Under the SEBI (Prohibition of Insider Trading) Regulations, 2015, once a person has traded in securities while in possession of unpublished price sensitive information, is the purpose for which the sale proceeds are used relevant to establishing insider trading?

The present appeal under Section 15Z of the Securities and Exchange Board of India Act, 1992[^1] challenges the correctness of the final judgment and order dated 19.04.2022 passed by the Securities Appellate Tribunal, Mumbai 2 in Appeal No.536 of 2021, whereby the SAT, while allowing the said appeal, quashed and set aside the order dated 24.05.2021 passed by the Whole Time Member[^3], SEBI holding the Respondents herein, guilty of insider trading under the SEBI Act. C.A.NO. 4905/2022 1

Brief facts giving rise to the present appeal, shorn of unnecessary details, are as follows: 2.1. Tara Jewels Limited[^4] is a company engaged in buying and selling of jewelry. The Respondent No.1 before us, namely, Mr. Rajeev Vasant Sheth, is the Chairman and Managing Director; Respondent No. 2, namely Ms. Aarti Sheth, and Respondent No. 3, Divya Sheth, being the daughters of Respondent No. 1, were the Promoters and Vice Presidents of TJL. 2.2. TJL was traded on the Bombay Stock Exchange and National Stock Exchange. It had entered the liquidation process by order dated 30.07.2019 passed by the National Company Law Tribunal. The Company suffered losses of Rs.166.80 Crores during the quarter ending in September 2017, whereas in the previous quarter ending in June 2017 net loss was of Rs.6.62 Crores. For the same period, net Sales of the Company fell by approximately 69%. 2.

During the Unpublished Price Sensitive Information[^5] Period i.e., 02.10.2017 to 29.11.2017, the Respondent No.1 sold of 30,93,948 shares owned by him, which was about 12.56% of the total shareholding of the company, and a further 29,75,000 shares by subsequent transactions. Respondents No.2 and 3 sold of their entire holding - 1,14,440 each. Consequently, a cumulative loss of approximately Rs.1.38 crores was avoided. 2.

SEBI issued Impounding Order-cum-Show Cause Notice[^6] on 04.09.2020 seeking explanation as to why appropriate directions be not issued against them as also the penalty imposed.

The above-mentioned SCN culminated in order 24.05.2021 of the WTM whereby all the three respondents were found to have committed insider trading prohibited under the SEBI Act and the Securities and Exchange Board of India C.A.NO. 4905/2022 2 (Prohibition of Insider Trading) Regulations 2015[^7]. Relevant part of the order is extracted hereunder:

Aggrieved thereby, the Respondents filed an appeal before SAT, Mumbai. It was observed that the explanation given by the respondents herein that TJL was at the risk of being downgraded to a non-performing asset is sufficient to prove his innocence regarding trading of shares while in possession of UPSI. It was held that such an explanation would be covered under the proviso to Regulation 4(1) of the PIT Regulations 2015. It was further observed with reference to the closing price of TJL’s shares on 29.11.2017 and 30.11.2017 on both NSE and BSE that there was hardly any price difference and as such it could not be observed that the sale of the shares was for the purpose of avoiding further losses. The appeal was allowed. C.A.NO. 4905/2022 4

SEBI takes exception to setting aside the liability imposed upon the respondents in this appeal. We have heard learned Senior Counsel/Counsels for the parties.

Let us first understand the concept of Insider Trading. In essence, it is dealing in a company’s securities having been informed by confidential information which is likely to affect the price of the securities in the market, once such information is made public. It qualifies as a breach of fiduciary duty by the employees of the company who are, by virtue of being such employees, privy to such insider information. The genesis of this concept is found in the United States of America, and the same is regulated by the Securities Exchange Act of 1934. 6.1. The SEBI Act, similar to the 1934 Act in the USA, does not define ‘Insider Trading’. It only provides under Chapter VA titled “Prohibition of Manipulative and Deceptive Devices, Insider Trading and Substantial Acquisition of Securities or Control” and specifically under Section 12A thereunder that no person shall directly or indirectly engage in insider trading. The said section is reproduced hereunder:

