Supreme Court on Insider Trading: Test is whether the act of the insider in dealing with the securities, was an attempt to encash the benefit of information in his possession

Supreme Court recently held that,"An attempt by the insider to encash the benefit of the information is not exactly the same as mens rea. Therefore, the Court can always test whether the act of the insider in dealing with the securities, was an attempt to take advantage of or encash the benefit of the information in his possession".

Facts: Mr. Abjijit Rajan, the then chairman and managing director of Gammon Infrastructure Projects Ltd (GIPL) sold shares just before a material event which came under the SEBI scanner.

Issue: How to establish a charge of ‘Insider Trading’?

Test: The Hon’ble Supreme Court devised the test of whether there was an attempt by the ‘insider’ to benefit from the unpublished price sensitive information.

Ruling: The Court distinguished between profit motive and mens rea and held that under the Prohibition of Fraudulent and Unfair Trade Practiced Regulations (“PFUTP Regulations”), mens rea is not an indispensable requirement in respect of matters under the Prevention of Insider Trading Regulations (“PIT Regulations”), the test to be applied is that of profit motive i.e., whether the insider’s actions in dealing in securities represented an effort to gain from or exploit the asymmetrical / unpublished information in his possession.

Decision: On application of the abovementioned test, the Court held that since shares were not sold with an intent to encash the benefit of the unpublished information. Thus, the same is not covered under the mischief of insider trading.

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