New Delhi: The Supreme Court has held that mere possession of unpublished price sensitive information, coupled with trading in securities during that period, is sufficient to attract the presumption of insider trading under the SEBI (Prohibition of Insider Trading) Regulations, 2015, and that the purpose for which the proceeds of such trades are applied is not a relevant consideration once this is established.
The Bench of Justice Sanjay Karol and Justice Nongmeikapam Kotiswar Singh was hearing an appeal filed by the Securities and Exchange Board of India under Section 15Z of the SEBI Act, 1992, against a judgment dated April 19, 2022, of the Securities Appellate Tribunal, Mumbai, whereby the SAT had quashed an order of the Whole Time Member, SEBI, holding the respondents guilty of insider trading.
The respondents were the Chairman and Managing Director and two daughters, who were Promoters and Vice Presidents, of Tara Jewels Limited, a company later admitted to liquidation by the National Company Law Tribunal. The Court noted that TJL had suffered losses of Rs. 166.80 Crores for the quarter ending September 2017, as against a net loss of Rs. 6.62 Crores in the preceding quarter, with net sales falling by approximately 69 per cent. During the unpublished price sensitive information period between October 2, 2017 and November 29, 2017, Respondent No. 1 had sold over 60 lakh shares across transactions, amounting to over 12 per cent of the company's total shareholding, while Respondents No. 2 and 3 had sold off their entire respective holdings, cumulatively avoiding a loss of approximately Rs. 1.38 crore.
Following an Impounding Order-cum-Show Cause Notice, the Whole Time Member, by order dated May 24, 2021, held all three respondents guilty of insider trading under the SEBI Act and the PIT Regulations, 2015, restraining them from the securities market for periods of one year and six months respectively, directing disgorgement of the loss avoided with interest, and imposing monetary penalties under Sections 15G and 15HB of the SEBI Act. On appeal, the SAT held that the respondents' explanation that TJL faced the risk of being downgraded to a non-performing asset was sufficient to establish their innocence under the proviso to Regulation 4(1) of the PIT Regulations, and further observed that there was little difference in TJL's closing share price on either side of the relevant dates, indicating that the sales were not intended to avoid losses. The appeal filed by the respondents was accordingly allowed.
Examining the statutory scheme, the Court noted that Section 12A of the SEBI Act prohibits insider trading without defining the term, and that Regulation 4 of the PIT Regulations, 2015 prohibits trading while in possession of unpublished price sensitive information, incorporating a rebuttable presumption that such trades are motivated by the information in the trader's possession. The Regulation sets out six illustrative defences, including off-market inter-se transfers between insiders, transactions through the block deal window mechanism, transactions pursuant to statutory or regulatory obligations, exercise of pre-determined stock options, defences available to non-individual insiders, and trades under approved trading plans. Crucially, the Court extracted the note appended to Regulation 4(1), which was central to its conclusion:
“When a person who has traded in securities has been in possession of unpublished price sensitive information, his trades would be presumed to have been motivated by the knowledge and awareness of such information in his possession. The reasons for which he trades or the purposes to which he applies the proceeds of the transactions are not intended to be relevant for determining whether a person has violated the regulation.”
The respondents had sought to rely on the decision in SEBI v. Abhijit Rajan, reported in (2024) 11 SCC 645, where persons accused of insider trading were found to have rerouted proceeds of the sale of shares towards funding the company's corporate debt restructuring. The Court, however, distinguished this precedent, noting that the transactions in Abhijit Rajan were governed by the predecessor 1992 PIT Regulations, whose defence provision under Regulation 3B did not contain a similar note excluding consideration of the purpose behind a trade, and that the shares in that case had in fact been sold before an anticipated rise in price, unlike the fall in price involved in the present matter. Since the 2015 Regulations expressly exclude the purpose or intent behind a trade from consideration once possession of unpublished price sensitive information and trading during that period are established, the Court held that neither the absence of profit nor the corporate purpose cited by the respondents could operate as a defence.
On the appellant's contention that the respondents' case did not fall within any of the six defences enumerated under Regulation 4(1) or defences of a similar nature construed ejusdem generis, the Court, relying on the principles explained in P. Mohanraj v. Shah Bros. Ispat (P) Ltd., reported in (2021) 6 SCC 258, and the earlier decisions in Vikram Singh v. Union of India and Siddeshwari Cotton Mills (P) Ltd. v. Union of India, held that the rule of ejusdem generis was not, strictly speaking, attracted, since the specific defences in Regulation 4(1) follow, rather than precede, the general word “including”. The Court nonetheless observed that the use of the word “including” indicated that the enumerated defences were illustrative rather than exhaustive, and that any additional defence would have to be of a similar nature to those already specified.
Holding that the respondents were admittedly in possession of unpublished price sensitive information and had sold substantial or entire portions of their shareholding during that period, the Court concluded that insider trading stood established regardless of the quantum of profit made or loss avoided, or the purpose to which the sale proceeds were applied. The appeal was accordingly allowed, and the disgorgement order of the Whole Time Member, along with the penalty imposed under Section 15HB for violation of the Minimum Standards for Code of Conduct, was restored. However, taking a cumulative view of the facts, the Court found the penalty of Rs. 25 lakh imposed under Section 15G on Respondent No. 1 to be excessive, and reduced it to Rs. 10 lakh, in parity with the minimum penalty imposed on Respondents No. 2 and 3.
The Court also observed that the SAT's reliance, in the impugned judgment, on the defence of “legitimate corporate purpose” as recognised in Rakesh Agrawal v. Securities Exchange Board of India, a decision rendered under the 1992 PIT Regulations, was not available to it in view of the note appended to Regulation 4(1) of the 2015 PIT Regulations. The penalty was modified to the above extent, to be paid within three months if not already paid, and pending applications, if any, were disposed of.
Case Title : Securities and Exchange Board of India v. Rajeev Vasant Sheth & Ors.