Keeping in view the aforesaid scheme of the Act, we now move to the PIT Regulations 2015. Regulation 2 provides the definitions for certain aspects that are relevant here: 7.1. Sub-regulation (d) thereunder, defines a ‘connected person’ as follows: “(d) "connected person" means,- (i) any person who is or has during the six months prior to the concerned act been associated with a company, directly or indirectly, in any capacity including by reason of frequent communication with its officers or by being in any contractual, fiduciary or employment relationship or by being a director, officer or an employee of the company or holds any position including a professional or business relationship between himself and the company whether temporary or permanent, that allows such person, directly or indirectly, access to unpublished price sensitive information or is reasonably expected to allow such access. (ii) Without prejudice to the generality of the foregoing, the persons falling within the following categories shall be deemed to be connected persons unless the contrary is established, - (a). an immediate relative of connected persons specified in clause (i); or (b). a holding company or associate company or subsidiary company; or (c). an intermediary as specified in section 12 of the Act or an employee or director thereof; or (d). an investment company, trustee company, asset management company or an employee or director thereof; or (e). an official of a stock exchange or of clearing house or corporation; or (f). a member of board of trustees of a mutual fund or a member of the board of directors of the asset management company of a mutual fund or is an employee thereof; or C.A.NO. 4905/2022 9 (g). a member of the board of directors or an employee, of a public financial institution as defined in section 2 (72) of the Companies Act, 2013; or (h). an official or an employee of a self- regulatory organization recognised or authorized by the Board; or (i). a banker of the company; or (j). a concern, firm, trust, Hindu undivided family, company or association of persons wherein a director of a company or his immediate relative or banker of the company, has more than ten per cent. of the holding or interest; NOTE: It is intended that a connected person is one who has a connection with the company that is expected to put him in possession of unpublished price sensitive information. Immediate relatives and other categories of persons specified above are also presumed to be connected persons but such a presumption is a deeming legal fiction and is rebuttable. This definition is also intended to bring into its ambit persons who may not seemingly occupy any position in a company but are in regular touch with the company and its officers and are involved in the know of the company’s operations. It is intended to bring within its ambit those who would have access to or could access unpublished price sensitive information about any company or class of companies by virtue of any connection that would put them in possession of unpublished price sensitive information.” (emphasis supplied) 7.2. Sub-regulation (g) defines ‘insider’: “(g) "insider" means any person who is: i) a connected person; or ii) in possession of or having access to unpublished price sensitive information; NOTE: Since “generally available information” is defined, it is intended that anyone in possession of or having access to unpublished price sensitive information should be considered an “insider” regardless of how one came in possession of or had access to such information. Various circumstances are provided for such a person to demonstrate that he has not indulged in insider trading. Therefore, this definition is intended to bring within its reach any person who is in receipt of or has access to unpublished price sensitive information. The onus of showing that a certain person was in possession of or had access to unpublished price sensitive information at the time of trading would, therefore, be on the person leveling the charge after which the person who has traded when in possession of or having access to C.A.NO. 4905/2022 10 unpublished price sensitive information may demonstrate that he was not in such possession or that he has not traded or or he could not access or that his trading when in possession of such information was squarely covered by the exonerating circumstances.” (emphasis supplied) 7.3. Sub-regulation (n) defines ‘unpublished price sensitive information’: “(n) "unpublished price sensitive information" means any information, relating to a company or its securities, directly or indirectly, that is not generally available which upon becoming generally available, is likely to materially affect the price of the securities and shall, ordinarily including but not restricted to, information relating to the following: – (i) financial results; (ii) dividends; (iii) change in capital structure; (iv) mergers, de-mergers, acquisitions, delistings, disposals and expansion of business and such other transactions; (v) changes in key managerial personnel. [***]. NOTE: It is intended that information relating to a company or securities, that is not generally available would be unpublished price sensitive information if it is likely to materially affect the price upon coming into the public domain. The types of matters that would ordinarily give rise to unpublished price sensitive information have been listed above to give illustrative guidance of unpublished price sensitive information.” (emphasis supplied)

