SC : Selling Shares While in Possession of UPSI Constitutes Insider Trading Even if No Profit Is Made

The Supreme Court has ruled that selling shares while in possession of Unpublished Price Sensitive Information (UPSI) constitutes insider trading, regardless of whether a profit was made or a loss was avoided. The court found that the mere act of trading with UPSI triggers a presumption of guilt. This decision overturned a previous ruling by the Securities Appellate Tribunal and restored SEBI's findings of insider trading, including the disgorgement of losses avoided.

Facts of the Case

Tara Jewels Ltd. was facing severe financial difficulties, including a net loss of approximately ₹166.80 crore for the quarter ended September 2017. During the UPSI period from 2 October 2017 to 29 November 2017, Rajeev Vasant Sheth, Chairman and Managing Director, sold substantial quantities of shares, while his two daughters, who were promoters and Vice Presidents, sold their entire shareholding. Collectively, the transactions helped avoid losses of approximately ₹1.38 crore.

SEBI's Whole Time Member found them guilty of insider trading and imposed market restrictions, disgorgement and monetary penalties. However, the Securities Appellate Tribunal (SAT) subsequently set aside the order, accepting the explanation that the shares were sold because the company was at risk of being downgraded to an NPA.

Supreme Court's Key Findings

1. Possession of UPSI and trading are sufficient to trigger the presumption

The Court held that it was undisputed that the respondents were in possession of UPSI and sold substantial portions of their holdings while possessing that information. Under the note to Regulation 4(1), such trades are presumed to have been motivated by the UPSI.

2. No-profit or loss-avoidance argument is not a valid defence

The Court specifically held that less or no profit is of no consequence. The reasons for trading or the purpose for which the sale proceeds are utilised are not relevant once trading while in possession of UPSI is established, unless the transaction falls within an applicable defence under Regulation 4(1).

3. The six statutory defences are not exhaustive

The Court observed that the word "including" preceding the specified defences indicates that the six listed circumstances are not exhaustive. However, any additional defence must be of the same or similar nature as those specifically contemplated by Regulation 4(1).

4. Earlier decisions under the 1992 Regulations cannot automatically be applied

The Court distinguished SEBI v. Abhijit Rajan, noting that the transactions in that case were governed by the 1992 PIT Regulations, which did not contain the same note as Regulation 4(1) of the 2015 Regulations. Therefore, the purpose for which sale proceeds were used could not be considered as a defence in the present case.

Final Decision

The Supreme Court allowed SEBI's appeal and restored the finding that the respondents had engaged in insider trading. The disgorgement of approximately ₹1.38 crore, representing the loss avoided, was restored. The penalty imposed for violation of the Code of Conduct was also upheld.

However, considering the facts and circumstances, the Court found the ₹25 lakh penalty imposed on Rajeev Vasant Sheth under Section 15G excessive and reduced it to ₹10 lakh, the minimum penalty imposed on the other two respondents. The modified penalty was directed to be paid within three months, if not already paid.

This AI-generated summary is for informational purposes only. Please view attached original judgment for the complete text and authoritative interpretation.