Insider Trading Can't Be Presumed Due To Proximity Between Parties; Onus To Prove Is On SEBI : Supreme Court

The Supreme Court has held that insider trading cannot be presumed merely on the basis of proximity between the parties. The Court held 'communication' of Unpublished Price Sensitive Information under Regulation 3(1) of the SEBI (Prohibition of Insider Trading), 2015 ought to be proved by producing cogent materials, like, letters, emails, witnesses etc. and not be deemed owing to the alleged proximity between the parties. The Court further held that the onus is on the SEBI to prove such communication. A Bench comprising Justices Vineet Saran and Aniruddha Bose allowed appeals filed assailing the order of the Securities Appellate Tribunal, which had upheld the order of the Whole Time Member of SEBI, penalising the appellants for insider trading. Factual Background In 2005, P. Chand Jeweller Pvt. Ltd. was promoted by three brothers - P.C. 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, the Company was converted into a public limited company, PC Jeweller Ltd. ("PCJ"). In 2019 and 2020, the Securities and Exchange Board of India ("SEBI") issued impounding order and show cause notice alleging insider trading. P.C. 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daughter-in-law, Shivani Gupta along with Amar Chand Garg's son, Amit Garg were alleged to have traded on the basis of Unpublished Price Sensitive Information ("USPI") between 01.04.2018 and 31.07.2018. According to SEBI, these three (appellants) had access to the USPI due to their close proximity to the promoters. By its order dated 11.05.2021, the Whole Time Member of SEBI ("WTM") imposed a penalty of Rs.20 lakhs and, inter alia, restrained them from accessing the securities market. The appeal filed before the Securities Appellate Tribunal ("SAT") was also dismissed on 21.10.2021. Contentions raised by the appellants Senior Advocate, Mr. Dhruv Mehta, appearing for Balram Garg 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 Regulation 3 of SEBI (Prohibition of Insider Trading) Regulations, 2015 ("PIT Regulations), no presumptions could be raised. Mr. Mehta argued that the onus to establish communication of the USPI was on the SEBI, which it had failed to discharge. Moreover, given that the three appellants named above, were not under the control of Balram Garg, the benefit of the presumption against 'immediate relatives' cannot be availed by SEBI. Senior Advocate, Mr. V. Giri, appearing on behalf of the other appellants contended that the entire case of insider trading is based on the close relationship between the parties and charges were based on circumstantial evidence. It was submitted that the appellants have placed material on record to establish estrangement between the parties, even prior to the USPIs came into existence. It was emphasised upon that the burden of proof to establish that the appellants had access to the UPSI was always on SEBI. Contentions raised by the respondent Senior Advocate, Mr. Arvind Datar, appearing for SEBI, averred that Balram Garg, the Manager Director, was privy to the communications pertaining to buy-back and withdrawal of equity shares and he had communicated the UPSI to the other appellants. During the period 02.08.2018 to 31.07.2018, the said appellants had executed trades wherein they were able to make gains and avoid losses. Mr Datar submitted that the documents on record do not demonstrate that all ties between the parties were severed. On perusal of the trading pattern, he contended that it was evident that the appellants were in possession of the UPSI. Analysis by the Supreme Court Referring to H.K.N. Swami v. Irshad Basith (2005) 10 SCC 243 and UPSRTC v. Mamta (2016) 4 SCC 172, the Court noted that the SAT, as the first court of appeal had erred in routinely affirming the order of the WTM without independently assessing the evidence and material on record. Moreover, merely based on 'preponderance of probability', the SAT found that the appellants had received the UPSI from late P.C. Gupta and Balram Garg. The Court culled out two issues that it thought needed consideration - Whether the WTM and SAT rightly rejected the claim of estrangement?Whether appellants could have been held to be "insiders' in terms of Regulation 2(1)(g)(ii) of the PIT Regulations merely on the basis of circumstantial evidence? With respect to the claim of estrangement, the Court observed that though Amar Chand Garg was initially one of the promoters, he exited the Company in 2011. His son, Amar Chand Garg was never associated with PJC. In 2015, due to some differences with his parents, Sachin Gupta and Shivani Gupta resigned. Though later, by way of a family settlement...

Insider Trading Can't Be Presumed Due To Proximity Between Parties; Onus To Prove Is On SEBI : Supreme Court

Sohini Chowdhury

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