The Supreme Court has ruled that a person who trades in securities while in possession of unpublished price sensitive information (UPSI) is presumed to have traded on the basis of that information, and the purpose for which the sale proceeds are used is ordinarily irrelevant under the 2015 insider trading regulations.
Allowing SEBI’s appeal, a Bench of Justice Sanjay Karol and Justice Nongmeikapam Kotiswar Singh set aside the Securities Appellate Tribunal (SAT), Mumbai’s decision that had exonerated the respondents from insider trading liability.
The bench restored the disgorgement order relating to approximately ₹1.38 crore in losses avoided, while reducing the Section 15G penalty imposed on the first respondent from ₹25 lakh to ₹10 lakh. The judgment was delivered on August 11, 2026 in Securities and Exchange Board of India v. Rajeev Vasant Sheth & Ors., Civil Appeal No. 4905 of 2022.
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The dispute arose from trading in the shares of Tara Jewels Limited (TJL), a company engaged in the business of buying and selling jewellery. Rajeev Vasant Sheth was the company’s Chairman and Managing Director, while Aarti Sheth and Divya Sheth, his daughters, were promoters and Vice Presidents of the company. TJL was listed on both the Bombay Stock Exchange and the National Stock Exchange.
The company was facing severe financial difficulties during the relevant period. Its net loss increased dramatically from ₹6.62 crore in the quarter ending June 2017 to ₹166.80 crore in the quarter ending September 2017. During the same period, the company’s net sales declined by approximately 69%.
The Supreme Court noted that the relevant UPSI period extended from October 2, 2017 to November 29, 2017. During this period, Rajeev Sheth sold 30,93,948 shares, representing approximately 12.56% of the company’s total shareholding, followed by further transactions involving 29,75,000 shares. Aarti Sheth and Divya Sheth each sold their entire holding of 1,14,440 shares. Collectively, the transactions resulted in an avoided loss of approximately ₹1.38 crore.
SEBI subsequently issued an Impounding Order-cum-Show Cause Notice on September 4, 2020, seeking an explanation from the respondents and proposing appropriate directions and penalties.
The proceedings culminated in an order dated May 24, 2021 passed by SEBI’s Whole Time Member. The respondents were held guilty of violating the SEBI Act and the SEBI (Prohibition of Insider Trading) Regulations, 2015.
SEBI restrained Rajeev Sheth from accessing the securities market and from buying, selling or otherwise dealing in securities for one year. Aarti Sheth and Divya Sheth were subjected to a similar restraint for six months.
The WTM also directed the respondents to disgorge the amount corresponding to the loss avoided through the alleged insider trading, together with 12% annual interest calculated from November 30, 2017 until payment. The disgorged amount was directed to be credited to the Investor Education and Protection Fund.
In addition, monetary penalties were imposed. Rajeev Sheth was initially subjected to a ₹25 lakh penalty under Section 15G, while Aarti Sheth and Divya Sheth were each penalised ₹10 lakh. Additional penalties under Section 15HB were also imposed, including ₹5 lakh on Rajeev Sheth and ₹1 lakh each on Aarti and Divya Sheth.
The respondents challenged SEBI’s order before SAT.
SAT accepted their explanation that Tara Jewels was at risk of being downgraded to a non-performing asset and held that this explanation was sufficient to establish their innocence despite their possession of UPSI. It considered the explanation to fall within the proviso to Regulation 4(1) of the 2015 PIT Regulations.
SAT also examined the market price of TJL shares on November 29 and November 30, 2017 on both NSE and BSE and observed that there was hardly any difference in the closing price. It therefore concluded that the sales could not be said to have been undertaken for the purpose of avoiding further losses. SAT consequently allowed the appeal and set aside SEBI’s order.
SEBI challenged that decision before the Supreme Court under Section 15Z of the SEBI Act.
The Supreme Court began by explaining that insider trading essentially involves dealing in a company’s securities while possessing confidential information likely to affect the price of those securities once the information becomes public.
The Court observed that insider trading constitutes a breach of fiduciary responsibility by persons who, because of their position or relationship with a company, obtain access to confidential information.
The Court referred to Section 12A of the SEBI Act, which expressly prohibits insider trading and also prohibits dealing in securities while in possession of material or non-public information in contravention of the Act or regulations.
The Court further noted that Section 15G provides for penalties for insider trading. The provision covers dealing in securities on the basis of UPSI, communicating UPSI and counselling or procuring another person to trade on the basis of UPSI.
The Court examined the definition of “unpublished price sensitive information” under Regulation 2(n) of the 2015 PIT Regulations.
Such information must relate directly or indirectly to a company or its securities, must not be generally available and must be information which, once made public, is likely to materially affect the price of the securities.
The regulations specifically identify matters such as financial results; dividends; changes in capital structure; mergers, de-mergers and acquisitions; delisting and disposal transactions; expansion of business; and changes in key managerial personnel.
The Court noted that this list is illustrative rather than exhaustive.
The central issue before the Supreme Court concerned Regulation 4(1) of the 2015 PIT Regulations.
The Court explained that the provision prohibits trading while in possession of UPSI and incorporates a rebuttable presumption that trades undertaken by a person possessing UPSI were motivated by that information.
However, the regulation permits an insider to establish innocence by demonstrating specified circumstances.
The Court identified the recognised circumstances, including certain off-market inter-se transfers, block deal transactions, trades carried out pursuant to statutory or regulatory obligations, exercise of stock options at predetermined prices, certain safeguards applicable to non-individual insiders and trades undertaken pursuant to a trading plan.
