2025 (5) TMI 1148 - AT - SEBI

SEBI fails to prove insider trading case as appellants cleared of PIT Regulations violations

Securities Appellate Tribunal at Mumbai ruled in favor of appellants in insider trading case. SEBI failed to prove appellants were 'insiders' under PIT ... Insider trading - SCN holding the appellants to be ‘insiders’ under Regulation 2(1)(g)(ii) of the SEBI (PIT) Regulations, based on alleged access to UPSI through (Late) Mr. Rakesh Jhunjhunwala but order holds the appellants as “connected persons” which implies reliance on Regulation 2(1)(g)(i) requiring a distinct and separate legal standard - as alleged that the respondent has effectively modified the basis of the original SCN without due notice or opportunity of rebuttal. Whether appellants are ‘insiders’ under the PIT Regulations? And if so, whether they are insiders being “connected person” under Regulation 2(1)(g)(i) or by “being in possession having access to UPSI” under Regulation 2(1)(g)(ii)? - HELD THAT:- As we find no ground for holding appellant no. 1 as ‘connected person’ qua Aptech under Regulations 2(1)(g)(i). We have already held that preponderance of probabilities, do not suggest that appellant made trading while he was in possession of or had access to UPSI and hence he cannot be held as an insider under Regulation 2(1)(d)(ii). In view of this, we decide this question in negative. Whether the trading behaviour of the appellants can be construed to hold that trading by the appellants was guided by the UPSI? - Appellants did not exploit the advantage of having alleged access to UPSI and continued to hold on to it for a long period of 8 years. This substantiates the appellant’s explanation that their trading was made in accordance with their long-term investment strategy about this stock, considering certain positive developments. Moreover, if the company is venturing into education sector, which even in respondent’s view is a new area, (as the company has been in ‘vocational training’), a long-term investment at early stage could perhaps be a prudent investment strategy. Appellants are right in contending that under the Regulations 2(1)(g)(ii), the onus is on SEBI to prove that appellant had access to UPSI. This is a foundational fact, in terms of Balram Garg decision (SC), which needs to be proved in order to hold the charges of insider trading. We find no evidence in this regard and preponderance of probabilities also do not indicate that appellants had access to UPSI. On the contrary, the appellant cannot be called upon to prove that their trading was not guided by UPSI. However, appellants attempted to provide reasons for their trading behavior, inter-alia, their perception of positive outlook about Aptech, which respondent attempted to rebut before us. However, in our considered view, since appellants were held as ‘insider’ under Regulations 2(1)(g)(ii) in the SCN, they were under no onus to prove that the trading was not guided by UPSI as onus was on the SEBI and not on them. In view of this, the question B is decided in negative. We do not find merit in the findings of the respondent that appellants are in violation of PIT Regulations, 2015 with regard to trading in Aptech shares. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this appeal are:(a) Whether the appellants qualify as 'insiders' under the SEBI (Prohibition of Insider Trading) Regulations, 2015 (PIT Regulations), specifically whether they are insiders as 'connected persons' under Regulation 2(1)(g)(i) or as persons 'in possession of or having access to unpublished price sensitive information (UPSI)' under Regulation 2(1)(g)(ii)Rs.(b) Whether the trading behavior of the appellants during the UPSI period can be construed to establish that their trades were guided by possession of UPSI, thereby constituting insider trading under the PIT RegulationsRs.2. ISSUE-WISE DETAILED ANALYSISIssue A: Classification of appellants as 'insiders' under PIT Regulations - Connected persons or possession/access to UPSIRs.Relevant legal framework and precedents: The definition of 'insider' under Regulation 2(1)(g) of the PIT Regulations distinguishes two categories: (i) connected persons who are reasonably expected to have access to UPSI; and (ii) persons who actually possess or have access to UPSI. The evidentiary burden differs between these categories as established in SRSR Holdings Pvt. Ltd. & Ors. v. SEBI, which clarified that to be a connected person insider, both connection and reasonable expectation of access to UPSI must be shown, whereas possession/access insiders must be shown to have actual possession or access to UPSI. The burden of proof lies on the appellant for connected persons (Reg. 2(1)(g)(i)) and on the regulator for possession/access insiders (Reg. 2(1)(g)(ii)).Court's interpretation and reasoning: The show cause notice (SCN) initially alleged that the appellants were insiders under Regulation 2(1)(g)(ii) based on a single telephone call made by appellant No. 1 to the company's Non-Executive Chairman and promoter during the UPSI period, implying communication of UPSI. However, the impugned order shifted the basis to treat appellants as connected persons under Regulation 2(1)(g)(i), relying on the same phone call to establish frequent communication and hence access to UPSI.The Tribunal held this shift impermissible and not a mere technical error, as it altered the legal standard and evidentiary burden without notice or opportunity to the appellants, violating principles of natural justice. The Tribunal emphasized that a solitary one-minute phone call initiated by appellant No. 1 during the six-month UPSI period cannot substantiate a finding of frequent communication or connection