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Sun-Ranbaxy: Insider Trading?

Published on Mon, May 05,2014 | 18:55, Updated at Mon, May 05 at 19:14Source : CNBC-TV18 |   Watch Video :

This week the Andhra Pradesh High Court ordered an interim stay on the $4 billion Sun Pharma-Ranbaxy deal, on allegations of insider trading. 2 Hyderabad based Ranbaxy shareholders filed the petition alleging 2 instances of insider trading. That the Ranbaxy share price rose 24% between April 2nd and April 4th on 5 times the daily average volume traded, whereas the deal was announced only on April 6th – indicating ‘extensive trading by people who had prior knowledge about the proposed merger.


Writ Petition
Ranbaxy share price
Apr 1: Rs 370                    Apr 4: Rs 459
24% increase in Ranbaxy shares from Apr 2-4

Ranbaxy trading volume
Over 3.75 cr shares traded from Apr 2-4
That's 5 times daily average trading volume of 23.15 lakh shares

The second allegation of insider trading refers to the purchase of Ranbaxy shares by Silverstreet Developers – a 100% subsidiary of Sun Pharma. These purchases seemingly took place late last year and also in the first 3 months of 2014 prior to April 6th when the deal was announced. The petition alleges these purchases were made while Silverstreet and Sun Pharma were ‘in possession of price sensitive information as they were actively involved in the merger negotiations’.

Writ Petition

'The petitioners submit that the aforesaid high volume of transaction of shares and the increase in the price of shares prior to just three days before the announcement of proposed merger clearly demonstrates that there has been extensive trading by people who had prior knowledge about the proposed merger…'

Pre-Merger Purchases

            SUN PHARMA

100%                               100%
SUB                                 SUB

Silverstreet Developers LLP

Pre-Merger Purchases

October-December 2013
- Silverstreet Developers acquired a 1.41% stake in Ranbaxy (Approx 59.67 lakh shares)
- Valued a little over Rs 247.65 crore (average share price @ Rs 415 for December qtr)

January - March 2014
- Silverstreet Developers increased its stake in Ranbaxy to 1.64%

Writ Petition

'The Petitioner states that Respondent No. 7 (Silverstreet Developers LLP) and its partner Respondent No. 4 (Sun Pharma) were in the possession of price sensitive information as they were actively involved in the merger negotiations…'

On these grounds the 2 Ranbaxy shareholders filed a petition with the AP High Court seeking a SEBI investigation and action and seeking that SEBI, BSE, NSE not give their approval to the merger. Thus the AP High Court has issued notices to all involved and granted a status quo on the scheme of amalgamation till the case is disposed. Is there any substance to these insider trading allegations and should a deal be blocked on that account? To answer that Menaka Doshi spoke to Sanjay Buch of Crawford Bayley and Rajat Sethi of S&R Associates.

Doshi: I would like to start by focusing on the two insider trading allegations first, and the first one is fairly simple. There is no point of law to talk about- the allegation is that the Ranbaxy’s stock price ran up in anticipation to this deal. Clearly people in the market seem to be in the know of what was going on and hence there is case for an investigation to be made and to be found out whether any leaks took place and anybody had unpublished price sensitive information. I think the response to that allegation is simply a SEBI investigation without which we would not know anything about how this came to be. The second question, if I may say so, is the more important question in law here and which has to do with Silverstreet’s purchase of Ranbaxy shares. Can that be viewed as insider trading and to answer that question, I am going to lay a few situations in front of both of you. The first one being that Sun is able to show through evidence that the purchases took place much before it made any approaches to Ranbaxy. I am assuming if Sun is able to show that, then Sun is well in the clear. Would that be right?

Buch: Yes, that is right because the factual determination will determine the outcome of the investigation. Lot will depend on what is the evidence, the standard of proof which is available to determine whether or not the person in possession of unpublished price sensitive information utilized it for making undue gain of securities to the detriment of the retail investors.

Sethi: I think it would be a matter of evidence. It would be relevant when the discussion started. Obviously, even if the purchase was made at a time when there was a possible transaction, even then Sun may be in the clear. But if however, the negotiations were advanced and there was reasonable probability of a transaction then perhaps one has to look at it in a closer fashion.

Doshi: Assuming that Sun is speaking the truth and saying we did not make any purchases while we were in conversation with Ranbaxy, why are you saying that had they bought the shares even as they were making an approach to Ranbaxy, they would be in the clear?

Response to CNBC TV18 Query

'We would like to state that Silverstreet Developers LLP did not trade in Ranbaxy shares just prior to the merger deal as is being perceived. Specifically, it had no role to play in the trading that happened in the week prior to the announcement wherein the share price of Ranbaxy went up. We hope this helps in explaining why we have repeatedly said that there is no insider trading here as far as Sun Pharma or its subsidiaries or its directors are concerned. Silverstreet had previously bought these shares as a matter of investment and at a time when Sun Pharma had no access to any non-public information on Ranbaxy. We are constrained and won't be providing any specific information on the purchase.'

- Sun Pharma's Official Spokesperson

Sethi: Not when they were making an approach- when there is a possible transaction- perhaps at that stage, one is able to say that they do not have access to any unpublished price sensitive information because it is only a possible transaction and I think the determination to be made in these cases would be when do you crossover from the realm of a possible transaction to a probable transaction and unfortunately, there is no bright line. It would be a factual determination; you look at when those conversations took place and what the status of those conversations was to be able to answer this question.

