5 days ago
Supreme Court Broadens Insider-Trading Defences, Raising Legal Uncertainty
The case involved company promoters who sold shares before bad financial results became public.
They said they sold the shares to raise money for the company and repay creditors.
India’s market regulator said the sales avoided losses and violated insider-trading rules.
A tribunal accepted the promoters’ explanation, but the Supreme Court reversed that decision.
The court said the six listed exceptions in the rules are examples, not the complete list.
However, it also said that why the money was used does not matter.
The article argues that this makes it hard for insiders to know what defenses are available.
It suggests that people should be able to prove they decided to sell before learning confidential information.
The Supreme Court of India restored Securities and Exchange Board of India findings against Tara Jewels promoters over share sales made before poor results were published.
The promoters sold 30,93,948 shares between October 2 and November 29, 2017, while unpublished results showed a quarterly loss of Rs 166.80 crore.
The court held that six defences listed under Regulation 4(1) are illustrative, not exhaustive, because the provision uses the word “including.”
It also ruled that the purpose of using sale proceeds is irrelevant, rejecting the argument that the shares were sold to repay creditors and prevent a non-performing-asset downgrade.
The ruling reduced the principal promoter’s penalty from Rs 25 lakh to Rs 10 lakh but otherwise restored disgorgement, interest, market restrictions and penalties.
- Who
- The Supreme Court of India, the Securities and Exchange Board of India, and the promoters of Tara Jewels Limited, including chairman and managing director Rajeev Vasant Sheth and his two daughters.
- What
- The Supreme Court restored findings and sanctions against the promoters for selling shares while holding unpublished price-sensitive information.
- Where
- The case concerned India’s securities market and was decided by the Supreme Court of India.
- When
- The sales occurred between October 2 and November 29, 2017; the Supreme Court issued its decision on August 11, with the year not specified in the article.
- Why
- The promoters sold shares before Tara Jewels’ sharply worse results were published; they said the proceeds were used to raise company funds and repay creditors.
Supreme Court’s Interpretation
Article’s Critique
Scope of available defences
Supreme Court’s Interpretation
The six circumstances listed in Regulation 4(1) are illustrative rather than exhaustive, allowing additional defences of the same or a similar character.
Article’s Critique
The broader wording creates uncertainty because insiders must persuade a tribunal that their facts resemble examples that are already accepted.
Purpose of sale proceeds
Supreme Court’s Interpretation
The reason for applying the sale proceeds is irrelevant; avoiding a loss is treated as a benefit just as making a gain is.
Article’s Critique
The article argues that the ruling is unnecessarily broad because it does not allow a defence based on proving that confidential information did not cause the trade.
Role of intent and causation
Supreme Court’s Interpretation
The ruling applies the current regulatory framework, which presumes use of unpublished price-sensitive information and does not require a separate showing of the trade’s purpose.
Article’s Critique
The article says the law should permit an insider to prove that the decision to trade was made before the information was received, and urges the regulator to add such a defence.
Key facts
- Case
- Securities and Exchange Board of India v. Rajeev Vasant Sheth
- Company
- Tara Jewels Limited
- Shares sold
- 30,93,948 shares, approximately 12.56% of the shareholding
- Sales period
- October 2 to November 29, 2017
- Unpublished quarterly result
- A loss of Rs 166.80 crore, compared with a loss of Rs 6.62 crore in the previous quarter
- Regulation involved
- Regulation 4(1) of the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015
- Penalty change
- The principal promoter’s penalty was reduced from Rs 25 lakh to Rs 10 lakh
Sources
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