INSIDER TRADING WHILE IN POSSESSION OF UNPUBLISHED SENSITIVE INFORMATION

Insider Trading

Regulation 2(g) of the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 (‘Regulations’ for reference) as any person who is-

• a connected person; or
• in possession of or having access to unpublished price sensitive information.

Insider trading is the buying or selling of a public company's securities using material, non-public information that gives an unfair advantage over other investors.

Prohibition of insider trading

The prohibition of insider trading is governed in India by the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 (‘Regulations’ for reference), which stop individuals from trading securities using unpublished price-sensitive information (UPSI’ for short).

• Insiders cannot buy or sell listed securities when they have UPSI.
• Insiders cannot leak or pass sensitive secrets to others unless required for official duties or legal obligations
• Companies set strict trading restriction periods and require approval from a compliance officer before trades happen.

Penalties for violation

Any person who contravenes the provisions of Act or regulations shall be liable for-

• Heavy financial fines and penalty;
• Market bans and restraining orders from trading.
• Criminal prosecution and imprisonment in severe cases.

Trading not allowed while having UPSI

In Securities And Exchange Board Of India Versus Rajeev Vasant Sheth & Ors. - 2026 (8) TMI 805 - Supreme Court, Tara Jewels Limited (‘TJL’ for reference) is a company engaged in buying and selling of jewellery. The Respondent No.1 Mr. Rajeev Vasant Sheth, is the Chairman and Managing Director; Respondent No. 2, Ms. Aarti Sheth, and Respondent No. 3, Divya Sheth, are the daughters of Respondent No. 1, were the Promoters and Vice Presidents of TJL.  TJL listed its shares in the Bombay Stock exchange and National Stock Exchange.  The National Company Law Tribunal ordered for liquidation of TJL because of its continuing losses.  

During the UPSI period i.e., from 02.10.2017 to 29.11.2017, the Respondent No.1 sold of his 30,93,948 shares, amounting to 12.56% of the total shareholding of the TJL, and 29,75,000 shares by subsequent transactions. The Respondents No.2 and 3 sold of their entire holding - 1,14,440 each. By this the TJL avoided the loss to the tune of Rs.1.38 crores approximately.           

The Securities and Exchange Board of India (‘SEBI’ for short) issued an Impounding Order-cum-Show Cause Notice6 on 04.09.2020 seeking explanation as to why appropriate directions be not issued against them as also the penalty imposed.  The Whole Time Director, vide his order dated 24.05.2021 held that the three respondents were found to have committed insider trading prohibited under the SEBI Act and the regulations made thereunder.  The order further restrained the first respondent and other 2 respondents from accessing the securities market and further prohibited from buying, selling or otherwise dealing in securities (including units of mutual funds), directly or indirectly, or being associated with the securities market in any manner, for a period of 1 year for the 1^st respondent and 6 months for the 2^nd and 3^rd respondents respectively.   They are also directed to disgorge the amount to the extent of loss avoided by their insider trading Rs.25 lakhs (1^st respondent) and Rs.12 lakhs (2^nd and 3^rd respondents) of the said order within 45 days from the date of receipt of the order.

Being aggrieved against the said order the respondents filed appeals before the Securities Appellate Tribunal (‘SAT’ for short).  The SAT accepted the explanation offered by the respondents that the sales were prompted by a genuine fear that TJL would be downgraded to a non-performing asset, and held that this was  covered by the statutory proviso available to an insider to demonstrate innocence under Regulation 4(1).  It also noted that the closing share price around the date the results were published showed little movement. The appeal was allowed and the original order set aside.

SEBI, being aggrieved against the order of SAT, filed an appeal before the Supreme Court.  The appellant SEBI submitted the following before the Supreme Court-

• Once it is shown that a person traded while in possession of unpublished price-sensitive information, the regulations presume that the trade was motivated by that information; the reasons for trading, or the use to which the proceeds are later put, are expressly excluded from consideration.
• The only circumstances that can rebut this presumption are those specifically enumerated in the regulation — off-market inter-se transfers between insiders, block-deal transactions, transactions under a statutory obligation, exercise of pre-determined stock options, and safeguards applicable to nonindividual insiders — none of which is present here.
• A ‘business necessity’ or ‘legitimate corporate purpose’ explanation cannot be read into the regulation through the doctrine of ejusdem generis, since it is not of the same genus as the specific, narrowly-drawn defences that precede it.
• The precedent relied upon by the Respondents was decided under an earlier regulatory regime that did not contain the explicit bar on considering the end use of sale proceeds; it has no application to trades governed by the current regulations.
• Loss avoided is treated on par with profit made for the purpose of insider-trading liability and disgorgement; the absence of a price movement around the date of disclosure does not, by itself, establish that the trades were untainted.
• Disgorgement is a remedial measure tied to the loss avoided, not a punitive one, and must follow automatically once the underlying violation is established.

