report could be considered as ‘innocent recipients’ of UPSI.  The order finds that information relating to the financial condition of MFL was allegedly selectively disclosed to Ambit Capital prior to the official stock exchange release. Ambit Capital published a research report basis its meeting with MFL, which was made available to over 2500 parties and some of whom in turn used it for onward publications.  On being asked to show cause why they are not liable for insider trading, the Noticees pleaded that they relied on the research report which was public information as it was made available to more than 2500 persons and had no reason to suspect that it was based on UPSI. Under the Insider Trading Regulations, UPSI is limited to information that is not generally available; information that is accessible to the public on a non-discriminatory basis is considered generally available. The NK Sodhi High Level Committee Report stated that a research report that is priced for purchase and is made available to all clients of a stock broker would be considered non-discriminatory and generally available. Any client of the broker or any class of clients of a broker having a certain risk profile may acquire that research report. Merely because the report is priced and needs to be purchased would by itself mean that access to it is non-discriminatory. However, it added that, if one were to find extraordinary and peculiar structures such as pricing a research report at a level not in line with market practice such that only some identified persons may be able to acquire it and hope to rely on it by way of ostensible non-discriminatory access, it would not be non-discriminatory.

The SEBI order in this case held that the alleged UPSI becomes public information and generally available the minute it is published in a research report. It also states that (a) recipients of the report are not required to verify if the information contained therein is UPSI; and (b) such reports come with a disclaimer that they are based on public information and it is reasonable for market participants to rely on the same for their trading activities (even though in this case it is titled as ‘meeting with the management’). The Noticees were therefore held to be innocent recipients who are not liable for any insider trading whilst in possession of alleged UPSI.