PC Jeweller Insider Trading Case: Supreme Court Overturns SEBI Order

Only circumstantial evidence such as trading pattern, without establishing possession and communication of unpublished price-sensitive information, cannot be enough to bring insider trading charges, the Supreme Court of India held in the PC Jeweller case this week.

The top court was hearing appeals by PC Jeweller's Balram Garg and three others—Sachin Gupta, Shivani Gupta and Amit Garg. Sachin and Shivani are the son and daughter-in-law of Balram's deceased brother PC Gupta, while Amit is Balram's nephew.

The individuals were fined Rs 20 lakh, restrained from accessing the securities market for one year, and have been barred from trading in shares of PC Jeweller for two years.

In May last year, the Securities and Exchange Board of India found Balram Garg guilty of communicating UPSI to the three individuals. Sachin, Shivani and Amit were found guilty of trading on the basis of that.

The UPSI was related to a buyback proposal conveyed to the stock exchanges in May 2018, and its subsequent withdrawal in July 2018.

On appeal, the Securities Appellate Tribunal largely agreed with SEBI. It noted that there was no direct evidence of who had disseminated UPSI. But on preponderance of probability it concluded that it were the late PC Gupta, the company's chairman at the time, and Balram Garg who had disseminated UPSI to the three individuals.

This week, the apex court set aside the SAT's order.

Family Cited Past Settlements To Argue Estrangement

In its order, the market regulator had noted that Sachin, Shivani and Amit were not "connected persons" to Balram Garg, as they were not in any contractual, fiduciary or employment relationship with the company six months prior to the alleged act of insider trading. But they were in proximity to PC Gupta and Balram Garg.

To be an insider as per the regulations, one has to be either a connected person or be in possession of UPSI.

An insider is not permitted to share the unpublished information except with other insiders or for furtherance of legitimate purpose.

SEBI's case was that Balram Garg was privy to UPSI by virtue of being an insider. And he was in proximity to Sachin, Shivani and Amit who had traded on its basis. Amit Garg and his wife were 100% shareholders in Quick Developers Pvt., which took a short position on July 13, 2018—just before the information about the withdrawal of the buyback proposal was communicated to the exchanges. The regulator also pointed to trading via Shivani's account when the information was price-sensitive.

The apex court heard two sets of appeals—one by Balram Garg and the second by Shivani, Sachin and Amit.

The top court examined two conclusions by SEBI:

• There existed a close relationship between the appellants and they were in possession of unpublished price-sensitive information.

• Based on circumstantial evidence—trading pattern and timing of trading—it could reasonably be concluded that Shivani, Sachin and Amit were “insiders” in terms of SEBI (Prohibition of Insider Trading) Regulations, 2015.

Balram Garg had argued that the burden of proof to establish any communication of UPSI was on the regulator. And that SEBI had failed to show any evidence of frequent communication such as call details, emails, witnesses, etc.

Sachin, Shivani and Amit pointed to settlements to show estrangement in the family. Thereby making a case against SEBI's "proximity" claim. The entire case against them was on the basis of close relationship with Balram Garg, whereas there was actually a complete breakdown of ties much before the buyback proposal, they argued. According to them, the charges have been sustained solely on the basis of circumstantial evidence such as trading patterns and timings of trade.

Top Court’s Disagreement With SAT And SEBI

The Supreme Court noted that the appellate tribunal had failed to appreciate the evidence before it. SAT failed to apply its mind on the issues raised by the parties and routinely affirmed SEBI's findings, the apex court said.

The apex court examined the settlement agreements cited by the parties and observed that:

• Amit Garg was never associated with the company.

• His father Amar Chand Garg dissociated himself from the company in September 2011.

• Sachin and Shivani Gupta were never directors of PC Jeweller and had resigned from their roles in 2015.

• PC Gupta and his wife had agreed to transfer 1,60,000 shares to Sachin and his family and in return they agreed not to have any right in the immovable and movable property of PC Gupta.

The two family arrangements, considered in their right perspective, adequately demonstrate that there was a breakdown of ties between the parties much prior to the UPSI, the top court held.

On whether the three individuals could be considered to be in possession of UPSI by their association with Balram Garg, the top court answered the question in the negative. There was absence of any concrete material to show frequent communication between Garg and the three individuals, the bench pointed out.

The three individuals had nothing to do with Balram Garg in any decision-making process relating to securities or even otherwise, the judgment said.

According to Ajay Shaw, partner at DSK Legal, mere circumstantial evidence such as trading pattern and timing of trading will not be sufficient for someone to be guilty of insider trading.

Anand Lakra, partner at JSA, said the judgment reiterates the position that reasonable inference must be drawn from foundational facts.

Absent which, relying only on circumstantial evidence may not be helpful in bringing home a charge, Lakra said.

The apex court has directed the regulator to refund the deposits made by the parties.