The respondents submitted the following before the Supreme Court-

• The decision to sell was a bona fide response to a genuine business concern, the risk of TJL being downgraded to a non-performing asset and not a scheme to profit from inside knowledge.
• No profit was made by any of the Respondents; at best, a loss was avoided, and that too because of circumstances that had nothing to do with personal enrichment.
• The explanation offered squarely falls within the kind of circumstance the regulations intend to protect, and is analogous in character to defences recognised in comparable precedent where sale proceeds were shown to have been applied for a legitimate corporate purpose.
• The Appellate Tribunal’s finding that the share price around the relevant dates showed no meaningful movement is a finding of fact that ought not to be disturbed in an appeal confined to questions of law.
• Restraining and penalising the promoters of a family-run, financially distressed listed company disproportionately harms the very shareholders the regulatory framework seeks to protect.

The Supreme Court considered the submissions of the parties to the present appeal.  The Supreme Court analysed the concept of ‘insider trading’.  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 Supreme Court analysed the provisions of Sections 11, 12A and also Section 30.  The Supreme Court further analysed the provisions of Section 15G, which provides for penalty for insider trading.  The Supreme Court also analysed Section 15J which provides the factors to be taken into account while adjudicating the quantum of penalty. 

The Supreme Court analysed the appeal provisions in the Act to be filed before SAT.  The Supreme Court also analysed the provisions of Regulations-

• 2(d) – definition of the expression ‘connected person’;
• 2(g) – definition of the term ‘insider’;
• 2(n) – definition of the expression ‘Unpublished Price Sensitive Information’.

The Supreme Court also analysed the Regulations 3, 4, 5 of the said regulations. 

Regulation 4 provides the defences available to a person who is alleged to have insider information and benefits by means of that information.  They are described as below-

• Off-Market inter Se Transfers: Transactions between insiders in possession of the same UPSI, provided it was not a disclosure under Regulation 3(3), and reported to the company/stock exchanges within 2 working days;
• Transactions via Institutional/Non-individual Operators: Trades by non-individual entities where individuals making the decision were different from those in possession of UPSI, and information barriers were operational.
• Pursuant to a Trading Plan: Trades executed in accordance with a pre-approved trading plan formulated under Regulation 5.
• Exercise of Stock Options (ESOPs): Exercise of stock options where the exercise price is pre-fixed, and the insider had no role in price determination.
• Ejusdem Generis Rule on Other Defences: The Supreme Court clarified that while the listed defences are illustrative and not strictly exhaustive, any additional unlisted defence must belong to the same class (structured, transparent, or regulated transactions that negate misuse of UPSI)—commercial motives or general financial necessity (such as avoiding loan defaults or NPAs) do not constitute valid defences.

The Supreme Court observed that the respondents did not fall with any of the defences provided under Regulation 4.  The respondents contended that they did not gain any thing from such transactions.  The Supreme Court relied on the judgment in SECURITIES AND EXCHANGE BOARD OF INDIA Versus ABHIJIT RAJAN - 2022 (9) TMI 1072 - Supreme Court in which the persons accused of insider trading had rerouted the funds for the purposes of the company.  In this regard the Supreme Court observed that 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.

The Supreme Court, next considered the contentions of the appellant that none of the defences provided or those of the similar nature would cover the respondents is concerned.  The Supreme Court observed that what is implied by the appellant is that even if the defences laid out in Regulation 4 (1) are read ejusdem generis.  The Supreme Court held that the respondents would still not be covered. 

On the aspect of penalty and disgorgement the Supreme Court observed that SAT set aside the order of Adjudicating Authority.  The Supreme Court considered it as incorrect.  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 Act, such order of the WTM cannot be faulted.

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, the Supreme Court was 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.