Regulation 3 of the PIT Regulations, 2015 prescribes that no insider shall communicate, provide or allow access to any UPSI other than in furtherance of legitimate purposes or discharge of, inter alia, legal obligations. The relevant part thereof inasmuch as it relates to the mainstay of the present lis, i.e., Regulation 4, is as under: “(3) Notwithstanding anything contained in this regulation, an unpublished price sensitive information may be communicated, provided, allowed access to or procured, in connection with a transaction that would:– (i) entail an obligation to make an open offer under the takeover regulations where the board of directors of the [listed] company is of informed opinion that [sharing of such information] is in the best interests of the company; C.A.NO. 4905/2022 11 NOTE: It is intended to acknowledge the necessity of communicating, providing, allowing access to or procuring UPSI for substantial transactions such as takeovers, mergers and acquisitions involving trading in securities and change of control to assess a potential investment. In an open offer under the takeover regulations, not only would the same price be made available to all shareholders of the company but also all information necessary to enable an informed divestment or retention decision by the public shareholders is required to be made available to all shareholders in the letter of offer under those regulations. (ii) not attract the obligation to make an open offer under the takeover regulations but where the board of directors of the [listed] company is of informed opinion [that sharing of such information] is in the best interests of the company and the information that constitute unpublished price sensitive information is disseminated to be made generally available at least two trading days prior to the proposed transaction being effected in such form as the board of directors may determine [to be adequate and fair to cover all relevant and material facts]. NOTE: It is intended to permit communicating, providing, allowing access to or procuring UPSI also in transactions that do not entail an open offer obligation under the takeover regulations 14[when authorised by the board of directors if sharing of such information] is in the best interests of the company. The board of directors, however, would cause public disclosures of such unpublished price sensitive information well before the proposed transaction to rule out any information asymmetry in the market.”

Regulation 4 of the PIT Regulation 2015 prohibits trading when in possession of UPSI. It incorporates a rebuttable presumption that the trades done by the person in possession of such UPSI are motivated by the information contained therein. It provides for scenarios where the person accused of having traded while in possession of such UPSI, can demonstrate their innocence. It says ‘provided that the insider may prove his innocence by demonstrating circumstances including the following’. 9.1. The transaction that is subject matter of dispute is (a) off-market; (b) inter se transfer between insiders; (c) while they were in possession of same UPSI; and (d) that it was not in violation of Regulation 3 with the exception of sub-regulation C.A.NO. 4905/2022 12 (3) of Regulation 3 which we have already extracted supra and (e) both parties made a conscious and informed trade decision. It is further provided that such inter-se transfer be notified to the company in two-working days and that such companies shall further transmit such information to the stock exchange where such company is listed. “(i) the transaction is an off-market inter-se transfer between [insiders] who were in possession of the same unpublished price sensitive information without being in breach of regulation 3 and both parties had made a conscious and informed trade decision. [Provided that such unpublished price sensitive information was not obtained under sub-regulation (3) of regulation 3 of these regulations. Provided further that such off-market trades shall be reported by the insiders to the company within two working days. Every company shall notify the particulars of such trades to the stock exchange on which the securities are listed within two trading days from receipt of the disclosure or from becoming aware of such information.]” 9.2. The second defence is if the transaction in question has been carried out through the block deal window mechanism between persons who were in possession of UPSI, having made an informed and conscious decision; not being in violation of Regulation 3; and not having secured the relevant information under sub-regulation (3) of Regulation 3. “(ii) the transaction was carried out through the block deal window mechanism between persons who were in possession of the unpublished price sensitive information without being in breach of regulation 3 and both parties had made a conscious and informed trade decision; Provided that such unpublished price sensitive information was not obtained by either person under sub-regulation (3) of regulation 3 of these regulations.” 9.3. The transaction was in furtherance of statutory or regulatory obligations in connection with a bona fide transaction. “(iii) the transaction in question was carried out pursuant to a statutory or regulatory obligation to carry out a bona fide transaction.” C.A.NO. 4905/2022 13 9.4. The transaction was in exercise of stock options, and the price thereof was predetermined as per applicable regulations. “(iv) the transaction in question was undertaken pursuant to the exercise of stock options in respect of which the exercise price was pre- determined in compliance with applicable regulations.” 9.5. The fifth defence deals with non-individual investors and provides for two scenarios where innocence can be pleaded (1) where the people making the trade and the people in possession of the UPSI were different and (2) where adequate arrangements were in place to prevent the communication of the UPSI, and there is no evidence of such arrangements having been breached. “(v) in the case of non-individual insiders: – (a) the individuals who were in possession of such unpublished price sensitive information were different from the individuals taking trading decisions and such decision-making individuals were not in possession of such unpublished price sensitive information when they took the decision to trade; and (b) appropriate and adequate arrangements were in place to ensure that these regulations are not violated and no unpublished price sensitive information was communicated by the individuals possessing the information to the individuals taking trading decisions and there is no evidence of such arrangements having been breached;” 9.6. The sixth defence is trades carried out in accordance with trading plans as formulated under Regulation 5. 9.7. At the end of Regulation 4(1) there is a note that embeds a presumption of trades so made being motivated by such knowledge and information in his possession, when such a person has UPSI. The intentions and the purposes to which the proceeds of the transactions are applied are thereby made irrelevant. The text of the note is: “NOTE: 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 C.A.NO. 4905/2022 14 violated the regulation. He traded when in possession of unpublished price sensitive information is what would need to be demonstrated at the outset to bring a charge. Once this is established, it would be open to the insider to prove his innocence by demonstrating the circumstances mentioned in the proviso, failing which he would have violated the prohibition.” (emphasis supplied)

