Supreme Court directs SEBI not to make insider-trading presumptions

Supreme Court directs SEBI not to make insider-trading presumptions

The bench had allowed the appeals of the Securities Appellate Tribunal that upheld the order of penalizing the appellants

The Supreme Court has held that insider trading cannot be presumed merely on the basis of proximity between the parties.

It held that 'communication' of Unpublished Price Sensitive Information (UPSI) under the Securities and Exchange Board of India (SEBI), Prohibition of Insider Trading Regulations 2015 had to be proved by producing cogent materials. These included letters, emails, and witnesses and not just the alleged proximity between the entities. It further said that the onus of proving such communication was on SEBI.

A bench comprising Justice Vineet Saran and Justice Aniruddha Bose allowed the appeals filed by assailing the order of the Securities Appellate Tribunal (SAT), which had upheld the order of the Whole Time Member (WTM) of SEBI, penalizing the appellants for insider trading.

In 2005, P Chand Jeweller Private Limited was promoted by three brothers PC Gupta, Amar Chand Garg and Balram Garg. In 2011, Amar Chand Garg and his family exited the Company and he resigned from the post of Vice-Chairman. Subsequently, it was converted into PC Jewellers Limited, a public limited company.

In 2019 and 2020, SEBI issued an impounding order and show-cause notice alleging insider trading. PC Gupta's son, Sachin Gupta and daughter-in-law, Shivani Gupta along with Amar Chand Garg's son, Amit Garg were alleged to have traded on the basis of UPSI between April 2018 and July 2018.

SEBI claimed that the three appellants had access to the USPI due to their proximity to the promoters. By its May 2021 order, the WTM of SEBI imposed a penalty of Rs.20 lakhs and restrained them from accessing the securities market. In October 2021, it also dismissed the appeal filed before SAT.

Appearing for Balram Garg, Senior Advocate, Dhruv Mehta submitted that the WTM had held that Sachin Gupta, Shivani Gupta and Amit Garg were not 'connected persons' or 'immediate relatives' of Balram Garg. It was asserted that since Balram Garg was found to have violated the SEBI Regulations, no presumptions could be raised.

The counsel argued that the onus to establish the communication of the UPSI was on SEBI and it had failed to discharge that. Moreover, since the three appellants were not under the control of Balram Garg, SEBI could not avail the benefit of the presumption against 'immediate relatives'.

Appearing on behalf of the other appellants, Senior Advocate V Giri contended that the entire case of insider trading was based on the close relationship between the parties. The charges were based on circumstantial evidence. He submitted that the appellants had placed the material on record to establish estrangement between the parties, even before the UPSI existed.

On the other hand, appearing for SEBI, Senior Advocate, Arvind Datar claimed that the managing Director, Balram Garg was privy to the communications pertaining to the buy-back and withdrawal of the equity shares. He had communicated the UPSI to the other appellants, who executed the trades wherein they made gains and could avoid losses. He averred that the documents on record did not demonstrate that all ties between the parties were severed and the UPSI was in their possession.

However, the court ruled that even if there was no estrangement, SEBI had failed to discharge its burden of establishing the possession of UPSI. Also, there was no correlation between the UPSI and the sale of shares. The shares were sold based on purely personal and commercial decisions.