Supreme Court: In an appeal filed under Section 15-Z, Securities and Exchange Board of India Act, 19921 (SEBI Act) challenging the judgment and order dated 19 April 2022 passed by the Securities Appellate Tribunal, Mumbai (SAT), whereby the SAT, while allowing the said appeal, quashed and set aside the order dated 24 May 2021 passed by the whole-time member (WTM), SEBI holding the respondents guilty of insider trading under the SEBI Act, the Division Bench of Sanjay Karol* and Nongmeikapam Kotiswar Singh, JJ., set aside the SAT’s order holding that where an insider trades in securities while in possession of unpublished price sensitive information (UPSI), Regulation 4(1), SEBI (Prohibition of Insider Trading) Regulations, 2015 (2015 PIT Regulations) creates a presumption that the trade was motivated by the UPSI. Once possession of UPSI and trading during its currency are established, the reasons for undertaking the trade or the purposes to which the sale proceeds are applied are not relevant for determining insider trading. The Court further held that the defences specifically enumerated in Regulation 4(1) are not exhaustive, but any additional defence must be of the same or similar nature as those expressly provided.
Accordingly, the Court allowed SEBI’s appeal and —
-
restored the finding of insider trading against the Chairman and Managing Director and 2 Promoters of Tara Jewels Ltd.;
-
restored the disgorgement of approximately ₹1.38 crore, together with the applicable interest;
-
upheld the penalty relating to violation of Clause 6 of the Minimum Standards under Schedule B read with Regulation 9(1), 2015 PIT Regulations; and
-
restored the Section 15-G penalties, but reduced Respondent 1’s penalty from ₹25 lakh to ₹10 lakh to be paid within 3 months, if not already paid.
Also Read: SEBI hits Trader with Rs 10 lakh penalty for insider trading in HDFC-HDFC Bank merger
Brief Facts
Tara Jewels Limited (TJL) was engaged in the business of buying and selling jewellery and its shares were listed on the Bombay Stock Exchange and the National Stock Exchange. Respondent 1, was the Chairman and Managing Director of TJL, while Respondents 2 and 3, his daughters, were Promoters and Vice-Presidents of the company.
TJL’s financial position had deteriorated substantially. It suffered a net loss of ₹166.80 crore in the quarter ending September 2017, as against a net loss of ₹6.62 crore in the preceding quarter. During the same period, the company’s net sales declined by approximately 69 per cent.
During the UPSI period, i.e. 2 October 2017—29 November 2017, Respondent 1 sold 30,93,948 shares, representing approximately 12.56 per cent of the company’s total shareholding, followed by further sales of 29,75,000 shares. Respondents 2 and 3 sold their entire respective holdings of 1,14,440 shares each.
According to SEBI, the trades resulted in avoidance of an aggregate loss of approximately ₹1.38 crore. Thereafter, SEBI issued an impounding order-cum-show-cause notice dated 4 September 2020, calling upon the respondents to explain why appropriate directions and penalties should not be imposed.
Procedural History
The WTM, by order dated 24 May 2021, held that all the 3 respondents were guilty of insider trading in violation of the SEBI Act and the 2015 PIT Regulations.
The WTM restrained Respondent 1 from accessing the securities market for 1 year; restrained Respondents 2 and 3 for 6 months; directed the respondents to disgorge the loss avoided through insider trading, together with interest at 12 per cent per annum; directed that the disgorged amount be credited to the Investor Education and Protection Fund (IEPF) and imposed monetary penalties under Sections 15-G and 15-HB, SEBI Act. Respondent 1 was subjected to a penalty of ₹25 lakh under Section 15-G, while Respondents 2 and 3 were each subjected to ₹10 lakh. Additional penalties were imposed under Section 15-HB.
Aggrieved, the respondents challenged the WTM’s order before the SAT. SAT accepted respondents’ explanation that TJL was at risk of being downgraded to a non-performing asset and treated this as sufficient to establish their innocence despite their possession of UPSI. SAT also noted that there was hardly any difference between the closing price of TJL shares on 29 November 2017 and 30 November 2017 on the NSE and BSE. Therefore, it held that the sales could not be said to have been made for the purpose of avoiding further losses.
Accordingly, SAT had exonerated respondents, holding that the sale of shares was prompted by the company’s financial difficulties and the risk of its account being downgraded to a non-performing asset.
Issues for Determination
-
Whether respondents, having admittedly traded in TJL shares while in possession of UPSI, were guilty of insider trading under Regulation 4(1), 2015 PIT Regulations?
-
Whether the respondents could rely upon the purpose for which the sale proceeds were utilised, particularly the company’s financial difficulties, as a defence to insider trading?
-
Whether the defences enumerated in Regulation 4(1) are exhaustive or whether other defences of a similar nature can also be established?
-
Whether SEBI was justified in directing disgorgement of the loss avoided by the respondents?
-
Whether the penalties imposed by the WTM were sustainable?
Analysis
Insider Trading — Statutory and Regulatory Framework
At the outset, the Court explained that insider trading essentially involves dealing in a company’s securities while possessing confidential information that is likely to affect the price of those securities once the information becomes public. Insider trading constitutes a breach of fiduciary duty by those who, because of their position, have access to confidential information.
