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

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daughter-in-law, Shivani Gupta along with Amar Chand Garg's son, Amit Garg were alleged to have traded on the basis of Unpublished Price Sensitive Information ("USPI") between 01.04.2018 and 31.07.2018.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 -

1. Whether the WTM and SAT rightly rejected the claim of estrangement?
2. 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 1,60,00,000 shares of the company were transferred to Sachin Gupta in lieu of his rights to any other property of his parents. The Apex Court noted that these facts, which establish that there was a complete breakdown of relations between the parties, were neither considered by the WTM nor SAT. It noted -

"…given the fact that the entire case against the appellants for the offence of insider trading was based on the nature of close relationship between the parties, once it has been rightly held by the WTM that the appellants are neither "connected persons" within the meaning of Regulation 2(1)(d) nor "immediate relatives" within the meaning of Regulation 2(1)(f) of PIT Regulation, the question of ipso facto relying on the nature of relationship between the parties to come to the conclusion that they were "in possession of or having access to UPSI" while trading with the shares of the company is legally unsustainable."

The Court opined, in the alternative, even if there was no estrangement, the SEBI failed to discharge its burden of establishing the possession of UPSI.

On the second issue, perusing the material of record the Court was of the view that there was no correlation between the UPSI and the sale of shares. Shares were sold based on purely personal and commercial decisions. Moreover, it noted that without any evidence to show frequent communication, a presumption regarding communication of UPSI by Balram Garg could not have been made. Citing Hanumant v. State of Madhya Pradesh AIR 1952 SC 343, Chintalapati Srinivasa Raju v. Securities Exchange Board of India (2018) 7 SCC 443 and Seema Silk And Sarees v. Directorate of Enforcement (2008) 5 SCC 580, the Court stated that the circumstantial evidence can be considered only when certain foundational facts are established, and it rejected that the trading pattern of the appellants can be the circumstantial evidence to prove communication.

"Hence, it is only through producing cogent materials (letters, emails, witnesses etc.) that the said communication of UPSI could be proved and not by deeming the communication to have happened owing to the alleged proximity between the parties."

The Court noted that SEBI failed to prove that the said appellants were "connected persons" to Balram Garg as required by Regulation 2(1)(d)(ii)(a) read with Regulation 2(1)(f) of the PIT Regulations as they were not financially dependent on him or alleged to have consulted him in any decision related to trading in securities.

Case Name: Balram Garg v. Securities and Exchange Board of India

Citation: 2022 LiveLaw (SC) 397

Case No. and Date: Civil Appeal No. 7054 of 2021 | 19 April 2022

Corum: Justices Vineet Saran and Aniruddha Bose

Headnotes

Regulation 2(1) of SEBI (Prohibition of Insider Trading), 2015 - onus is on SEBI to prove communication of Unpublished Price Sensitive Information(Paragraph 32).

Regulation 3(1) of SEBI (Prohibition of Insider Trading), 2015 - does not create a deeming fiction in law - in absence of material to show frequent communication between parties, there could not be a presumption of communication - it is only through producing cogent materials (letters, emails, witnesses etc.) that the said communication of UPSI could be proved and not by deeming the communication to have happened owing to the alleged proximity between the parties(Paragraph 40).

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