The Supreme Court placed particular emphasis on the Note appended to Regulation 4(1).
According to the Court, once it is established that a person traded while possessing UPSI, the reasons for undertaking the trade or the purpose for which the proceeds were used do not become relevant unless the person establishes one of the recognised exonerating circumstances.
Applying this principle to the present case, the Court found that it was undisputed that the respondents were in possession of UPSI and had sold substantial portions, or their entire shareholding, while possessing that information.
The Court therefore held that the fact that the proceeds may have been used for a particular purpose, or that the respondents may have made little or no profit, could not by itself absolve them from insider trading liability.
A significant aspect of the judgment is the Court’s treatment of loss avoidance.
The transactions did not necessarily generate a conventional trading profit. Instead, according to SEBI’s findings, the respondents avoided approximately ₹1.38 crore in losses by selling shares while in possession of UPSI.
The Supreme Court made it clear that insider trading law is not confined to situations where an insider purchases shares at a lower price and later sells them at a profit. Avoiding a loss through trading while possessing UPSI can also attract regulatory consequences.
The Court ultimately held that the respondents’ trades constituted insider trading notwithstanding the absence of conventional profit.
The respondents relied upon the Supreme Court’s earlier decision in SEBI v. Abhijit Rajan, contending that the facts were similar because the proceeds from the share transactions were used for corporate purposes.
The Supreme Court, however, distinguished that decision.
The Court noted that Abhijit Rajan concerned transactions undertaken in 2013, when the earlier 1992 PIT Regulations governed insider trading. The earlier regulations did not contain the specific Note now appended to Regulation 4(1) of the 2015 Regulations, which makes the purpose for which sale proceeds are used irrelevant to determining whether insider trading has occurred.
The Court therefore held that the legal position under the 2015 Regulations could not simply be equated with the position under the earlier regulatory regime.
The Court also considered whether the defences specifically enumerated in Regulation 4(1) constituted an exhaustive list.
It observed that the provision uses the expression “including” before setting out the specified circumstances. Consequently, the six defences are not necessarily exhaustive.
However, the Court clarified that any additional defence would have to be of the same or similar nature as the circumstances contemplated by the regulation.
Thus, while Regulation 4(1) permits room for circumstances beyond the six expressly identified categories, a general plea based merely on the purpose of the transaction cannot override the specific statutory framework and the Note attached to the provision.
Having concluded that the respondents had committed insider trading, the Supreme Court restored the disgorgement direction issued by SEBI’s Whole Time Member.
The Court explained that disgorgement essentially requires an insider to give up the wrongful gain secured, or the loss avoided, through a transaction carried out in violation of the securities law.
Since the respondents had avoided approximately ₹1.38 crore in losses, the Court held that SEBI’s direction to disgorge the amount could not be faulted.
The Court also upheld the additional penalty imposed for violation of Clause 6 of the Minimum Standards for Code of Conduct to Regulate, Monitor and Report Trading by Insiders under Schedule B read with Regulation 9(1) of the PIT Regulations, 2015.
While restoring the insider trading liability, the Supreme Court modified the quantum of penalty imposed on Rajeev Sheth under Section 15G.
The Court took a cumulative view of the facts and circumstances and found that the original ₹25 lakh penalty was excessive.
It therefore reduced the penalty to ₹10 lakh, corresponding to the minimum penalty imposed on the other two respondents.
The modified penalty was directed to be paid within three months, if it had not already been paid.
In an important observation towards the end of the judgment, the Supreme Court noted that SAT appeared to have recognised a defence based on “legitimate corporate purpose”, relying on its earlier decision in Rakesh Agrawal v. Securities and Exchange Board of India.
The Supreme Court held that such an approach was not available to SAT in the present case because the matter was governed by the 2015 PIT Regulations, including the Note appended to Regulation 4(1).
This distinction between the old and new regulatory regimes is particularly significant. The Court’s reasoning indicates that judicial consideration of the commercial purpose behind a trade cannot be used to dilute the regulatory presumption applicable under the 2015 framework where the essential ingredients of insider trading are established.
The Supreme Court’s ruling establishes several important principles concerning insider trading:
First, possession of UPSI coupled with trading attracts the Regulation 4(1) presumption. Once the foundational fact of trading while in possession of UPSI is established, the insider must bring the transaction within an applicable exonerating circumstance.
Second, actual profit is not necessary for insider trading liability. A transaction resulting in the avoidance of a loss can attract disgorgement and other regulatory consequences.
Third, the purpose for which trading proceeds are used is ordinarily irrelevant under the Note to Regulation 4(1).A plea that the money was required for corporate purposes or to avert financial difficulties does not, by itself, constitute a defence under the 2015 framework.
Fourth, the 2015 PIT Regulations must be distinguished from the earlier 1992 regime. The Supreme Court specifically relied on the absence of the corresponding Note in the old regulations while distinguishing Abhijit Rajan.
Fifth, disgorgement can cover loss avoided. Section 11B expressly recognises SEBI’s power to direct a person who has made a profit or averted a loss through a contravening transaction to disgorge an equivalent amount.
The Supreme Court allowed SEBI’s appeal, overturned SAT’s decision and restored the finding that the respondents had engaged in insider trading. The disgorgement direction concerning approximately ₹1.38 crore of avoided losses was restored, along with the applicable interest and the additional penalty for violation of the insider trading code of conduct.
At the same time, the Court reduced the Section 15G penalty on Rajeev Sheth from ₹25 lakh to ₹10 lakh.
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