Turning back to the present facts, it is the case of the appellant that the respondents do not fall within any of the defences provided under Regulation 4 (1) and therefore the SAT had erred. Per contra, the respondents contend that the present case would be covered by the judgment of this Court in SEBI v. Abhijit Rajan[^8] given its similarity on facts. In that case too, the persons accused of insider trading had rerouted the funds for the purposes of the company. It is further submitted that the respondents gained nothing from the trades.

We are of the considered view that the law as discussed above leads us to only one conclusion. It is not in dispute that the respondents were in possession of UPSI. It is also not in dispute that the respondents had sold of large portions or the entirety of their shareholding while in possession of such UPSI. As such, in view of the note appended to Regulation 4 (1) reproduced supra, the purposes for which the proceeds are employed is an irrelevant consideration. The fact that the respondents had indulged in the trades at the relevant point in time is sufficient to conclude that they had conducted insider trading. In that view of the matter, less or no profit, is of no consequence.

Insofar as the argument of the appellant that none of the defences provided or those of the similar nature would cover the respondents is concerned, let us consider the same. In short, what is implied by the appellant is that even if the defences laid out in Regulation 4 (1) are read ejusdem generis, the respondents C.A.NO. 4905/2022 15 would still not be covered. Regarding this principle, it is said by a three-Judge Bench in P. Mohanraj v. Shah Bros. Ispat (P) Ltd.[^9] with reference to an earlier decision in Vikram Singh v. Union of India[^10] which in turn further referred to Siddeshwari Cotton Mills (P) Ltd. v. Union of India[^11] that: “26. In Vikram Singh v. Union of India [Vikram Singh v. Union of India, (2015) 9 SCC 502 : (2015) 4 SCC (Cri) 213] , this Court was asked to construe the expression “government or any other person” contained in Section 364-A of the Penal Code, 1860 with reference to ejusdem generis. This Court, in repelling the contention, went on to hold : (SCC pp. 523-25, paras 26-30 & 32) … … … 27. In Siddeshwari Cotton Mills (P) Ltd. v. Union of India [Siddeshwari Cotton Mills (P) Ltd. v. Union of India, (1989) 2 SCC 458 : 1989 SCC (Tax) 297] M.N. Venkatachaliah, J., as his Lordship then was, examined the rationale underlying ejusdem generis as a rule of construction and observed : (SCC p. 463, para 14) ‘14. The principle underlying this approach to statutory construction is that the subsequent general words were only intended to guard against some accidental omission in the objects of the kind mentioned earlier and were not intended to extend to objects of a wholly different kind. This is a presumption and operates unless there is some contrary indication. But the preceding words or expressions of restricted meaning must be susceptible of the import that they represent a class. If no class can be found, ejusdem generis rule is not attracted and such broad construction as the subsequent words may admit will be favoured. As a learned author puts it: ‘… if a class can be found, but the specific words exhaust the class, then rejection of the rule may be favoured because its adoption would make the general words unnecessary; if, however, the specific words do not exhaust the class, then adoption of the rule may be favoured because its rejection would make the specific words unnecessary.’ [ See: Construction of Statutes by E.A. Driedger, p. 95 quoted by Francis Bennion in his Statutory Construction, pp. 829 and 830.]’”

