SAT Orders [Week ending 18.11.11]

This week, SAT delivered two orders which might have a precedential value.

1.      T. S. Murali vs CPIO, SEBI, Mumbai: This is an order relating to the application of the RTI. The SAT has widened the scope of RTI in relation to SEBI’s investigation operations, and reducing the scope of ‘price sensitive information’ in the process.

2.    Gujarat NRE Mineral Resources Ltd vs SEBI: This order centers around the definition of ‘Price Sensitive Information’ in relation to investment by a company.

T. S. Murali vs CPIO, SEBI, Mumbai

The Appellant had sought information under the RTI from SEBI in relation to a number of topics. The appellant sought information as to whether SEBI was conducting any investigation into the affairs of M/s. Sanghvi Forging and Engineering Limited in relation to price rigging or market manipulation or capital issue related manipulation or insider trading. SEBI refused to answer the same citing it as ‘Price Sensitive Information’ and also mentioned that such disclosure might lead to destruction of evidence.

SAT refused to accept SEBI’s contention. It however restricted such order by stating that the details regarding the report of the investigation might be withheld on grounds that it might lead to destruction of evidence.

Although SAT’s decision seems to be in line with the entire scheme of the RTI Act, the arguments advanced by the SEBI was not without merit. Consider this situation where SEBI informs an RTI applicant that investigations are ongoing against a particular company. The applicant trades in shares of that company, and subsequently SEBI makes the information public. The prices of shares are affected accordingly and the RTI applicant profits from the same. The information was confidential information when disclosed to the RTI applicant, on the basis of which he traded and profited. Further he cannot be booked for insider trading, since the information was not received from any insider.

On the other hand disclosing such information as soon as the investigation is undertaken will affect the share prices adversely, and may be, without reason. It may also hinder investigation by destruction of evidence.

In light of the above reasons, the information whether an investigation has been undertaken against a company was better off outside the ambit of RTI, as argued by SEBI.

A copy of the order can be found here.

Gujarat NRE Mineral Resources Ltd vs SEBI

The sole issue that arose in this case was whether a listed investment company was obligated to inform its decision to dispose a part of its investment under Clause 2.1 of the Disclosure norms in relation to insider trading regulations under Schedule II of the SEBI Insider Trading Regulations of 1992.

The Investment Company, FCGL Industries Ltd had most of its assets as investments in other companies, one of such company being Gujarat NRE Coke Ltd. The company decided to acquire coal mines in Australia under the name Gujarat NRE FCGL Pty Ltd in its Board Meeting on July 4, 2005. The stock exchanges where it was listed were informed accordingly and a press release was issued by Gujarat NRE Coke Ltd.

The issue arose because FCGL did not inform the stock exchange that it had decided to arrange for funds for the mines by selling certain shares. Two other companies, the directors of whom were those of FCGL, dealt with the shares of FCGL Industries Ltd and profited from the same. The issue was whether this amounted to insider trading.

Reading the definition of price sensitive information, SAT held that the information relating to the sale of the investment in any company by an investment company is not price sensitive information under the Regulations and hence the company and the directors were not guilty of insider trading.

It would be interesting to note if this order is appealed against. If this remains to be good law, what distinguishes mutual funds or other investment vehicles from investment companies? Can the directors of such funds decide to invest in a certain security, purchase the same personally before the fund purchases the same, profit from the same and still not be guilty of insider trading?

A copy of the order can be found here.