The Supreme Court set aside the Securities Appellate Tribunal’s order and restored the penalty and disgorgement imposed on three promoters of Tara Jewels Ltd for insider trading, emphasizing that the mere possession of unpublished price sensitive information (UPSI) and the act of trading suffices to establish liability, irrespective of the profit earned or the purpose of the proceeds.
Background & Facts
The Dispute
The appeal, filed under Section 15Z of the Securities and Exchange Board of India Act, 1992, challenges the SAT’s decision to quash the order dated 24.05.2021 of the Whole Time Member (WTM) of SEBI that found the respondents guilty of insider trading.
Key Facts
- Tara Jewels Limited (TJL) was a jewellery trading company listed on BSE and NSE.
- The National Company Law Tribunal ordered liquidation of TJL on 30.07.2019.
- During the unpublished price sensitive information period from 02.10.2017 to 29.11.2017, Respondent No.1 (Mr. Rajeev V. Sheth, Chairman & MD) sold 30,93,948 shares (12.56% of total holding) and later 29,75,000 shares. Respondents No.2 (Ms. Aarti Sheth) and No.3 (Ms. Divya Sheth) each sold their entire holdings of 1,14,440 shares.
- The cumulative trades avoided an estimated loss of approximately Rs.1.38 crore.
- SEBI issued an Impounding Order-cum-Show Cause Notice on 04.09.2020.
- The WTM’s order dated 24.05.2021 imposed:
- A one-year market-access restriction on Mr. Sheth and a six-month restriction on Ms. Aarti and Ms. Divya.
- Disgorgement of the loss avoided, payable within 45 days, with interest at 12% per annum from 30.11.2017.
- Monetary penalties: Rs.25 lakh on Mr. Sheth (later reduced), Rs.10 lakh each on Ms. Aarti and Ms. Divya, and additional penalties under Sections 15G and 15HB totaling Rs.5 lakh for Mr. Sheth and Rs.1 lakh each for the two daughters.
- The SAT, in Appeal No.536 of 2021, set aside the WTM order, holding that the respondents’ explanation of an impending downgrade qualified as a defence under Regulation 4(1) of the PIT Regulations, 2015.
Procedural History
- 02.10.2017 - 29.11.2017: Trading by respondents while in possession of UPSI.
- 04.09.2020: SEBI issued Impounding Order-cum-SCN.
- 24.05.2021: WTM order imposing penalties and disgorgement.
- 2021: Respondents filed Appeal No.536 of 2021 before the SAT.
- 19.04.2022: SAT allowed the appeal and quashed the WTM order.
- 11.08.2026: Supreme Court delivered the present judgment.
Relief Sought
The appellant (SEBI) sought restoration of the WTM order, affirmation of the disgorgement amount, and confirmation that the purpose of the proceeds is irrelevant to liability.
The Legal Issue
Whether the defences enumerated in Regulation 4(1) of the Prohibition of Insider Trading Regulations, 2015 apply to the respondents’ trades, and whether the purpose for which the proceeds of an insider-trading transaction are used can be taken into account when determining liability under the SEBI Act.
Arguments Presented
For the Appellant
The appellant argued that the respondents were in possession of UPSI and traded during the prohibited period, satisfying the statutory prohibition under Section 12A(d) of the SEBI Act and Regulation 4(1). It contended that the note appended to Regulation 4(1) creates a rebuttable presumption that such trades are motivated by the UPSI, making the purpose of the proceeds irrelevant. The appellant relied on SEBI v. Abhijit Rajan and the statutory construction principles articulated in P. Mohanraj v. Shah Bros. Ispat (P) Ltd..
For the Respondent
The respondents maintained that their explanation - that the company was at risk of being downgraded to a non-performing asset - fell within the proviso to Regulation 4(1), thereby providing a legitimate defence. They also cited SEBI v. Abhijit Rajan to argue that the absence of profit should preclude liability.
The Court's Analysis
The Court began by interpreting Regulation 4(1) of the PIT Regulations, 2015. It noted that the regulation contains a note stating that once a person who has traded while in possession of UPSI is identified, the motive behind the trade is irrelevant. The Court held that this note creates a statutory presumption that the trade is motivated by the UPSI, and the burden shifts to the insider to prove an exemption.
"In view of the note appended to Regulation 4(1) reproduced supra, the purposes for which the proceeds are employed is an irrelevant consideration."
The Court rejected the respondents’ reliance on the downgrade explanation, observing that the proviso to Regulation 4(1) lists specific circumstances - off-market inter-se transfers, block-deal windows, statutory obligations, stock-option exercises, and safeguards for non-individual insiders - none of which matched the present facts. The Court applied the rule of ejusdem generis as explained in Vikram Singh v. Union of India and Siddeshwari Cotton Mills v. Union of India, concluding that the general word “including” in Regulation 4(1) does not extend to explanations not enumerated in the specific list.
The Court further examined the relevance of profit. Citing SEBI v. Abhijit Rajan, it clarified that while the amount of profit may influence the quantum of penalty under Section 15J, it does not affect the finding of liability. The purpose of the proceeds, even if used to avert loss, does not negate the insider-trading breach because the statutory language under Section 12A(d) and Regulation 4(1) focuses solely on the possession of UPSI at the time of trade.
Regarding the penalty, the Court applied Section 15J’s factors - disproportionate gain, loss to investors, and repetitive nature - and reduced the penalty on Mr. Sheth from Rs.25 lakh to Rs.10 lakh, aligning it with the penalties imposed on his daughters. The Court upheld the disgorgement amount (loss avoided of Rs.1.38 crore) and the 12% per annum interest from 30.11.2017, directing payment within 45 days. It also reinstated the market-access restrictions and ordered the penalty to be paid within three months.
The Verdict
The Supreme Court allowed the appeal, restored the WTM order dated 24.05.2021, and modified the penalty. Mr. Rajeev V. Sheth’s monetary penalty was reduced to Rs.10 lakh; Ms. Aarti Sheth and Ms. Divya Sheth each remain liable for Rs.10 lakh. Additional penalties of Rs.5 lakh (Clause 6 of the Minimum Standards) and Rs.1 lakh each (under Regulation 15HB) were upheld. The respondents must disgorge Rs.1.38 crore (the loss avoided) with interest at 12% per annum from 30.11.2017, payable within 45 days of receipt of the order. Market-access restraints of one year for Mr. Sheth and six months for the daughters were reinstated. All penalties are to be paid within three months.
What This Means For Similar Cases
The Presumption of Motive Is Controlling
- Once a person trades while in possession of UPSI, the law presumes the trade is motivated by that information.
- The insider bears the burden of proving an exemption listed in Regulation 4(1).
Profit or Loss Is Not Determinative of Liability
- The existence of profit, or the avoidance of loss, does not affect the finding of insider-trading liability.
- Penalty quantum may consider profit, but liability attaches regardless.
Defences Must Fit the Specific Enumerated Scenarios
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Off-market inter-se transfers, block-deal windows, statutory obligations, stock-option exercises, and safeguards for non-individual insiders are the only recognised defences.
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Generic explanations such as “downgrade risk” are insufficient.
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Practitioners should meticulously document any claim of exemption and ensure it aligns with the six categories in Regulation 4(1).
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When advising clients, emphasize that the purpose of proceeds will not mitigate liability; focus on preventing possession of UPSI at the time of trade.