The Court noted that Section 12-A(d), SEBI Act expressly prohibits a person from engaging in insider trading, while Section 12-A(e) prohibits dealing in securities while in possession of material or non-public information in contravention of the Act or regulations. Section 15-G provides the statutory penalty for insider trading and Section 11-B empowers SEBI to issue directions, including directing a person who has made a profit or averted a loss through a contravention to disgorge an amount equivalent to the wrongful gain or loss avoided.
The Court further noted that under Regulation 2(d), 2015 PIT Regulations a connected person includes a person whose relationship with the company gives, or is reasonably expected to give, access to UPSI. The regulatory note to Regulation 2(d) intended to encompass persons who may not formally occupy a position in the company but are regularly in touch with the company and its officers and are involved in the know of the company’s operations. An insider under Regulation 2(g) includes any connected person as well as any person who is in possession of or has access to UPSI.
The Court stated that UPSI is information relating to a company or its securities which is not generally available and which, upon becoming generally available, is likely to materially affect the price of the securities. Financial results are expressly included within its illustrative scope.
Regulation 4(1) creates a rebuttable presumption
The Court explained that Regulation 4(1), 2015 PIT Regulations prohibits trading while in possession of UPSI and incorporates a rebuttable presumption that the trade was motivated by the information in the insider’s possession.
The Court noted that Regulation 4(1) permits an accused insider to establish innocence by demonstrating specified circumstances. It identified the 6 categories of circumstances expressly contemplated by Regulation 4(1), including:
-
certain off-market inter se transfers between insiders;
-
transactions through the block deal window;
-
transactions pursuant to statutory or regulatory obligations;
-
exercise of stock options at a predetermined price;
-
specified circumstances involving non-individual insiders; and
-
trades carried out pursuant to trading plans under Regulation 5.
However, the Court made clear that these circumstances do not exhaust the possible defences.
Interpreting the note appended to Regulation 4(1), the Court noted that it expressly provides that where a person trades while in possession of UPSI, the trade is presumed to have been motivated by that information. The reasons for trading and the purposes to which the proceeds are applied are not relevant to determining whether the regulation has been violated.
Applying this principle, the Court held “the purposes for which the proceeds are employed is an irrelevant consideration”.
Possession of UPSI + Trading = Presumed Insider Trading
The Court found it undisputed that the respondents were in possession of UPSI and they sold large portions, or the entirety, of their shareholding while in possession of that UPSI. Consequently, once these facts were established, the trades attracted the statutory presumption under Regulation 4(1).
The Court rejected the argument that the respondents should be exonerated because they were seeking to protect the company from financial distress. It categorical held that “the purposes for which the proceeds are employed is an irrelevant consideration” and “less or no profit, is of no consequence”. Thus, the fact that the respondents may not have derived a conventional profit from the trades did not alter the legal character of the transactions.
Defences under Regulation 4(1) — Scope of
The Court rejected SEBI’s argument that even if the defences under Regulation 4(1) were read ejusdem generis, the respondents’ explanation would not fall within them. It observed that the 6 specified defences are preceded by the word “including”. Since “including” is a word of enlargement, the “six defences provided are not meant to be exhaustive”. Therefore, other defences may be available, but they must be “of the same and similar nature” as those already provided for in Regulation 4(1).
The Court distinguished SEBI v. Abhijit Rajan, (2024) 11 SCC 645, and noted that in Abhijit Rajan, the relevant transactions had taken place in 2013 and were therefore governed by the predecessor 1992 PIT Regulations. While those regulations contained provisions dealing with defences, they did not contain the specific note found in Regulation 4(1), 2015 PIT Regulations stating that the reasons for trading or the purposes for which proceeds were used are irrelevant.
Also Read: The Need to Strip “Profit Motive” off of Insider Trading
Decision
The Court allowed the appeal and restored the WTM’s direction for disgorgement of approximately ₹1.38 crores, holding that the respondents had engaged in insider trading and had avoided losses to that extent.
The Court upheld the penalty imposed for violation of Clause 6, Minimum Standards for Code of Conduct under Schedule B read with Regulation 9(1), PIT Regulations, 2015 was upheld. However, the Court held the penalty of ₹25 lakhs imposed on Respondent 1 under Section 15-G, to be excessive and reduced it to ₹10 lakhs, the minimum penalty imposed on Respondents 2 and 3.
The Court also clarified that SAT’s reliance upon “legitimate corporate purpose”, as recognised in Rakesh Agrawal v. SEBI, 2003 SCC OnLine SAT 38, under the 1992 PIT Regulations, was not available under the 2015 Regulations in view of the note appended to Regulation 4(1).
The Court directed that the modified penalty was to be paid within 3 months, if not already paid.
Also Read: Expanding the Net: The New Scope of “Connected Person” in Insider Trading
[SEBI v. Rajeev Vasant Sheth, 2026 SCC OnLine SC 1539, decided on 11-8-2026]
*Judgment Authored by Justice Sanjay Karol
Advocates who appeared in this case:
For the Appellant: Mr. Abhishek Singh, Adv. M/S. K Ashar & Co., AOR
For the Respondent: Ms. Pallavi Pratap, AOR Mr. Aadhar Nautiyal, AOR
