Case at a glance: The Supreme Court has allowed SEBI’s appeal against a Securities Appellate Tribunal order that had set aside insider trading findings against the Chairman and Managing Director of Tara Jewels Limited and his two daughters. It held that, under the 2015 PIT Regulations, trading while in possession of unpublished price sensitive information (UPSI) is enough, that the purpose of the trades and the use of proceeds are irrelevant, and that low or no profit makes no difference. Disgorgement of the loss avoided was restored and one penalty was reduced.
Tara Jewels Limited was listed on the BSE and NSE. For the quarter ending September 2017 it reported a loss of Rs 166.80 crore, against Rs 6.62 crore in the previous quarter. During the UPSI period, 2 October 2017 to 29 November 2017, the Chairman and Managing Director sold large blocks of shares and his two daughters, who were promoters and vice presidents, each sold their entire holdings of 1,14,440 shares.
SEBI’s Whole Time Member found insider trading on 24 May 2021 and ordered market restraints, disgorgement of the loss avoided (about Rs 1.38 crore) with 12% interest, and penalties under Sections 15G and 15HB of the SEBI Act. On 19 April 2022 the Securities Appellate Tribunal set the order aside, accepting that the sales were explained by the risk of the company being downgraded to a non-performing asset and noting little price movement after disclosure.
The Key Question Before the Court
Can promoters who sold shares while holding unpublished bad news escape insider trading liability by explaining a legitimate purpose for the sale or showing they made little or no profit?
The Presumption, the Note and the Defences
The Court held that trading while in possession of UPSI is presumed to be motivated by it, and that the note to Regulation 4(1) of the 2015 Regulations makes the reason for the trades and the use of the proceeds irrelevant. In its words, “the purposes for which the proceeds are employed is an irrelevant consideration”. As the respondents held UPSI and sold large or entire holdings, insider trading was established; lower or no profit was of no consequence.
On the defences in the proviso to Regulation 4(1), the Court relied on P. Mohanraj v. Shah Bros. Ispat to hold that the word “including” shows the six listed defences are not exhaustive, but any other defence must be of the same and similar nature. It distinguished SEBI v. Abhijit Rajan as a case under the 1992 Regulations, which had no equivalent note, and held the Tribunal’s ‘legitimate corporate purpose’ reasoning was not open under the 2015 Regulations.
What the Court Actually Held
- SEBI’s appeal was allowed and the SAT order of 19 April 2022 was set aside on penalty and disgorgement.
- Disgorgement of the loss avoided (about Rs 1.38 crore) with interest was restored.
- The Section 15HB penalties were upheld.
- The CMD’s Section 15G penalty was reduced from Rs 25 lakh to Rs 10 lakh, payable within three months.
Why This Judgment Matters
- It confirms that the 2015 PIT Regulations make the motive behind an insider’s trade irrelevant once UPSI is held.
- It clarifies that the Regulation 4(1) defences are illustrative but must be of a similar kind.
- It confirms that disgorgement under Section 11B can cover a loss avoided, not only a profit made.
What Should Advocates Take Away From the Judgment?
For Listed Companies and Promoters
- Treat any trade during a UPSI window as presumptively tainted, whatever the business reason.
- A financial-distress explanation will not, by itself, answer an insider trading charge under the 2015 Regulations.
For Securities Litigators
- Distinguish Abhijit Rajan carefully: it turned on the 1992 Regulations.
- Frame any non-listed defence as one of the same nature as the six in the proviso.
Key Takeaways
- Trading while holding UPSI is enough under the 2015 Regulations.
- The purpose of the sale and use of proceeds are irrelevant.
- The six statutory defences are not exhaustive but any other must be similar.
- Avoided losses can be disgorged.
Frequently Asked Questions
The Court said low or no profit is irrelevant; it found that about Rs 1.38 crore in losses was avoided.
Disgorgement and the Section 15HB penalties were restored or upheld; the CMD’s Section 15G penalty was reduced to Rs 10 lakh.
It was decided under the 1992 Regulations, which lacked the note that makes the purpose of the trade irrelevant.
Conclusion
The judgment brings the Supreme Court firmly behind a strict reading of the 2015 insider trading regime: possession of UPSI plus trading is the core of the offence.
Practical takeaway: Insiders cannot explain away trades made during a UPSI window by pointing to business needs or thin profits; the safest course is not to trade at all.