2025 (11) TMI 612 - AT - SEBI

Independent director found insider for trading after FY 2020-21 financials; Rs 10 lakh penalty under s.15G upheld, appeal dismissed

Nagreeka Capital and Infrastructure Limited, Mr. Sushil Patwari Versus Securities and Exchange Board of India

The SAT upheld findings of insider trading by an independent director who, while privy to the company's annual financials for FY 2020-21, traded the next ... Appropriateness of Imposition of a penalty u/s 15G - Insider trading - trading during the Unpublished Price Sensitive Information (UPSI) period - standard of preponderance of probabilities - HELD THAT:- In view of undisputed facts that Mr. Patwari was an Independent Director with Rupa and Co. ltd., who was privy to annual financials for FY 2020-2021 and the trade having taken place on the very next day of receiving the financials of Rupa and Co. Ltd., we are of the view that no exception can be taken to the findings recorded in the impugned order on the basis of preponderance of probabilities. Insider trading is a serious matter as it adversely affects the trust of genuine investors. Therefore, the said violation has to be dealt with firmly. We are in agreement with the submissions of the learned Advocate for the respondent that appellants are ‘insiders’ both as ‘connected person’ and being in possession of UPSI under Regulation 2(1)(g) and 2(1)(d) of PIT Regulations, 2015. The minimum penalty under Section 15G of the SEBI Act, 1992 is Rs. 10 Lakhs and SEBI has imposed the minimum penalty, which is just and appropriate. In the result, this appeal must fail and is accordingly dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether trades executed by the appellant-entity constitute trading on the basis of Unpublished Price Sensitive Information (UPSI) in contravention of SEBI (Prohibition of Insider Trading) Regulations, 2015 (PIT Regulations), having regard to the communication of annual financials to an individual who was both an independent director of the target company and Chairman/Managing Director of the trading entity. 2. Whether the regulator (SEBI) discharged the burden of proof to establish that the trading was based on UPSI and/or that the director communicated UPSI to the trading-authorized person of the appellant-entity such as to render the appellant an 'insider' (connected person or person in possession of UPSI). 3. Whether the imposition of the minimum monetary penalty under Section 15G of the SEBI Act is justified on the facts and consistent with the regulatory framework. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Trading on the basis of UPSI Legal framework: The PIT Regulations prohibit trading when in possession of UPSI and define 'insider', 'connected person' and 'possession of UPSI' (Regulations 2(1)(d) and 2(1)(g)). The temporal link between possession/communication of UPSI and trading is relevant to establish trading on the basis of UPSI. Precedent Treatment: The Tribunal did not cite or rely on any binding precedents in the impugned order. No precedent was expressly followed, distinguished or overruled in the reasons furnished. Interpretation and reasoning: The Tribunal accepted the undisputed documentary evidence (an email dated May 30, 2021 appending standalone financial statements and related materials) showing that the annual financials of the target company were communicated to the director on May 30, 2021. The appellant-entity executed buy trades on May 31, 2021 and sell trades on June 1, 2021 (immediately following receipt of the financials), establishing a close temporal nexus between disclosure of UPSI and trading. The director occupied dual positions: independent director of the target (privy to UPSI) and Chairman/MD of the trading entity. The Tribunal treated the temporal proximity together with the director's positions as sufficient to infer that the trades were connected to UPSI on the preponderance of probabilities. The Tribunal rejected contentions about purported ordinary trading pattern and about the director being 'too busy' to have seen emails as insufficient to rebut the inference drawn from the documentary evidence and trading chronology. Ratio vs. Obiter: Ratio - where a person privy to UPSI (by virtue of directorship) receives the target's financials (documentary evidence) and trading by an entity closely connected to that person occurs immediately thereafter, a finding of trading on the basis of UPSI is sustainable on the preponderance of probabilities. Obiter - remarks on seriousness of insider trading and impact on investor trust are persuasive but not essential to the legal holding. Conclusions: The Tribunal concluded that the trades constituted insider trading based on UPSI and upheld the finding of violation of PIT Regulations by the appellants. Issue 2 - Burden of proof and communication of UPSI to the trading-authorized person Legal framework: SEBI bears the burden of establishing breach of PIT Regulations; the standard applied by the Tribunal is preponderance of probabilities in adjudication. The Regulations capture liability for persons who are 'connected' or who are 'in possession' of UPSI; proof of actual transfer of UPSI to a specific trading-authorized individual is not invariably required where circumstantial and documentary evidence link the insider to the trading entity and the trades temporally follow receipt of UPSI. Precedent Treatment: No specific case law was relied upon to modify the burden or standard; the Tribunal applied the ordinary civil/adjudicatory standard (preponderance of probabilities). Interpretation and reasoning: The Tribunal noted arguments that the company's CFO was authorized to undertake trades by a 2014 board resolution and that there was no direct proof that the director communicated UPSI to the CFO. The Tribunal held that SEBI was not required to prove direct communication to the CFO where admissible documentary evidence (email of May 30 containing financials), the insider status of the director, and immediate trading by the related entity furnished a convincing inference of connection/possession. The Tribunal found that the appellants' explanation (director's preoccupation and longstanding trading in the scrip) did not sufficiently rebut the inference. The table of trading dates and quantities was relied upon to demonstrate the unusual timing (purchase on May 31-day after disclosure-and sale on June 1-day after price rise), distinguishing prior sporadic trades and establishing that the appellant had acted on information received during the UPSI window. Ratio vs. Obiter: Ratio - in regulatory adjudication for insider trading, circumstantial evidence (documentary receipt of UPSI by a person with dual roles and immediate subsequent trades by an entity connected to that person) can satisfy the regulator's burden on preponderance of probabilities without proof of direct transmission to the trading agent. Obiter - emphasis that specific board resolutions delegating trading authority do not immunize an entity where the person in possession of UPSI is materially connected to the trading decision. Conclusions: The Tribunal concluded SEBI discharged its burden on the facts; absence of direct proof of communication to the CFO did not invalidate the finding of insider trading. Issue 3 - Appropriateness of penalty under Section 15G of the SEBI Act Legal framework: Section 15G prescribes monetary penalty for insider trading; the statute permits imposition of penalties having regard to gravity, nature, and consequences of violation, with a prescribed minimum applicable in the facts (the Tribunal noted statutory minimum). Precedent Treatment: No prior decisions were invoked to alter or calibrate the quantum; the Tribunal applied the statutory scheme. Interpretation and reasoning: The Tribunal observed that insider trading undermines investor trust and merits firm regulatory response. Having upheld violation, the Tribunal noted SEBI imposed the minimum statutory penalty and found the quantum 'just and appropriate' on the facts, given the nature of the violation and the conduct of the parties. Ratio vs. Obiter: Ratio - where a violation of the PIT Regulations is established, imposition of the statutory minimum penalty under Section 15G may be upheld as appropriate if proportionate to the violation. Obiter - general observations on deterrence and investor confidence. Conclusions: The Tribunal sustained the penalty of Rs. 10 Lakhs as the prescribed minimum under Section 15G and dismissed the appeal. Cross-References and Interrelationships The Tribunal's determination on Issue 1 and Issue 2 are interlinked: the documentary evidence of receipt of financials (May 30 email) + director's dual capacity + immediate trading sequence (May 31-June 1) together satisfy SEBI's burden (Issue 2) and support the finding of trading on the basis of UPSI (Issue 1). The penalty analysis (Issue 3) flows from the affirmative conclusions on Issues 1-2 and is assessed under statutory minima and considerations of deterrence.