Proceeds of Insider Trade Are Irrelevant; Sale During UPSI Period Enough to Establish Guilt
A Supreme Court division bench restores SEBI's insider trading orders against a jewellery firm's promoters, holding that how trade proceeds are used is simply not relevant.
The Supreme Court has reversed the Securities Appellate Tribunal's decision that had exonerated three promoters of Tara Jewels Limited from insider trading charges. The Court held that once a person in possession of Unpublished Price Sensitive Information has traded in securities, the purpose for which the sale proceeds are used is wholly irrelevant. The Note to Regulation 4(1) of the SEBI (Prohibition of Insider Trading) Regulations, 2015 creates a presumption that such trades are motivated by the knowledge of that information, and no argument about corporate need or lack of personal profit can displace that presumption unless one of the specified defences is established. The WTM's orders of disgorgement and market restraint have been restored, with a limited modification reducing the Section 15G penalty imposed on the first respondent.
How the Dispute Reached the Court
Tara Jewels Limited, a company trading on both BSE and NSE, suffered a net loss of Rs.166.80 crores in the quarter ending September 2017 — compared with a loss of just Rs.6.62 crores in the previous quarter. Net sales fell by approximately 69% in the same period. The company subsequently entered liquidation by an NCLT order dated 30 July 2019.
During what was identified as the UPSI period — 2 October 2017 to 29 November 2017 — Respondent No. 1, Rajeev Vasant Sheth, the Chairman and Managing Director, sold 30,93,948 shares representing about 12.56% of the total shareholding, and then a further 29,75,000 shares in subsequent transactions. His daughters, Aarti Sheth and Divya Sheth, who were Promoters and Vice Presidents of TJL, sold their entire holdings of 1,14,440 shares each. By doing so, the three collectively avoided losses of approximately Rs.1.38 crores.
SEBI issued an Impounding Order-cum-Show Cause Notice on 4 September 2020. The Whole Time Member, by order dated 24 May 2021, found all three guilty of insider trading under the SEBI Act and the PIT Regulations 2015. Rajeev Sheth was restrained from the securities market for one year and directed to disgorge the loss avoided with interest at 12% per annum from 30 November 2017. Aarti Sheth and Divya Sheth were restrained for six months each and similarly directed to disgorge. Monetary penalties were imposed: Rs.25 lakhs on Rajeev Sheth and Rs.10 lakhs each on his daughters under Section 15G, plus Rs.5 lakhs and Rs.1 lakh respectively under Section 15HB for Code of Conduct violations.
The respondents appealed to SAT, Mumbai. SAT allowed the appeal, holding that the explanation that TJL faced the risk of being downgraded to a non-performing asset was sufficient to establish innocence, and that this would fall within the proviso to Regulation 4(1). SAT also observed that there was hardly any price difference in TJL shares on 29 and 30 November 2017, and so it could not be said the sales were aimed at avoiding losses. SEBI challenged that finding before the Supreme Court under Section 15Z of the SEBI Act in Civil Appeal No. 4905 of 2022.
The Statutory Framework: What the 2015 PIT Regulations Actually Say
The Court set out the governing framework carefully. Section 12A of the SEBI Act prohibits any person from directly or indirectly engaging in insider trading or dealing in securities while in possession of material or non-public information. Section 15G imposes penalties, and Section 11B — through an Explanation — gives SEBI the power to direct disgorgement of any profit made or loss averted through a contravention.
Under Regulation 4(1) of the PIT Regulations 2015, trading while in possession of UPSI is prohibited. The regulation offers six specific defences — off-market inter-se transfers between insiders sharing the same UPSI; block deal window transactions; trades under statutory or regulatory obligation; exercise of pre-determined stock options; arrangements separating decision-makers from UPSI-holders in non-individual insiders; and trades under a Regulation 5 trading plan.
