2025 (11) TMI 963 - AT - SEBI

Single phone call and routine WhatsApp messages insufficient to prove insider trading under Regulation 3(1) PFUTP and Section 12A(e)

SAT held that a single telephone call and routine WhatsApp exchanges did not suffice to infer insider trading under Regulation 3(1) PFUTP and Section ... Insider - purchase of shares based on Unpublished Price Sensitive Information (UPSI) - Validity of communications made on single call and WhatsApp, as basis for inference of insider trading - violation of Regulation 3(1) of the PFUTP Regulations and Section 12A(e) of SEBI Act, 1992 - whether the purchase of shares by Mr. Jain on February 21, 2022 was based on the UPSI given by Mr. Rao? - HELD THAT:- It is relevant to note that the WhatsApp message stating that they had not talked or met for a long time was sent by the Mr. Jain on February 20, 2022 at 9.44 a.m. The telephonic conversation between the appellants took place at 9:45:59 a.m. for 530 seconds. It is SEBI’s case that on the very next day Mr. Jain has purchased 92,000 shares which probabalises that the purchase is based on the UPSI. In our view, the explanation by Mr. Jain (that he was a sector agnostic trader by profession and he had invested huge money in various sectors during the UPSI period), coupled with exchange of normal and formal WhatsApp messages (between the parents of a bride and a groom), leads us to an irresistible inference that Mr. Jain’s investment in JPL is in the normal course of his business. In the facts of this case, we are of the view that the solitary telephone call is not sufficient to hold that Mr. Jain’s purchase of shares was based on the UPSI. In addition, appellants’ uncontroverted contention that Mr. Rao has retired after serving for 31 years with an unblemished record of any regulatory proceedings against him also fortifies appellants’ case. In the result, these appeals merits consideration. ISSUES PRESENTED AND CONSIDERED 1. Whether the purchase of shares on 21 February 2022 was based on Unpublished Price Sensitive Information (UPSI) allegedly conveyed in breach of Regulation 3(1) of the PFUTP Regulations and Regulation 4(1) of the PIT Regulations and Sections 12A(d) & 12A(e) of the SEBI Act. 2. Whether the communications between the alleged insider and the purchaser-comprising WhatsApp messages, a single telephone call of 530 seconds on 20 February 2022, and surrounding trading activity-constitute sufficient evidence, on the preponderance of probabilities, to infer insider trading. 3. Whether the purchaser's trading pattern and professional profile (sector-agnostic active trading of large volumes) negate the inference that the JPL purchase was based on UPSI. 4. The standard of inference to be applied in insider trading proceedings (preponderance of probabilities) and the manner in which contemporaneous conduct, prior record of the alleged insider, and market information should be weighed in drawing adverse inferences. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Whether the purchase was based on UPSI conveyed by the alleged insider Legal framework: Trading on the basis of UPSI is prohibited under Regulation 3(1) of the PFUTP Regulations and Regulation 4(1) of the PIT Regulations; contraventions attract liabilities under Sections 12A(d) and 12A(e) of the SEBI Act. Precedent treatment: The Tribunal recognised that prior decisions have held trading based on UPSI may be inferred from surrounding circumstances; however, the weight of inference depends on facts of each case and distinguishing factual scenarios is permissible. Interpretation and reasoning: The Tribunal examined the nature and content of the WhatsApp exchanges (three pages) and concluded they consisted of routine matrimonial arrangements and appointment messages, with no reference to corporate or price-sensitive matters. The isolated WhatsApp message on 20 February 2022 ('Good morning Sir! Haven't talked or met for a long time.') and the immediately succeeding 530-second call were found to be normal/formal social communications. The Tribunal placed emphasis on the absence of any explicit transmission of UPSI in the contemporaneous electronic communications and on the fact that the alleged insider had an unblemished 31-year service record with no regulatory proceedings, which weakened the inference of deliberate leakage. Ratio vs. Obiter: Ratio - a solitary call and routine WhatsApp exchanges, without corroborating evidence of transmission of UPSI, are insufficient to conclude that subsequent trading was based on UPSI. Obiter - observations on the probative value of an erstwhile employee's unblemished record and social relationship context. Conclusion: The Tribunal held that there was insufficient basis to conclude the purchase on 21 February 2022 was based on UPSI conveyed by the alleged insider; the order restraining market access and directing disgorgement and penalty was therefore set aside. Issue 2 - Sufficiency of communications (single call and WhatsApp) as basis for inference of insider trading Legal framework: In civil/administrative insider-trading adjudications, findings are to be drawn on the preponderance of probabilities, by