Case Note & Summary
The present civil appeal arose under Section 15Z of the Securities and Exchange Board of India Act, 1992 challenging the order dated 19.04.2022 passed by the Securities Appellate Tribunal (SAT) in Appeal No. 536 of 2021. By the impugned order, the SAT allowed the appeal filed by the respondents and quashed the order dated 24.05.2021 of the Whole Time Member (WTM) of SEBI, which had held the respondents guilty of insider trading. Tara Jewels Limited (TJL), a company engaged in jewelry, had suffered significant losses during the quarter ending September 2017, with net sales falling by approximately 69%. The respondents, being Chairman & Managing Director and Promoters/Vice Presidents, sold shares during the Unpublished Price Sensitive Information (UPSI) period from 02.10.2017 to 29.11.2017. Respondent No. 1 sold 30,93,948 shares (12.56% of total shareholding) and further shares; respondents 2 and 3 sold their entire holdings, thereby cumulatively avoiding a loss of approximately Rs. 1.38 crores. SEBI issued a Show Cause Notice, and after proceedings, the WTM found the respondents guilty of violating Section 12A(d) & (e) of the SEBI Act and Regulations 3(1) and 4(1) of the PIT Regulations, 2015. Penalties and disgorgement were imposed. On appeal, the SAT held that the respondents’ explanation that the shares were sold to avoid TJL being downgraded to a non-performing asset fell under the proviso to Regulation 4(1), and that there was no significant price difference to suggest insider trading. SEBI then appealed to the Supreme Court. The Court heard the parties and proceeded to examine the legal framework on insider trading. It observed that insider trading is dealing in a company’s securities based on confidential information likely to affect price once made public, constituting breach of fiduciary duty. The SEBI Act, like the U.S. Securities Exchange Act of 1934, does not define insider trading but prohibits it under Section 12A. Sections 11 and 30 empower SEBI to make regulations, and accordingly the PIT Regulations, 2015 were framed. Section 15G provides for penalty. The judgment text ends while discussing these provisions without recording the final decision on the appeal.
Headnote
A) Securities Law - Insider Trading - Concept and Prohibition - Securities and Exchange Board of India Act, 1992, Sections 12A, 11, 30, 15G; Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015, Regulations 3(1), 4(1), 9(1) - The Court discussed that insider trading involves dealing in a company’s securities based on unpublished price sensitive information (UPSI) and constitutes breach of fiduciary duty. The SEBI Act does not define insider trading but prohibits it under Section 12A, with penalties under Section 15G. Regulations under the Act further detail prohibitions. (Paras 6-6.3)
Issue of Consideration
Whether the Securities Appellate Tribunal was justified in quashing the order of the Whole Time Member of SEBI holding respondents guilty of insider trading under the SEBI Act and PIT Regulations, 2015, particularly regarding the defense under proviso to Regulation 4(1).
Law Points
- Insider trading involves dealing in company's securities while in possession of confidential price-sensitive information
- Section 12A of SEBI Act
- 1992 prohibits insider trading
- Regulation 4(1) of PIT Regulations 2015 prohibits insider trading
- Penalty under Section 15G for insider trading
- UPSI definition
