As per the Preamble of the Securities and Exchange Board of India Act, 19921 (SEBI Act), the legislation aims to establish a Board i.e. Securities and Exchange Board of India (SEBI) for the protection of investors in securities, to promote the development and to regulate the securities market. SEBI is thus duty-bound to take any measures “as it thinks fit”2 in order to meet this objective. One such duty of SEBI is to curb insider trading in the securities market.
Insider trading is essentially an activity wherein a person would buy or sell securities of a listed company on the basis of unpublished price-sensitive information (UPSI). In other words, it is trading in the securities of a listed company on the basis of information that a person or a group of persons would have, and others would not. Since such activity leads to the advantage of some over the rest, it leads to the erosion of investor confidence in the market. In order to ensure a level playing field in the capital market and to fulfil the objectives as laid down in the Preamble of the SEBI Act, the law has made insider trading a criminal offence under Section 243 of the SEBI Act and has also come up with specific Regulations4 to curb the same.
Due to the severe consequences of violation of insider trading laws, the standard and evaluation of the evidence which the Board takes into account to hold someone liable becomes imperative. SEBI is cognizant5 of the fact that in cases of insider trading, direct evidence is seldom available and would have to rely on the chain of circumstances to arrive at a conclusion. In this blog it is argued that SEBI in a myriad of cases has not made the best use of the same. In Balram Garg v. SEBI6 (Balram Garg case) the Supreme Court has pushed the standard of evidence up a notch. However, in doing so, it has placed direct evidence on a higher pedestal than circumstantial evidence. This would bind the hands of the market regulator vis-à-vis insider trading cases since a lot of the time circumstantial evidence is all that comes through the door for SEBI. In that light, it is argued that a better course of action for the Court in Balram Garg case7 would have been to give equal weight to the two.
Analysing the (mis)use of circumstantial evidence in insider trading cases
Direct evidence in insider trading cases is hard to come by.8 Such evidence is usually in the knowledge of the alleged offenders. In Atlanta Ltd., In re9, it was observed that, with a myriad of encrypted methods of communication available today, getting hands on paper or electronic trail of e-mails, letters or even witnesses have gotten even rarer. The order also noted that in absence of direct evidence, a “prudent man’s” assessment of the probabilities of the circumstances of the case would be imperative. The N.K. Sodhi Committee Report10 too observed that it was simply not possible to obtain direct evidence in all insider trading cases, and the “facts and circumstances” of the case have to be assessed to determine if a person can reasonably infer to have access to UPSI.
The Supreme Court in SEBI v. Kishore R. Ajmera11 (Kishore R. Ajmera case) shed more light on this aspect and held that circumstantial evidence can be sufficient to establish the existence of insider trading if it leads to an “irresistible inference” that sensitive information was provided by the tippers to tippees. Among other evidence presented before the Court, it specifically used the pattern and timing of trade as circumstantial evidence in this case, including — the volume of the trade getting effected; the details of the buying and selling orders; and the amount of time between the different orders, etc. Similarly, SEBI v. Rakhi Trading (P) Ltd.12 also established that the commission of the violations can be proved by relying on circumstantial evidence if direct evidence does not exist.
The Courts in a myriad of cases have also guided us on the manner in which circumstantial evidence is to be used vis-à-vis cases of insider trading. In Kishore R. Ajmera13 it was held that “totality of the attending facts and circumstances surrounding the allegations” is what matters, and a single meeting or a call in isolation is not sufficient circumstantial evidence to create a presumption of guilt.
In V.K. Kaul v. SEBI14, telephonic conversations, bank transactions and the timing of trades and the prices at which they were executed, and Mr Kaul’s attempts to conceal his telephonic conversations were all taken into account to conclude that Mr Kaul had engaged in insider trading, despite the lack of sufficient direct evidence to the same effect. The aforementioned cases have therefore also laid out the limits to be kept in mind while evaluating circumstantial evidence vis-à-vis insider trading. The aforementioned cases, therefore, demonstrate a measured and prudent use of circumstantial evidence.
However, there have been several instances wherein the market regulator has relied on an incomplete chain of circumstantial evidence to determine the guilt of parties who are charged with the offence of insider trading. In Insider Trading in the Scrip of Deep Industries Ltd., In re15, “likes” on Facebook posts by certain individuals were used as the primary evidence to establish that the parties involved were “connected persons” that could reasonably be expected to have shared price sensitive information.