Critically, the Note appended to Regulation 4(1) states that where a person in possession of UPSI has traded, those trades are presumed to have been motivated by that knowledge. The Note then explicitly provides: the reasons for which a person trades, or the purposes to which the proceeds are applied, are not relevant for determining whether a violation has occurred.
This Note is the central feature distinguishing the 2015 Regulations from their predecessor — the SEBI (Prohibition of Insider Trading) Regulations, 1992 — which contained no equivalent bar on considering the use of proceeds.
Why the SAT's Reasoning and the Abhijit Rajan Precedent Did Not Apply
The respondents argued that the case was covered by this Court's decision in SEBI v. Abhijit Rajan, (2024) 11 SCC 645, where persons accused of insider trading had sold shares while in possession of UPSI apparently to fund a Corporate Debt Restructuring package. They contended that, similarly, no personal gain was made here, and the underlying purpose was legitimate.
The Court rejected this analogy on two distinct grounds. First, the transactions in Abhijit Rajan occurred in 2013 and were governed by the 1992 PIT Regulations, which contained no Note prohibiting consideration of the purpose behind the trades or the use of proceeds. Second, the shares in that case were sold before an anticipated increase in price — an unusual feature that informed the analysis. Here, the shares were sold to avoid a fall in value, and the 2015 PIT Regulations squarely apply.
The Court observed that had the same transactions in Abhijit Rajan taken place after the 2015 Regulations came into force, the corporate purpose behind the trades could not have been considered at all.
The Court also addressed whether the defences listed in Regulation 4(1) should be read ejusdem generis to cover the respondents' situation. It held that the rule of ejusdem generis applies where general words follow specific ones. Here, the defences follow the word “including” — a general term — meaning the rule is not attracted. The use of “including” does signal that the six defences are not exhaustive, but any unenumerated defence would have to be of the same nature as those already listed. Avoiding an NPA downgrade does not resemble any of them.
SAT had also invoked the concept of “legitimate corporate purpose” drawn from its earlier decision in Rakesh Agrawal v. Securities Exchange Board of India, 2003 SCC OnLine SAT 38 — a ruling rendered under the 1992 Regulations. The Court held that course was not open to SAT when deciding a case under the 2015 PIT Regulations, given the explicit Note in Regulation 4(1).
The Court's Findings on Guilt and Disgorgement
The Court found the position clear. It was not disputed that the three respondents were in possession of UPSI during the relevant period. It was not disputed that they sold large portions or the entirety of their shareholdings during that period. Given the Note to Regulation 4(1), the purpose of the sales and the absence of personal profit are both irrelevant. The trades during the UPSI period are sufficient.
On disgorgement, the Court found the WTM's order unassailable. The respondents had, by the trades in question, avoided approximately Rs.1.38 crores in losses. Section 11B of the SEBI Act expressly empowers SEBI to direct a person who averted a loss through a contravention to disgorge an amount equivalent to that loss averted. The WTM's disgorgement direction — set aside by SAT — was restored.
The penalty for violation of Clause 6 of the Minimum Standards for Code of Conduct to Regulate, Monitor and Report Trading by Insiders, read with Regulation 9(1) of the PIT Regulations, was also held justified and restored.
Partial Modification of the Section 15G Penalty
The Court made one modification in favour of Respondent No. 1. The WTM had imposed a penalty of Rs.25 lakhs on Rajeev Sheth under Section 15G. The Court, taking a cumulative view of the facts and the position of Respondents No. 2 and 3 who each received Rs.10 lakhs, reduced Rajeev Sheth's Section 15G penalty to Rs.10 lakhs — the minimum level.
Order
Civil Appeal No. 4905 of 2022 was allowed. The SAT's judgment dated 19 April 2022, which had quashed the WTM's order, was set aside. The WTM's order dated 24 May 2021 was restored in its entirety, subject to the reduction of the Section 15G penalty imposed on Respondent No. 1 from Rs.25 lakhs to Rs.10 lakhs. The modified penalties, to the extent not already paid, are to be paid within three months. All pending applications were disposed of.