The Use of Circumstantial Evidence in Securities Law Enforcement

[Shruti Rajan is a partner in the Financial Regulatory Practice at Trilegal. Vidhi Shah is an associate with the Financial Regulatory Practice at Trilegal.]

Quasi-judicial authorities are not bound by strict rules of evidence. It is settled law that they are “entitled to act on material that may not be accepted as evidence in a court of law,” and examine all relevant information and data in discharging their role as triers of fact. However, in the course of conducting and concluding their inquiry, authorities must remain faithful to substantive rules of evidence and natural justice. The Supreme Court set the perimeter around the use of evidence by administrative and quasi-judicial authorities a few decades ago, with Justice Krishna Iyer memorably steering us to the distinction between a rigid methodology to appreciate evidence (that must be left to civil courts) and material which is “logically probative” to a “prudent mind” and must be considered relevant by administrative and quasi-judicial bodies after a judicial and objective examination.

Given the nature of transgressions that come up for their scrutiny, bodies tasked with securities enforcement globally (both at the first instance and appellate forums) have long emerged as gracious patrons as well as active architects of standards around consumption of evidence. Whether one looks at fraudulent trades, manipulative practices or insider trading, the outcome of any market conduct action or securities law violation is determined by critical metrics around timing, facts and chronology of events down to the minute, all of which are crucial to the formulation of causal links and irrefutable charges. Unsurprisingly, therefore, the inferential tools utilised to appreciate evidence always beget compelling discourse. This post provides an overview of the nuances therein.

Burden of Proof

The burden of proof lies on the party bringing the charge and the regulator (in its capacity as the investigating body) must adduce evidence to support the allegations made out in its notice to show cause. There are exceptions to this rule, though, in cases where the transfer of such burden is hardwired into the law, subject to the satisfaction of certain circumstances. For instance, regulation 2(1)(q)(2) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 defines various categories of persons who are deemed to be acting in concert with other persons in the same category, unless the contrary is established. Therefore, where parties falling within the list of such enumerated relationships acquire shares in a listed company beyond certain legally identified thresholds without complying with the attendant requirements under the Takeover Regulations (of disclosures or open offers, as the case may be), the burden lies on them, and not SEBI, to rebut the presumption that they acted as a homogenous unit and establish that their acquisitions did not share a common objective.

Such rebuttable presumptions are enshrined in regulations 2(i)(d)(ii) and 2(1)(f) (and notes that follow) of the SEBI (Prohibition of Insider Trading) Regulations, 2015 as well, where the law constructs presumptions regarding access to price sensitive information based on a person’s structural or functional relationship with the listed company and its management. Should a person fall within these pre-determined categories, in response to a charge of insider trading, the ball remains in his court in terms of regulation 4(2)  of the SEBI Insider Trading Regulations to either demonstrate that the deeming fiction has been misapplied to him, or that he did not trade whilst in the possession of price sensitive information. As the party bringing the charge, SEBI’s burden is discharged by demonstrating the individual’s connection alone, and the law does not require the regulator to go one step ahead and adduce evidence on the actual violation itself.

Standard of Proof & Appreciation of Evidence

Where the action is civil in nature, the standard of proof has been well-established as being one that points to a ‘preponderance of probabilities’, while steering clear of surmises and conjectures.[1] Since securities law violations are almost always predicated on an expansive web of interconnected facts, and scienter must often be gleaned from circumstances, judicial precedent requires the examination of all available circumstantial evidence and a cumulative assessment of their degree of persuasion, to then draw inferences in line with the “preponderance” standard. Back in 2007, SEBI pithily concluded that the constraints faced in proving facts that would only be within the knowledge of the delinquent parties would mean that a prudent man’s estimate of the probabilities of a case can be inferred from several determinative circumstances.[2] In most cases thereafter, reliance on circumstantial evidence has been par for the course and almost a truism in the enforcement process.

This position has been consistently re-affirmed over the years, with the 2009 US District Court decision in the Rajaratnam case coming in to augment the regulator’s efforts in exploring the positive probative attributes of circumstantial evidence. The US District Court in Rajaratnam concluded that circumstantial evidence such as “(1) access to information; (2) relationship between the tipper and the tippee; (3) timing of contact between the tipper and the tippee; (4) timing of the trades; (5) pattern of the trades; and (6) attempts to conceal either the trades or the relationship between the tipper and the tippee” can be used to prove insider trading. This methodology (and this paragraph of the order, in particular) has been explicitly relied upon in a number of SEBI and SAT orders thereafter and dominated recent Indian discourse on circumstantial evidence.[3] Since 2016, Supreme Court decisions which upheld the preponderance standard have also endorsed the need to draw inferences from immediate circumstances and other auxiliary factors.[4]

Having thus established its indispensability in tilting the scales towards a preponderance of facts, courts and regulators must continue to work on how circumstantial data can converge to an acceptable degree of preponderance. Even within the contours of this probability standard, how closely should proximate factors be interlaced in order to meet the standard of preponderance? Naturally this assessment is more bespoke and not amenable to a formulaic approach. The intricacy and degree of interconnectedness that must be established between proximate factors and the weightage to be accorded have been a case-by-case assessment over the years. 

In certain cases, the SAT has struck a cautionary note and advocated the use of a “higher” preponderance of probabilities in establishing the claim, and advised against use of evidence that merely creates a probability and endeavours to prove facts leaning on the crutches of the preponderance test. Even the Supreme Court in SEBI v. Kanaiyalal Baldevbhai Patel recognised that circumstantial evidence could be successfully applied because it “only led to one conclusion”.

Overall, though, the acceptable level or quantification of probability is yet to be keenly parsed by our courts. The need for such guidance is especially felt in cases where multiple co-related data points certainly exist, but when read together may (i) not rise up to a preponderance of probable causation, (ii) allow for alternative explanations, or (iii) better still, tantamount to mere sequential inferences.

Successfully and extensively applied across SEC enforcement action for decades, circumstantial evidence largely owes its eminence from US market integrity indictments to the SEC’s ability to place wire taps. This enables the regulator to unearth robust circumstantial evidence around the relationship between delinquent parties, an impairment that Indian investigations have long suffered from. Consequently, regardless of the parity of evidentiary standards under law, the quality and precision with which proximate circumstances are disinterred and examined in other jurisdictions is, on most occasions, far more sophisticated and comprehensive than in India, primarily because of SEBI’s incomplete toolkit. In the years to come, the methodology applied for reliance on circumstantial evidence in India will hopefully be deconstructed more thoroughly, to ensure that its use is not carte blanche in permitting mere correlations or coincidences to substitute a more particularised standard of persuasion and sufficiency.

Shruti Rajan and Vidhi Shah



[1] Kishore Ajmera v. SEBI (2016) 6 SCC 368; SEBI v. Rakhi Trading Pvt Ltd (2018) 13 SCC 753.

[2] See, SEBI Order in the matter of Atlanta Ltd dated September 27, 2007; SEBI order in the matter of Mr. Manoj Ganeriwala v. SEBI dated November 7, 2007.

[3] SEBI Order against Bala Kaul dated January 4, 2012; SEBI order in the matter of KLG Capital Services dated July 24, 2014; SEBI Order in respect of Rupeshbhai Kantilal Savla dated September 30, 2019.

[4] Kishore Ajmera (above); SEBI v. Kanaiyalal Baldevbhai Patel (2017) 15 SCC 1; Rakhi Trading (above).

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