In Insider Trading in the Scrip of CRISIL Ltd., In re16, trading patterns alone were used to establish the occurrence of insider trading. However, selling of shares by the accused at opportune moments in large quantities during the “UPSI period”, along with a general interrelation between the various accused was considered to be sufficient circumstantial evidence to establish the existence of insider trading. Actual proof of any communication was not available here.
Similarly in Kunal Ashok Kashyap, In re17 and in Biocon Ltd., In re18, SEBI demonstrated that any person who is even remotely connected to the alleged offender can be presumed to have the ability to access UPSI. In the case, Mr Kunal Ashok Kashyap was presumed to have such information simply because Mr Kunal Ashok Kashyap was in the higher-ups of the organisation in question and acting in the capacity of an advisor of a transaction, even if such a position does not afford him this privilege. The fact that trading was done under the UPSI period and the fact that the offender knew key managerial personnel of the company was used to presume guilt with respect to the offence of insider trading. SEBI did not even consider factors like the direction of trade into account before coming to its conclusion. Thus, SEBI put presumptions on a higher pedestal and failed to take into account evidence concerning the totality of the circumstance at hand in this case.
Therefore, by analysis of the aforementioned orders, the complete chain of circumstance was missing while determining the guilt of the parties vis-à-vis insider trading. Such cases wherein the threshold of evidence required for proving someone guilty of insider trading is disturbed would result in chilling effects19 i.e. parties would much rather not participate in the capital market. Therefore, in our view such instances go against the mandate of SEBI as laid down in the Preamble of the SEBI Act.
Balram Garg case: A flawed solution?
This case concerns itself with respect to insider trading allegations over people who were part of the promoter group of the company PC Jeweller. Padam Chand Gupta (P.C. Gupta) was the Chairman of the company during the relevant period. Balram Garg i.e. the brother of P.C. Gupta, was the Managing Director of the company during the same timeframe. It was alleged by SEBI that Sachin Gupta, Shivani Gupta, and Amit Garg had traded on the basis of UPSI which they had access to due to their proximity to P.C. Gupta and Balram Garg during the relevant period. In light of the given facts, SEBI had also alleged that Balram Garg as well as P.C. Gupta, came within the definition of “connected person” and “insider” under the SEBI (Prohibition of Insider Trading) Regulations, 201520 (PIT Regulations). SEBI and the Securities Appellate Tribunal (SAT) found the parties guilty of the charge of insider trading under the PIT Regulations. However, the Supreme Court overturned the two aforementioned orders. The Court considered the following questions to examine the liability of the parties for insider trading:
(a) Whether the whole-time members and the SAT rightly rejected the claim of estrangement of the appellants in the case?
(b) Could the parties in the case be held to be insiders solely on the basis of circumstantial evidence?
On the first question, the Supreme Court was of the opinion that SEBI and SAT had not taken due consideration of the fact that the parties in trial were estranged as far as their personal and professional lives were considered while deciding on the liability of the parties vis-à-vis insider trading. The fact that the parties were estranged would make it highly improbable that any UPSI was communicated amongst them.
However, it is the answer to the second question which would merit our attention. The Supreme Court was of the opinion that there was a dearth of material on record which could indicate communication between the parties vis-à-vis UPSI. Therefore, the presumption that there was any communication with regard to the same by Balram Garg was faulty. Moreover, the Court held that mere trading pattern and timing of the trade is not enough circumstantial evidence to prove the communication of UPSI between Balram Garg and other parties in the case. In principle, the Court has held that it is only through the production of materials like letters, e-mails, and witnesses that one would be able to prove that any UPSI was communicated between parties.
It is not the case that the decision in Balram Garg case21 disregards the importance of circumstantial evidence. Rather the Court has relied on Hanumant v. State of M.P.22 to lay out the role of circumstantial evidence in such cases. The Court also relied on Chintalapati Srinivasa Raju v. SEBI23 and Kishore R. Ajmera case24 in order to demonstrate the same. But this has to be viewed in the light that in this case, SEBI had produced and was itself relying on limited set of evidence. Clearly, mere trading patterns and time of trades is not sufficient evidence to hold anyone liable for such an offence.
