The Supreme Court has Ruled that Proximity Between Parties Cannot Be Used To Infer Insider Trading; The Onus is on SEBI to Prove it.


    Insider trading cannot be imputed only on the basis of proximity between the parties, according to the Supreme Court. The Court held that under Regulation 3(1) of the SEBI (Prohibition of Insider Trading), 2015, ‘communication’ of Unpublished Price Sensitive Information must be proven by producing cogent materials such as letters, emails, witnesses, and so on, rather than being presumed based on the parties’ alleged proximity. The Court went on to say that the SEBI had the burden of proof in this case.

    Justices Vineet Saran and Aniruddha Bose sat on a bench that heard appeals against the Securities Appellate Tribunal’s decision upholding the Whole Time Member of SEBI’s judgment punishing the appellants for insider trading.

    Background Information:

    Three brothers, P.C. Gupta, Amar Chand Garg, and Balram Garg, founded P. Chand Jeweller Pvt. Ltd. in 2005. Amar Chand Garg and his family left the company in 2011, and he stepped down as Vice Chairman. PC Jeweller Ltd was formed as a result of the Company’s conversion into a public limited company (“PCJ”). SEBI (Securities and Exchange Board of India) issued an impounding order and a show-cause notice charging insider trading in 2019 and 2020.

    Between 01.04.2018 and 31.07.2018, P.C. Gupta’s son, Sachin Gupta, and daughter-in-law, Shivani Gupta, as well as Amar Chand Garg’s son, Amit Garg, were accused of trading on the basis of unpublished price sensitive information (“USPI”).Due to their proximity to the promoters, these three (appellants) had access to the USPI, according to SEBI. The Whole Time Member of SEBI (“WTM”) imposed a penalty of Rs.20 lakhs and barred them from accessing the securities market, among other things, in an order dated 11.05.2021. On October 21, 2021, an appeal filed with the Securities Appellate Tribunal (“SAT”) was also dismissed.

    The appellants have cited a number of issues:

    Mr. Dhruv Mehta, a senior advocate for Balram Garg, stated that the WTM had determined that Sachin Gupta, Shivani Gupta, and Amit Garg were neither ‘related individuals’ nor ‘immediate relatives’ of Balram Garg. No presumptions could be raised since Balram Garg was found to have violated Regulation 3 of the SEBI (Prohibition of Insider Trading) Regulations, 2015 (“PIT Regulations”). Mr. Mehta contended that the SEBI was responsible for establishing USPI communication, which it had failed to do.

    Furthermore, because the three appellants mentioned here were not under Balram Garg’s supervision, SEBI was unable to benefit from the presumption against ‘immediate relations.’

    Mr. V. Giri, a senior advocate for the other appellants, argued that the entire case of insider trading is based on the parties’ intimate relationship and that the allegations were founded on circumstantial evidence. The appellants allegedly put material on the record to indicate alienation between the couples even before the USPIS were established. The burden of proof to prove that the appellants had access to the UPSI was always on SEBI, it was emphasized.

    The Respondent’s points of Contention:

    Mr. Arvind Datar, a senior advocate for SEBI, claimed that Balram Garg, the Manager Director, was aware of the buy-back and withdrawal of equity shares communications and that he had communicated the UPSI to the other appellants. The abovementioned appellants performed trades between the dates of 02.08.2018 and 31.07.2018 in which they were able to achieve gains and prevent losses.

    Mr. Datar said that the documents on file do not show that the parties’ relationships were severed completely. He said that a review of the trading trend revealed that the appellants were in possession of the UPSI.

    The Supreme Court’s analysis:

    The Court emphasized that, in H.K.N. Swami v. Irshad Basith (2005) 10 SCC 243 and UPSRTC v. Mamta (2016) 4 SCC 172, the SAT erred in habitually affirming the WTM’s order without independently reviewing the evidence and substance on record. Furthermore, the SAT determined that the appellants acquired the UPSI from late P.C. Gupta and Balram Garg only on the basis of “preponderance of probability.” The Court identified two issues that it felt needed to be addressed.

    Is it true that the WTM and SAT were correct in dismissing the claim of estrangement?

    Is it possible that appellants could have been deemed “insiders” under Regulation 2(1) (g) (ii) of the PIT Regulations based solely on circumstantial evidence?

    Regarding the allegation of estrangement, the Court noted that, while Amar Chand Garg was originally one of the Company’s promoters, he left in 2011. Amar Chand Garg, his son, was never involved with PJC. Sachin and Shivani Gupta quit in 2015 due to conflicts with their parents.

    Later, as part of a family settlement, Sachin Gupta received 1, 60, 00,000 shares of the company in exchange for his rights to any other property of his parents. The Apex Court pointed out that neither the WTM nor the SAT took into account these facts, which show that the couples’ relationship had completely broken down. It was stated –

    “…given the fact that the entire case against the appellants for the offense of insider trading was based on the nature of close relationship between the parties, once it has been rightly held by the WTM that the appellants are neither “connected persons” within the meaning of Regulation 2(1)(d) nor “immediate relatives” within the meaning of Regulation 2(1)(f) of PIT Regulation, the question of ipso facto relying on the nature of relationship between the parties to come to the conclusion that they were “in possession of or having access to UPSI” while trading with the shares of the company is legally unsustainable.”

    In the alternative, the Court stated that even if there was no alienation, the SEBI failed to meet its burden of proving UPSI possession.

    On the second question, the Court determined that there was no link between the UPSI and the selling of shares after reviewing the evidence. Shares were sold for personal and commercial reasons only. Furthermore, it was noted that a presumption of UPSI communication by Balram Garg could not have been made without any evidence of frequent communication.

    The Court stated that circumstantial evidence can be considered only when certain foundational facts are established, citing Hanumant v. State of Madhya Pradesh AIR 1952 SC 343, Chintalapati Srinivasa Raju v. Securities Exchange Board of India (2018) 7 SCC 443, and Seema Silk And Sarees v. Directorate of Enforcement (2008) 5 SCC 580, and it rejected that the appellants’ trading pattern can be used to prove communication.

    “Thus, the asserted communication of UPSI could only be proven by producing convincing materials (letters, emails, witnesses, etc.) and not by deeming the communication to have transpired owing to the purported proximity between the parties.”

    SEBI failed to establish that the said appellants were “connected persons” to Balram Garg as required by Regulation 2(1) (d) (ii) (a) read with Regulation 2(1) (f) of the PIT Regulations because they were not financially dependent on him or alleged to have consulted him in any decision related to securities trading, according to the Court.

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