Doshi: Would you agree with that and what if I was to twist the question to ask you this that Sun would have known that any news of the fact that it is interested in doing a deal with Ranbaxy in itself is price sensitive information and until it is not published, it is unpublished price sensitive information. So if it knew of its own intent to pursue a deal, if it was buying shares while this intent was forming in its own mind and therefore whether it bought those shares a few days before making the first approach to Ranbaxy or on the day it made an approach to Ranbaxy or a few days after that but before Ranbaxy decided to do the deal, would it still not mean that Sun had unpublished price sensitive information regarding its own intentions and therefore bought shares of Ranbaxy violating the insider trading regulations or is that a stretch altogether?

Prohibition of Insider Trading Regulations

3A. No company shall deal in the securities of another company or associate of that other company while in possession of any unpublished price sensitive information.

Buch: No, that is a stretch altogether because Silverstreet is not a subsidiary company of Sun Pharma. It is a limited liability partnership.

Doshi: Yes but two partners in Silverstreet are 100 percent subsidiaries of Sun; so I get in legal language it may not technically be a 100 percent subsidiary but it is the equivalent of Sun, isn’t it?

Buch: So there cannot be direct allegation on Sun Pharma because Sun Pharma in its own independent capacity was negotiating the transaction with its..(Interrupted by Anchor)

Doshi: So you are saying Sun can make avail of the defense that what Silverstreet decided to do in terms of a transaction is not connected to what we were trying to do with Ranbaxy?

Buch: Yes.

Sethi: I think that would be more of a defense and the defense would be along the lines of what the regulations sort of provide for which is that the persons doing the discussions were different from the persons who were making the trade.

Prohibition of Insider Trading Regulations
Defences for 3A
-    Prove transaction decision was taken by person other than employee having UPSI
-    Prove systems/procedures demarcate activities of co - such that person making trade cannot have access to UPSI
-    Prove UPSI was not communicated

Doshi: These are defensives available in the insider trading regulation so to speak. Let us go back to the point I made before that- can your own self intent be equal to unpublished price sensitive information? Can somebody say look, Sun, you knew that you were going to in some way or the other do a deal with Ranbaxy and hence your purchase of Ranbaxy shares ahead to that deal amounts to the violation of the insider trading regulations?

Sethi: A state of mind regarding a possible transaction perhaps may not be enough. It may be a relevant factor when you look at it in the background of other facts but I think one has to go beyond that and look at a probable transaction and once that bright line had been crossed and it had entered into the realm of a probable transaction and if they entered into a trade at that time, then certainly that would be an issue under the insider trading regulations.

Doshi: Sun may have another defense, Sun may say look we are buying these shares because the first approach to a deal was maybe a takeover- it is only later on as we were sort of mulling over things that some banker came and told us, Daiichi wants to exit and we decided hey, a merger is a better form.

Sethi: So the unpublished price sensitive information in this case would be the transaction with Ranbaxy through a scheme of arrangement. So if there was no contemplation of a scheme of arrangement at the time the shares were purchased, then obviously a charge of insider trading would be hard to sustain.

Prohibition of Insider Trading Regulations

- "price sensitive information" means any information which relates directly or indirectly to a company and which if published is likely to materially affect the price of securities of company.

- "unpublished" means information which is not published by the company or its agents
and is not specific in nature.

Buch: I agree.

Doshi: Given the seriousness of these charges, I understand that the AP High Court has taken this on board but to grant a status quo on a deal and punish a deal for what might be possibly the alleged wrongdoing of some individuals, is that a fair thing to do?

Buch: There is no other alternative for the High Court because High Court will have to give a reasonable amount of opportunity to all the parties to give their say in the matter and after assessment of the facts on record, replies filed by SEBI, National Stock Exchange, a view can be taken whether this matter requires to be investigated by SEBI or not.

Sethi: I feel that the High Court has probably gone a bit too far. The jurisdiction, which SEBI has in relation to investigation of insider trading, is separate from the jurisdiction to look at a scheme of arrangement. When they receive a draft scheme of arrangement, they have to look at it from the perspective- is it a fair and reasonable scheme, is the valuation exaggerated. Those are the factors which we have to look at.

Doshi: If I may interrupt you there, that would not even be the responsibility of the Andhra Pradesh High Court because none of these two companies that are amalgamating are located in Andhra Pradesh. That would be the job of the High Courts in their respective States. So where would AP High Court get jurisdiction to look at that?

Sethi: Jurisdiction would be one point although the petitioners would say they are residents in Hyderabad and their shareholders so they can approach the High Court in the area where they reside but I think the point here also is that ultimately the High Court has to consider that as far as the transaction itself is concerned, the evaluation of the transaction has to be done by \\SEBI and the Stock Exchanges based on the merits of the scheme and not on the basis whether there was any insider trading. Insider trading is an entirely separate matter.

Buch: Probably what has happened is that under listing agreement there is a requirement to submit a scheme of arrangement for pre-clearance from BSE and NSE and under listing agreement there is a requirement that the scheme has to be in accordance with the securities laws and securities laws would include the prohibition of insider trading regulations also. So the petitioners may have apprehended that if BSE or NSE were to give a clearance then there would be nothing left in the matter and probably that has caused this leverage because currently I think the applications are pending.

Sethi: To that I would say that this scheme has to be judged on its contents. The scheme has not talked about whether there has or has not been insider trading and in fact if the transaction is stopped, then the benefits which may accrue to the shareholders, they maybe deprived of those benefits.

Doshi: Like you said that at this point in time, it does seem like it is the deal and the shareholders of the two companies that are suffering more than those who may have benefited from insider trading if these allegations are proven to be true.


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