The Hon’ble Supreme Court, in Securities and Exchange Board of India v. Rajeev Vasant Sheth¹, held that once an insider is shown to have traded while in possession of unpublished price-sensitive information (“UPSI”), the Note appended to Regulation 4(1) of the SEBI (Prohibition of Insider Trading) Regulations, 2015 (“PIT Regulations”) raises a presumption that the trade was motivated by that knowledge, rendering the reasons for trading, or the purpose to which the proceeds are applied, wholly irrelevant.

BRIEF FACTS
Tara Jewels Limited (“TJL”), a company engaged in the buying and selling of jewellery and listed on the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE), suffered a loss of INR 166.80 crores for the quarter ending September 2017, as against a net loss of INR 6.62 crores in the preceding quarter, with net sales falling by approximately 69% over the same period. TJL was subsequently admitted to liquidation by way of order dated 30th July 2019 passed by the National Company Law Tribunal (NCLT).

During the UPSI period spanning 2nd October 2017 to 29th November 2017, Respondent No. 1, Mr. Rajeev Vasant Sheth, sold 30,93,948 shares (approximately 12.56% of TJL’s total shareholding) and a further 29,75,000 shares in subsequent transactions, while Respondents No. 2 and 3, Ms. Aarti Sheth and Ms. Divya Sheth, each sold their entire individual holding of 1,14,440 shares. These sales cumulatively avoided a loss of approximately INR 1.38 crores.

Following an Impounding Order-cum-Show Cause Notice, the Whole Time Member (“WTM”) of SEBI, by order dated 24th May 2021, held all three respondents guilty of insider trading in violation of the SEBI Act, 1992, and the PIT Regulations. The WTM restrained Respondent No. 1 from accessing the securities market for one year and Respondents No. 2 and 3 for six months, directed disgorgement of the loss avoided together with 12% annual interest, and imposed monetary penalties under Sections 15G and 15HB of the SEBI Act, including a penalty of INR 25 lakhs on Respondent No. 1 under Section 15G. On appeal, the Securities Appellate Tribunal (“SAT”), Mumbai, by way of judgment dated 19th April 2022, quashed the WTM’s order, accepting the respondents’ explanation that TJL faced the risk of being downgraded to a non-performing asset and holding that this fell within the proviso to Regulation 4(1). SEBI thereafter appealed to the Supreme Court under Section 15Z of the SEBI Act.

CORE ISSUE
The principal question before the Supreme Court was whether the respondents, having admittedly traded while in possession of UPSI, could escape liability for insider trading on the ground that the shares were sold to avoid further losses to the company or to meet corporate requirements, and whether such a justification fell within, or was analogous to, the defences enumerated in Regulation 4(1) of the PIT Regulations 2015. A related question was whether the “legitimate corporate purpose” defence recognised by the SAT under the predecessor 1992 Regulations, in Rakesh Agrawal v. Securities and Exchange Board of India², could be read into the 2015 Regulations, and whether the decision in Securities and Exchange Board of India v. Abhijit Rajan³, being relied upon by the respondents, was applicable on similar facts.

DECISION
The Court held that Section 12A of the SEBI Act prohibits insider trading without defining it, and that the concept, borrowed from the United States’ Securities Exchange Act of 1934, involves dealing in a company's securities on the strength of confidential information likely to affect their price once made public. Under Regulation 4(1) of the PIT Regulations, once trading while in possession of UPSI is established, a rebuttable presumption arises that the insider intended to profit from that information; the insider may then displace the presumption only by demonstrating one of the enumerated defences, or a defence of the same or similar nature, since the use of the word “including” signals a non-exhaustive but ejusdem generis-limited list. Applying this framework, the Court found it undisputed that the respondents held UPSI and had sold substantial or entire shareholdings during that period; the Note appended to Regulation 4(1) rendered irrelevant both the motive for the sale and the use to which the proceeds were applied. The Court observed that “less or no profit, is of no consequence” once trading during the UPSI period is established.

Distinguishing SEBI v. Abhijit (supra), the Court noted that the transactions in that case were governed by the 1992 PIT Regulations, whose Regulation 3B, though similarly structured, contained no equivalent Note excluding consideration of the purpose of the sale; consequently, the tribunal there could examine why the accused had sold shares to fund a corporate debt restructuring package for a group company facing possible bankruptcy. No such latitude survives under the PIT Regulations. The Court further held that the SAT erred in reviving the “legitimate corporate purpose” defence articulated in Rakesh v. SEBI (supra), since that defence was tied to the 1992 Regulations and could not be transplanted into the 2015 regime given the specific Note under Regulation 4(1).

On this basis, the appeal was allowed, and the WTM’s direction for disgorgement of the INR 1.38 crore loss avoided, together with interest, was restored under Section 11B of the SEBI Act. The finding of violation of Clause 6 of the Minimum Standards for Code of Conduct under Schedule B, read with Regulation 9(1) of the PIT Regulations, was also upheld. However, having regard to the facts and circumstances, the Court reduced the Section 15G penalty imposed on Respondent No. 1 from INR 25 lakhs to INR 10 lakhs, aligning it with the minimum statutory penalty already imposed on Respondents No. 2 and 3, and directed that the modified penalty be paid within three months.

CONCLUSION
The judgment reinforces a strict, presumption-based approach to insider trading liability under the 2015 PIT Regulations, foreclosing reliance on commercial justification, absence of profit, or a distressed corporate context as a means of escaping the consequences of trading while in possession of UPSI. By clarifying that the “legitimate corporate purpose” defence recognised under the 1992 Regulations has no application under the 2015 regime, and by confining the non-exhaustive defences in Regulation 4(1) to matters of the same or similar nature as those expressly listed, the Court has narrowed the interpretive space previously available to insiders seeking to justify trades made during possession of price sensitive information.

By - Gurdev Singh Tung & Manan Tiwari