The defences provided for in the regulations are mentioned in Regulation 4 (1), preceded immediately by the word including; the rule of ejusdem generis C.A.NO. 4905/2022 16 cannot be applied since it is applied to words of general nature following specific and particular words. These general words are to be interpreted as per this rule, in light of the specific words. In this case, the specific words, i.e., the defences follow the general word, i.e., including. What we can observe, though, is that the word including indicates the six defences provided are not meant to be exhaustive. What follows is that the other defences that may be covered would be of the same and similar nature as already provided therein.

In regard to Abhijit Rajan (supra), it may be observed that in that case the persons accused of insider trading had sold of the shares while in possession of UPSI apparently for the purposes of funding the Corporate Debt Restructuring Package. It was observed in the facts of that case that one of the companies involved stood to gain “hugely” from the cancellation of the shareholders' agreements but had still proceeded with the selling of the shares since if the restructuring had not gone through, the parent company Gammon Infrastructure Projects Limited, Gammon India Limited could have gone into bankruptcy. In other circumstances, it was held that no ordinary man of prudence would expect an increase of value and would sell shares with the intent to commit insider trading before the relevant information became public. From a perusal of the judgment, it is clear that the transactions subject matter of the dispute took place in the year 2013 and accordingly were governed by the predecessor regulations i.e., Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992[^12].

Having gone through the above-said 1992 Regulations, Regulation 3B appears to deal with defences, in similar terms to what is provided in Regulation 4(1) in the 2015 PIT Regulations. The most obvious difference that appears plain C.A.NO. 4905/2022 17 to us, is that there is no such ‘note’ as there is in the latter. In other words, there was no specific bar against the consideration of the issue of where the proceeds of such insider trading transactions are used. As such, apart from the fact that in Abhijit Rajan the shares were sold before the increase in price shares, as opposed to a fall in the prices in the present case, there was scope available for the Tribunal and the Court to consider why a particular person undertook the transactions in question. Had it been that there was a fall in the shares of the company in that case, their intent to scrounge up the money for the CDR process for the parent company could have been considered. If the same transactions were after the 2015 PIT Regulations, that could not have been considered.

For the reasons as aforestated, the appeal is allowed. On the aspect of the penalty and disgorgement, the order that has been issued by the WTM stands reproduced supra. The SAT, consequent to its conclusion, has set aside the same. In accordance with the discussion above, the penalty has to be imposed once again. As far as disgorgement is concerned, which in simple terms is being asked by the order to give up the profits secured by the insider having traded securities while in possession of UPSI. It is clearly established that, in view of the above discussion that the respondents had engaged in insider trading and, as such, had avoided approximately Rs.1.38 crores in losses. In view of the explanation given in Section 11B of the SEBI Act reproduced supra, such order of the WTM cannot be faulted. The same is restored.

Regarding the penalty imposed upon the respondents in view of violation of Clause 6 of the Minimum Standards for Code of Conduct to Regulate, Monitor and Report Trading by insiders specified in Schedule B read with Regulation 9 (1) of the PIT Regulations 2015, that too, in our view, is justified. C.A.NO. 4905/2022 18

However, insofar as the amount of penalty imposed under section 15G is concerned, taking a cumulative view of the facts and circumstances of the present case as already discussed above, we are of the view that Rs.25 Lakhs as penalty to Respondent No.1 may be excessive. Accordingly, the same is reduced to 10 Lakhs i.e., the minimum penalty as imposed on Respondent Nos. 2 and 3.

Before parting with the matter, we may observe that in the impugned judgment, the SAT appears to recognize a defense to insider trading, i.e., legitimate corporate purpose as was interpreted by the SAT in Rakesh Agrawal v. Securities Exchange Board of India[^13], which was a decision rendered in the context of the 1992 PIT Regulations. That, however, was not a course open for the SAT to take in the impugned judgment in view of the note appended in Regulation 4(1).

The penalty is modified to the above extent. The same shall be paid within a period of three months, if not already paid. Pending application(s), if any, shall stand disposed of. .……….……………………………………J. (SANJAY KAROL) ..............…………………………………….J. (NONGMEIKAPAM KOTISWAR SINGH) NEW DELHI; AUGUST 11, 2026 C.A.NO. 4905/2022 19