Introduction
The Annual Report of SEBI for the fiscal year 2022-2023 unveiled a concerning trend wherein insider trading cases accounted for 59.02% of all investigations undertaken by SEBI, totaling 85 cases. This marked a notable escalation from the previous year, 2021-2022, during which SEBI had addressed only 17 such cases. As time progresses, it becomes increasingly evident that the incidence of insider trading is on the rise, necessitating a heightened demand for more stringent regulatory measures.
With the rapid increase in the number of insider trading cases, the issue of proving an insider trading case by SEBI was already a vexed one, but this problem got exacerbated after a decision of the Hon’ble Supreme Court in Balram Garg v. SEBI. The post aims to scrutinise the recent order of SEBI in the matter of insider trading activity in the scrip of United Spirits Limited. It further highlights the need to take a more logical approach while solving insider trading cases rather than confining SEBI to rely on circumstantial evidence. It concludes by suggesting certain changes in the current approach and a providing an essential point of view i such cases.
Background of the Case
Recently, SEBI issued its conclusive verdict on the insider trading activity involving specific entities in United Spirits Limited (“USL”) stock. An investigation scrutinised trading in USL shares from January to April 2014, focusing on potential regulatory breaches by three individuals. The core accusation centered on the Jashnanis’ alleged involvement in insider trading related to USL shares, purportedly facilitated by Nishant Gupte, who held the role of Global Business Development Manager (Mergers and Acquisitions) at Diageo.
Nishant possessed UPSI about the joint bid by Relay BV and Diageo Plc to acquire United Spirits shares. He played a crucial role in representing Diageo/PAC throughout the transaction aimed at consolidating the acquirer’s stake in USL, spearheading the group from its inception.
Shri Nishat, an insider and husband of Smit, Menka Haresh Jashnani, is the son-in-law of Smt. Poonam and Shri Haresh and brother-in-law of Shri Varun. It was reasonably anticipated that they had access to non-public information concerning USL securities, as during this period, the involved parties only engaged in trading with two symbols on the NSE, namely McDowell-N and
NIFTY. Preceding the UPSI period, spanning from January 1, 2014, to March 12, 2014, the trading endeavours of these three individuals were observed solely on two days, specifically March 10 and 11, 2014, centered on the symbol of McDowell-N.
SEBI, in its final order dated August 25, 2023, based on the precedent set by the Hon’ble Supreme Court in the Balram Garg case, determined that the trades of the concerned parties in this instance did not contravene the PIT Regulation.
Critical Oversights in the Order
The order failed on multiple grounds. Although SEBI considered the following contentions, it failed to appreciate the fact that not only the Noticees can be considered ‘relatives’ of the connected person and thereby ‘deemed connected persons’ in terms of Regulation 2(h)(vi) of PIT Regulations due to their familial ties as brother in law, mother in law, and father in law, but also the fact that Noticee Nos. 1 and 3 visited their daughter Menka and Shri Nishat in London in May 2013 soon after the UPSI period, which clearly shows that they had a cordial relationship with each other.
Moreover, for March expiry contracts, Noticees had paid a premium of 28.01 lakhs (approx.) to purchase the said contracts and had sold the said contracts for 78.02 lakhs (approx.), thereby earning a profit of 50 lakhs (approx.). Similarly, for April expiry contracts, Noticees paid a premium of 29.78 lakhs (approx.) to purchase the said contracts and sold the said contracts for 76.37 lakhs (approx.), thereby earning a profit of 46.6 lakhs (approx.). During these purchases of out-of-the-money call options of USL, they were risking their entire option amount paid. It would be erroneous to contemplate that the trades were made due to some unique skills of the noticees because the probability of the two events happening together, i.e., the large risk taken by the noticees and the large move in USL stock price, not just once but twice within the UPSI period, is 0.0008%, as refereed in the final order. This means that the odds against something like this happening are 99.9992%. But that is exactly what happened in this case.
