The Supreme Court has just told insiders they have more defences than the rulebook lists. That sounds like relief. It isn't. A closed list of six has become an open list nobody can state in advance, and the burden of discovering its contents falls on the person who already carries the burden of proof. Worse, the one defence an insider actually needs that he decided to sell before the information reached him, still isn't there. My column in Financial Express on SEBI v. Rajeev Vasant Sheth, and the entry SEBI should write into the proviso without waiting for Parliament.
The Supreme Court has told insiders that they have more defences than the rulebook lists. That is not the relief it appears to be. A closed list of six has become an open list. Nobody can state its contents in advance, and the work of discovering them falls on the person who already carries the burden of proof.
On 11 August 2026, in Securities and Exchange Board of India v. Rajeev Vasant Sheth, the apex Court set aside an order of the Securities Appellate Tribunal and restored SEBI’s findings against the promoters of Tara Jewels Limited. Between 2 October and 29 November 2017 the company’s collapsing results were still unpublished. In that window the Chairman and Managing Director sold 30,93,948 shares, roughly 12.56 per cent of the shareholding. His two daughters, both promoters and vice presidents, sold their entire holdings. The loss the market had not yet seen was Rs. 166.80 crore for the quarter, against Rs. 6.62 crore in the quarter before. The defence of the Sheth family was that they sold shares to raise money for the company, which used it to repay creditors.
SEBI’s whole time member found that the sales avoided a cumulative loss of about Rs. 1.38 crore. He ordered disgorgement with interest, restrained the three from the securities market and imposed penalties under the SEBI Act. The Tribunal set all of it aside. It accepted that the shares were sold to keep Tara Jewels from being downgraded to a non-performing asset. That explanation, it held, fell within the proviso to Regulation 4(1) of the SEBI (Prohibition of Insider Trading) Regulations, 2015. The Supreme Court restored the regulator’s order, reducing only the principal promoter’s penalty from Rs. 25 lakh to Rs. 10 lakh.
Two propositions emerge. The first is that the six circumstances in the proviso to Regulation 4(1) are illustrative and not exhaustive, because the enumeration is introduced by the word “including”. The Court declined to apply ejusdem generis, which reads a general expression down to the specific instances that follow it, because here the general expression comes first. Any further defence, it held, must be of the same or a similar character as the six. The second proposition is that the purpose to which the sale proceeds were applied is irrelevant. Avoiding a loss is as much a benefit as making a gain. The Court distinguished its own decision in SEBI v. Abhijit Rajan, where the trades dated from 2013 and the 1992 Regulations left room to ask why an insider had traded. That question, it said, no longer arises.
The first proposition will be reported as a liberalisation. It is not one. An insider who could once read the proviso and know that he stood outside it must now persuade a tribunal that his facts resemble facts that stand inside it. Certainty has been exchanged for analogy. Where the burden already rests on the accused, that is not obviously a favourable exchange.
The deeper problem is one the judgment exposes rather than creates. Indian law prohibits trading while in possession of unpublished price sensitive information. It does not require SEBI to prove that the information was used in a causal chain, that the informational advantage caused the trade. Regulation 4(1) presumes use, and the proviso is the only way out to break the causal chain. But the proviso lists transactional situations: off-market inter-se transfers, block deal window trades, transactions under a statutory obligation, the exercise of stock options, internal arrangements within non-individual insiders and trades under a Regulation 5 trading plan. Not one of them is a defence of non-use. There is no route by which an insider may say, and prove, that he decided and committed to sell before the information reached him. The Court has told us that further defences exist. It has not told us that non-use is among them, and on this language it could not have.
The proviso exists to let an insider break that causal chain, to show that the trade occurred while he was pregnant with unpublished information but was not caused by it. Its list does that only in transactional settings. Consider a promoter who needs money at short notice for open heart surgery in his family and sells shares while the results are unpublished, raising close to the sum the surgery costs. On no sensible view did the information cause that trade. Nothing in the proviso saves him, and after this ruling nothing outside it will either.
The second objection goes beyond causation, to intention. Insider trading began life as a fiduciary wrong. The earliest cases, brought by shareholders in American courts, predate any statute prohibiting insider trading by several decades. They share the DNA of the modern offence. The US passed the Securities Exchange Act in 1934 to prohibit fraud, and insider trading was drawn out of that anti-fraud rule only in 1961, in Cady, Roberts. Till today, the US has not passed a separate law prohibiting insider trading. The pedigree matters. The offence is quasi-criminal and its parent is fraud. India chose to write a standalone prohibition and left intention out of it. The Supreme Court has itself read the roots of fraudulent intent back into the law in two earlier rulings. This ruling departs from that, and would make a wrongdoer of the seller in the surgery example above. The Court could have reached the same result on these facts, by holding that the Sheths had not discharged the burden of showing that the information did not cause their trades and that nothing on the record displaced an intention to trade on it. It said instead that purpose never matters, which is far wider than the case needed.
SEBI can fix this without waiting for Parliament. A defence of non-use, open to an insider who can prove he committed to trade before the information reached him, belongs in the proviso itself. The Court has said the list is not closed. The regulator should write the missing entry into it. Dispensing with both causality and intent to harm will have long shadows on future innocent conduct.
No comments:
Post a Comment