However, by way of asking SEBI to present before the court e-mails, letters, witnesses and other evidence, the Court has pushed the standard of evidence up a notch. In our view, the Court was correct in holding that Regulation 3 of the SEBI (Prohibition of Insider Trading) Regulations, 201525 would not create a deeming fiction in law. By this articulation, any misuse of circumstantial evidence as mentioned earlier would be put to rest. However, as per the language of the Court, it is “only through producing cogent materials” through which the communication of UPSI could be proved. By implication of this line of thought, SEBI’s reliance on circumstantial evidence would exponentially reduce as the judgment has given more emphasis on production of direct evidence than circumstantial evidence. The Court has therefore ignored the ground reality that such evidence is hard to come through the door for SEBI. Even if they do, they come in bits and pieces and at the end of the day, SEBI has to rely on circumstantial evidence to prove its case. Our argument is that taking into account the difficulty of SEBI to get its hands on circumstantial evidence, the Supreme Court should have taken the route of holding that there should have been a complete chain of circumstances which should have been demonstrated by SEBI. To keep direct evidence on a higher pedestal in comparison to circumstantial evidence would bind the hands of the market regulator to establish any liability for insider trading before SEBI, SAT, and the Supreme Court.
Securities Regulators around the world such as the Securities and Exchange Commission of the United States of America have also acceded to the fact that evidence which they get their hands on for prosecuting insider trading related offences are purely circumstantial26, and in that light, cases27 have given equal importance to direct as well as circumstantial evidence. Moreover, in Donna Hutchinson, Cameron Edward Cornish, David Paul George Sidders and Patrick Jelf Caruso, In re28 the Ontario Securities Commission has supported the use of circumstantial evidence and has observed that in the absence of direct evidence it would play the role of filling the evidentiary gaps. The solution provided in Balram Garg case29 would therefore be faulty since it seems to not give direct and circumstantial evidence equal value vis-à-vis insider trading cases.
A court must take a balanced approach in appreciating circumstantial evidence. Balram Garg case30 has taken the correct position with respect to the facts before it. Yet, the answer to the second question should have been to consider circumstantial evidence in a proper and prudent manner, instead of minimising its importance. This line of argument becomes imperative as direct evidence is seldom available at the disposal of SEBI. Direct evidence must not be put on a pedestal, in relation to circumstantial evidence, as was done in Balram Garg case.31 However, the courts must also require a complete chain of circumstantial evidence32 that takes into account the totality of the situation, instead of finding the accused guilty on incomplete and isolated pieces of circumstantial evidence, as was done in Deep Industries case.33 According to the authors, the realities of scarce direct evidence and over-reliance on circumstantial evidence can be solved by adopting this prudent, balanced approach of requiring a complete chain of circumstantial evidence. This would enhance the quality of the outcome, which comes out from the courts, and would enable SEBI to continue its duty to protect the interests of investors, without causing any “chilling effect” to existing and potential investors in the capital market.
† 4th year law student at NALSAR University of Law, Hyderabad. Author can be reached at email@example.com.
†† 4th year law student at NALSAR University of Law, Hyderabad. Author can be reached at firstname.lastname@example.org.
19. Sandeep Parekh, Anil Choudary and Manal Shah, “Insider Trading Violations: The Implications of SEBI’s Recent Rulings”, The Financial Express, (16-9-2021) <https://www.financialexpress.com/opinion/insider-trading-violations-the-implications-of-sebis-recent-rulings/2331027/>.
26. Thomas C. Newkirk, “Speech by SEC Staff: Insider Trading — A U.S. Perspective”, U.S. Securities and Exchange Commission, <https://www.sec.gov/news/speech/speecharchive/1998/spch221.htm>. See also, L. Hilton Foster, “Insider Trading Investigations”, U.S. Securities and Exchange Commission, <https://www.sec.gov/about/offices/oia/oia_enforce/foster.pdf>.
27. Securities Exchange Commission v. Evans, No. CV. 05-1162-PK (Order dated 13-11-2006) (United States District Court, Oregon).
28. Hutchinson (Re), 2020 ONSEC 1 (Ontario Securities Commission).
32. Sandeep Parekh, Anil Choudary and Manal Shah, “Insider Trading Violations: The Implications of SEBI’s Recent Rulings”, The Financial Express, <https://www.financialexpress.com/opinion/insider-trading-violations-the-implications-of-sebis-recent-rulings/2331027/>.