Moreover, the situation becomes more startling as the noticees fail to rationalise the peculiarity of their trading behaviour, instead proposing various alternative hypotheses for what might constitute insider trading conduct.
Additionally, the Investigation Report revealed that Smt. Poonam forwarded 18.40 lakhs, received from Religare Securities Ltd., as a portion of futures settlement proceeds pertaining to trades involving the symbol of McDowell-N to Shri Haresh on May 09, 2014. Subsequently, upon receipt of these funds, Shri Haresh expeditiously transferred the entire amount to the bank account of his daughter, Smt. Menka Haresh Jashnani, who happens to be the spouse of Shri Nishat. This transaction unequivocally illustrates the transfer of funds between the parties under investigation and Shri Nishant, presenting substantial circumstantial evidence of insider trading.
Tracing the History of Evidentiary Burden
In essence, the final order accepts the fact that there is a strong preponderance of probability that the positions taken by the noticees in USL during March-April 2014 could not have been taken without having access to UPSI. But SEBI set aside all the circumstantial evidence and held that due to the lack of cogent evidence of communication, it could not infer that the peculiar trading by the noticees was done while in possession of UPSI.
In the case of SEBI v. Kishore R. Ajmera (2016), the Supreme Court established that the presence of insider trading activities can be substantiated by circumstantial evidence alone. Circumstantial evidence refers to information that can be deduced through a logical process of reasoning based on the circumstances and factual context surrounding the allegations. This Supreme court decision mitigated SEBI’s extensive burden to prove rising insider trading cases. However, the Supreme Court in Balram Garg v. SEBI (2022) distinguished with the above judgement and held that SEBI must prove insider trading cases only using cogent evidence like emails, witnesses, etc. It has the effect of limiting the ability of SEBI to rely on circumstantial evidence and thereby enhancing its evidentiary burden.
Analysis
In reality, cases of insider trading generally lack direct evidence. In the present instance, if the Kishore R. Ajmera case were applied and as there was no cogent evidence available, by looking from a logical perspective, the SEBI could have directly deduced that the trades were done while in the possession of UPSI. The circumstantial evidence, such as the unusually minute odds of such a trading pattern, the relationship of the noticees with Shri Nishat Gupte, and the transfer of funds by the noticees, would have strongly supported the conclusion that the noticees can be regarded as insiders.
Now, it is established that sole reliance on cogent evidence result in an accumulation of insider trading cases, making it difficult for the regulator to procure direct evidence of such wrongdoing. It must be noted that sole reliance on circumstantial evidence would also not be beneficial, as it could lead to unbridled power for SEBI. Before solely applying circumstantial evidence, sound principles governing reliance on circumstantial evidence should be enacted. For example, the factors listed by the New York District Court in Rajaratnam provide some useful guidance on various categories of evidence that may be relevant.
The author is of the view that neither cogent evidence nor circumstantial evidence should be solely put on a pedestal. The cases of insider trading are unpredictable, and various concerns might need to be evaluated on an individual basis, considering the circumstances. Thus, in most instances, there should be an equilibrium between cogent and circumstantial evidence. For the rest of the cases where no direct evidence is accessible, in order to ease the burden of the judiciary, it is imperative for SEBI and the insider to classify the classification in which mens rea should be considered as a key element of commission of insider trading.
Conclusion
Considering the escalating prevalence of insider trading cases, a call for more rigorous regulatory measures is imperative. Recently, SEBI also released a draft of the Unlawful Suspicious Trading Activities Regulations, which will define suspicious trades involving repetitive trading patterns in stocks within a certain period. Such regulations will be helpful for SEBI to prove insider trading cases that do not meet the standards of insider trading and market fraud laws due to a lack of cogent evidence.
Achieving a balance between circumstantial and cogent evidence holds paramount importance in guaranteeing a just and expeditious adjudication process. Sole reliance on cogent evidence may prove inadequate in addressing the complexities inherent in such cases. Instead, a nuanced and case-specific approach that considers both types of evidence is advocated, thereby achieving a more balanced and equitable resolution in these intricate matters.
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