with Mr. Jhunjhunwala. The appellants' longstanding acquaintance since the 1990s and co-promotion of an unrelated company does not establish 'connected person' status vis-`a-vis Aptech, where appellants had no stake or directorial position.Key evidence and findings: The investigation revealed only one brief phone call during the UPSI period; no other communications were established. The appellants' statements confirmed acquaintance but not frequent communication. The appellant initiated the phone call, negating inference that UPSI was awaited or shared during the call. No direct or circumstantial evidence demonstrated possession or access to UPSI.Application of law to facts: Applying the dual requirements for 'connected person' insider status, the Tribunal found no reliable or convincing material to show the appellants were connected persons reasonably expected to have access to UPSI in relation to Aptech. Similarly, the absence of evidence disproved possession or access to UPSI under Regulation 2(1)(g)(ii).Treatment of competing arguments: The respondent argued that the appellants' association with Mr. Jhunjhunwala and timing of trades implied access to UPSI. The appellants countered that the single phone call was insufficient and that the respondent failed to discharge the burden of proof under Regulation 4(2). The Tribunal sided with the appellants, emphasizing the importance of evidentiary standards and procedural fairness.Conclusion: The appellants cannot be held as insiders under either Regulation 2(1)(g)(i) or 2(1)(g)(ii). The classification in the SCN and impugned order was inconsistent and unsupported by evidence.Issue B: Whether appellants' trading behavior indicates trading based on UPSIRs.Relevant legal framework and precedents: Regulation 4(1) of the PIT Regulations creates a rebuttable presumption that trades made during the UPSI period are motivated by possession of UPSI. The burden lies on the trader to rebut this presumption by demonstrating legitimate reasons for the trades. The Supreme Court in Balram Garg v. SEBI emphasized the necessity of proving possession of UPSI as a foundational fact for insider trading charges.Court's interpretation and reasoning: The appellants' trading activity in Aptech shares occurred during the UPSI period but was characterized by a long holding period of over seven years, consistent with a long-term investment strategy rather than speculative trading based on UPSI. The Tribunal noted that unlike promoters and immediate relatives of Mr. Jhunjhunwala who settled with SEBI, the appellants' trades were modest in size relative to their overall market activity and did not exhibit suspicious timing or volume.The Tribunal also observed that the appellants' prior investments in Aptech and their broader trading history were not adequately considered by the respondent, which would have provided context undermining the inference of insider trading.Key evidence and findings: The stock price rose approximately 9.99% immediately after the public disclosure of the UPSI on September 7, 2016. However, the appellants did not sell their shares to capitalize on this price movement but held them for many years, indicating absence of intent to exploit UPSI. The appellants cited technical break-out signals and positive sectoral developments as rationale for their trades.Application of law to facts: Given the lack of evidence of possession or access to UPSI, the presumption under Regulation 4(1) was not triggered against the appellants. Even if triggered, the appellants' long-term holding and investment rationale sufficiently rebutted any inference of trading based on UPSI.Treatment of competing arguments: The respondent contended that the timing and volume of trades during the UPSI period, coupled with the appellants' association with Mr. Jhunjhunwala, supported an inference of insider trading. The appellants countered with evidence of consistent investment strategy and absence of suspicious trading patterns. The Tribunal found the appellants' arguments more persuasive and noted the respondent's failure to produce cogent evidence of UPSI communication or trading motivated by UPSI.Conclusion: The appellants' trading behavior does not support a finding that their trades were guided by UPSI. The charge of insider trading on this basis is unsustainable.3. SIGNIFICANT HOLDINGS'Classification of appellant as insiders under Regulation 2(1)(g)(ii) in the show cause notice is not a 'technical' error...such a material difference cannot be called as mere technical.''A solitary one-minute phone call initiated by the appellant during the UPSI period cannot substantiate frequent communication or connection with the promoter.''The appellants' longstanding acquaintance with the promoter does not establish 'connected person' status with respect to Aptech, where appellants had no stake or directorial position.''On the basis of one brief phone call, it cannot be held that the two persons were in frequent communication to hold them as 'connected persons'.''The appellants' long-term holding of shares after the UPSI disclosure negates the inference that trading was guided by UPSI.''The onus to prove possession of UPSI under Regulation 2(1)(g)(ii) lies on SEBI, and in absence of evidence, the appellants cannot be held liable.''The appeal is allowed and the impugned order dated February 28, 2023 is set aside.'Core principles established include the strict adherence to the legal definitions and evidentiary burdens under the PIT Regulations, the necessity of procedural fairness in framing allegations consistent with the SCN, and the requirement of cogent evidence to establish insider trading beyond circumstantial or associative inferences.