Reversing the Securities Appellate Tribunal (SAT) order, the Supreme Court has held that trading while in possession of Unpublished Price Sensitive Information (UPSI) automatically triggers insider trading liability, regardless of the purpose behind the trade. The Apex Court clarified that under the SEBI (Prohibition of Insider Trading) Regulations 2015, the mere execution of a trade by an insider while in possession of Unpublished Price Sensitive Information constitutes the offense of insider trading.
The legislative note appended to Regulation 4(1) explicitly precludes any judicial or regulatory inquiry into the motive behind the trade, the quantum of profit made or loss avoided, or the intended use of the transaction proceeds, making the possession of sensitive information at the time of trading the sole determinative factor for liability, added the Court.
A Two-Judge Bench comprising Justice Sanjay Karoland Justice Nongmeikapam Kotiswar Singh observed that the SEBI (Prohibition of Insider Trading) Regulations 2015 fundamentally altered the landscape of insider trading by introducing a specific legislative note to Regulation 4(1). This note embeds a strict legal presumption that any trade executed by a person in possession of UPSI is motivated by the knowledge and awareness of such information. The Court noted that the reasons for executing the trade or the ultimate purpose for which the proceeds are applied are entirely irrelevant under the 2015 regulatory framework.
Furthermore, the Court distinguished the present circumstances from previous judicial precedents that relied on the older 1992 Regulations, observing that the predecessor regulations did not contain a similar explicit bar against considering the underlying intent or purpose of the transactions. The Court also observed that the defences provided under the regulations are not exhaustive but must be of a similar nature to the specific defences listed, none of which protected the promoters in this instance.
Briefly, Tara Jewels Limited, a company engaged in the jewellery business, entered the liquidation process after suffering significant financial losses. During the Unpublished Price Sensitive Information (UPSI) period between October and November 2017, the promoters and management of the company sold off a substantial portion of their shareholding, thereby avoiding a cumulative loss of approximately Rs. 1.38 crores.
The Whole Time Member of the Securities and Exchange Board of India held the promoters guilty of insider trading, imposing market restraints, directing disgorgement of the avoided losses with interest, and levying monetary penalties. However, the Securities Appellate Tribunal overturned this order, accepting the promoters’ defence that the shares were sold because the company was at risk of being downgraded to a non-performing asset, and concluding that the sale was not motivated by an intent to avoid losses.