assessing the totality of circumstantial and direct evidence. Precedent treatment: The Tribunal acknowledged authorities that permit inference of trading on UPSI from temporal proximity and communications but reaffirmed that each case must be tested on its factual matrix and that probability must be compelling. Interpretation and reasoning: The Tribunal analysed timing (WhatsApp at 9:44 a.m.; call at 9:45:59 a.m. lasting 530 seconds) and subsequent trading (large purchase the next day). It weighed these temporal facts against the content of WhatsApp messages (social/matrimonial) and the broader communications history (infrequent exchanges, mundane content). The Tribunal found the isolated phone call, unsupported by content indicating UPSI, inadequate to satisfy even the preponderance standard when balanced against countervailing facts (trader's usual patterns, market movement on 18 February 2022). The Tribunal explicitly held that while preponderance is the standard, inferences must be reasoned and based on the cumulative strength of evidence, not on speculation from temporal coincidence alone. Ratio vs. Obiter: Ratio - temporal proximity plus a single communication is not conclusive; content and broader context must support the inference. Obiter - commentary on the need to avoid drawing adverse inferences from familial or social communications without substantiating evidence. Conclusion: The single telephone call and associated WhatsApp message did not, without more, establish transmission of UPSI; therefore they could not sustain a finding of insider trading. Issue 3 - Effect of the purchaser's trading profile and market movements on the inference of insider trading Legal framework: Adjudicatory assessment must consider the trader's normal business conduct, historical trading volumes, sectoral diversification, and contemporaneous market information in assessing whether a particular trade is anomalous. Precedent treatment: Prior orders indicate that trading consistent with a trader's long-standing pattern reduces the force of an inference of trading on UPSI; conversely, trading that is anomalous to a trader's profile may strengthen the inference. Interpretation and reasoning: The Tribunal examined detailed trading data showing extensive purchases across diverse sectors with substantial buy values during the relevant period (aggregate buy value exceeding Rs. 23 Crores and numerous scrips including large purchases in other sectors). The JPL purchase (approximately Rs. 2.14 Crores) was comparable to other sector investments (e.g., Canfin Home Rs. 4.23 Crores), and trades in the period were sector-agnostic. Further, market data showed a large surge in trading volume and identification of the scrip as a market mover on 18 February 2022, supporting an independent market reason for interest in the scrip. Given this context, the Tribunal inferred the JPL purchase could be in the ordinary course of the trader's business rather than uniquely tied to UPSI. Ratio vs. Obiter: Ratio - a consistent pattern of high-volume, sector-agnostic trading and contemporaneous market movement weakens the inference that a specific purchase was based on UPSI. Obiter - remarks on comparative buy values and the non-isolation of the JPL investment. Conclusion: The purchaser's trading profile and contemporaneous market activity rebutted the presumption that the JPL purchase was based on UPSI; the transaction was consistent with ordinary trading activity. Issue 4 - Application of the preponderance of probabilities standard and weighing of mitigating/contextual factors Legal framework: Administrative findings of insider trading rest on a balance of probabilities; however, the quality, content and context of communications and corroborating factual matrix determine whether adverse inferences may properly be drawn. Precedent treatment: The Tribunal reiterated that preponderance does not permit reliance on conjecture; factual inferences must be cogent and supported by the record. Interpretation and reasoning: The Tribunal accepted that preponderance is the correct standard but cautioned that its application requires careful assessment of all evidence. In this instance the solitary telephone call, routine WhatsApp messages, the trader's high-volume diversified trading, prior market signals, and the alleged insider's spotless record collectively undercut a finding on the balance of probabilities that UPSI was communicated and acted upon. The Tribunal emphasised that inferences must arise from cumulative strength of facts rather than isolated temporal links. Ratio vs. Obiter: Ratio - even under the preponderance standard, administrative fact-finding must be anchored in a coherent and complete evidentiary picture; isolated coincidences do not suffice. Obiter - observations on the relevance of an alleged insider's service record and social relationships when assessing motive and probability. Conclusion: Applying the preponderance standard to the totality of facts led the Tribunal to conclude that SEBI had not established, on probabilities, that UPSI was conveyed and acted upon; accordingly, the impugned order was set aside and appeals allowed.