The issue of the burden of proof of the securities regulator in insider trading cases has been a vexed one. This is particularly because direct evidence is often hard to come by, and the Securities and Exchange Board of India (SEBI) has to resort to circumstantial evidence. The jurisprudence thus far has borne some recognition of the practical difficulties surrounding the regulator’s evidentiary burden, and has sought to incorporate a balanced regime on evidentiary matters in insider trading cases. However, a decision of the Supreme Court in Balram Garg v. Securities and Exchange Board of India (19 April 2022) has the effect of limiting the ability of SEBI to rely on circumstantial evidence and thereby enhancing its evidentiary burden.
Facts and Ruling
The alleged insiders are members of a promoter family of PC Jeweller Limited. While Mr. P.C. Gupta was the chairman of the company, his brother Mr. Balram Garg is the managing director of the company. The allegation is that three individuals, being Mr. Sachin Gupta (son of Mr. P.C. Gupta), Mrs. Shivani Gupta (daughter-in-law of Mr. P.C. Gupta) and Mr. Amit Garg (nephew of Mr. P.C. Gupta and Mr. Balram Garg) had engaged in trades involving the shares of PC Jewellers, either directly or through their holding company while in possession of unpublished price sensitive information (UPSI). The UPSI herein was bifurcated into two parts: first, the information relating to the announcement by the company of a buyback of securities and, second, the information relating to a subsequent termination of the buyback transaction due to the failure to receive the consent of the lenders.
Based on a detailed analysis of these and other facts, a whole time member of SEBI passed an order finding a case of insider trading and imposing appropriate penalties on the parties. On appeal, SEBI’s order was upheld by the Securities Appellate Tribunal (SAT). Aggrieved by the order of SAT, the alleged insiders filed an appeal before the Supreme Court, which overturned the decisions of both SAT and SEBI.
The Supreme Court raised two questions. The first was whether SEBI and SAT were right in rejecting the claim of the alleged insiders that the recipients of the information (i.e., tippees) were estranged from the communicators of that information (i.e., the tippers). The second related to whether the tippees can indeed be treated as “insiders” within the meaning of the SEBI (Prohibition of Insider Trading) Regulations, 2015 (the “PIT Regulations”) only on the basis of circumstantial evidence.
On the first question, the Supreme Court found that there was estrangement among the members of the promoter family both the professional and personal levels. The breakdown in the relationship between the parties is suggestive of the fact that communication of information about the company’s affairs between the parties was unlikely. The Court stated that the onus was on SEBI to prove that the tippees were in possession of UPSI, which cannot be discharged simply by arguing based on a lack of estrangement between the parties (which fact too was disputed by the Supreme Court).
While the above question relates essentially to a factual matter, it is the second question that goes to the heart of the evidentiary burden in tipping cases, and specifically whether the regulator can simply rely on circumstantial evidence to indicate that the tippees were in possession of UPSI. At the outset, the Supreme Court clarified that it is not permissible to look only at the trading patterns and the timing of trading to determine whether the tippees can be treated as “insiders” for purposes of the PIT Regulations. On the facts, the Supreme Court found the lack of a sufficient correlation between the UPSI and the trading patterns. It noted that “decisions of selling the shares and the timings thereof were purely a personal and commercial decision undertake by [the alleged insiders] and nothing more can be read into those decisions.” Hence, solely a pattern of trading cannot be determinative of the fact that there was communication of UPSI from the tippers to the tippees. The Court illustrated that “it is only through producing cogent materials (letters, emails, witnesses, etc.) that the said communication of UPSI could be proved and not by deeming the communication to have happened owing to the alleged proximity between the parties.”
While arguing its position, SEBI fell back on the ruling in SEBI v. Kishore R. Ajmera (2016) 6 SCC 368, wherein the Supreme Court permitted the securities regulator to rely on “circumstantial evidence or on a preponderance of probability by a logical process of reasoning from the totality of the attending facts and circumstances …[whereby] an irresistible inference can be drawn that the [tipper] had passed on the price sensitive information [to the tippees].” The Kishore Ajmera decision has been relied upon extensively by SEBI and SAT in cases involving circumstantial evidence. However, it has been subject to limited applicability depending upon the facts and circumstances of individual cases, for instance in Chintalapati Srinivasa Raju v. Securities and Exchange Board of India (2018) 7 SCC 443.
In the present case, the Supreme Court has effectively distinguished Kishore Ajmera on the facts, as the earlier decision involved a case of fraudulent and manipulative trade practices and not insider trading. Furthermore, Court has also found that “in the absence of any material available on record to show frequent communication between the parties, there could not have been a presumption of communication of UPSI by [Mr. Balram Garg, the alleged tipper]. The trading pattern … cannot be the circumstantial evidence to prove the communication of the UPSI …” For the aforesaid reasons, the Supreme Court allowed the appeal and set aside the orders of SEBI and SAT.
Analysis and Conclusion
Although the decision is largely based on the facts of the case, the ruling of the Supreme Court bears broader implications. The earlier decision in Kishore Ajmera sought to mitigate the extensive burden of SEBI in insider trading cases, which is recognition of the absence usually of direct evidence in insider trading cases. However, the present case of Balram Garg limits the applicability of Kishore Ajmera and effectively enhances the burden of proof the regulator. Even though it does not eliminate the possibility of the use of circumstantial evidence, SEBI’s reliance merely on the pattern and timing of trading in securities is clearly insufficient to discharge its burden of proof. Other direct or circumstantial evidence is necessary to establish communication from the tipper to the tippee. This is usually difficult to gather, thereby making SEBI’s burden onerous, and somewhat unduly so.
In its zeal to offer illustrations in the form of likely evidence, such as letter, emails and witnesses, the Supreme Court may have limited the availability of circumstantial evidence. While the decision explicitly distinguishes Kishore Ajmera on facts, the import of the new ruling from the Court may have wide-ranging implications on evidentiary matters in insider trading cases. At the same time, while it is noteworthy that the PIT Regulations have been subject to several rounds of amendments and a revamp in 2015 to strengthen the regulatory apparatus, matters relating to burden of proof in market abuse cases continue to be regulator’s bugbear.