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evidence SEBI insider.docx

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Summary
Critical Issues in SEBI's Insider Trading Verdict
Also, need to look at Insider trading cases from a logical perspective

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, totalling
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 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 Hon’ble Supreme court in Balram Garg v. SEBI. The post aims to scrutinize the recent order
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of SEBI in the matter 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 provides an essential view point towards such cases.

FACTS

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Recently, SEBI issued its conclusive verdict on the Insider Trading activity involving specific
entities in the United Spirits Limited ("USL") stock. An investigation scrutinized trading in
USL shares from January to April in 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 for acquiring United
1
Spirits shares. He played a pivotal role in representing Diageo/PAC in the transaction to
consolidate the acquirer's stake in USL, leading the group from its inception.

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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
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involved parties only engaged in trading with two symbols on NSE, namely McDowell-N and
NIFTY. Preceding the UPSI period, from January 1, 2014 to March 12, 2014, the trades of
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these three individuals were only observed on two days, specifically March 10 and 11, 2014,
in the symbol of McDowell-N.

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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.

ISSUES IN THE ORDER

The order failed on multiple grounds. Although SEBI considered the following contentions but
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it failed to appreciate the fact that not only the Noticees can be considered as ‘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 had sold the said contracts
for 76.37 lakhs (approx.), thereby earning a profit of 46.6 lakhs (approx.). During these
purchase 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 notices because the probability of the two events happening together i.e. the large risk taken
by notices and large move in USL stock price that too 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 to happen are 99.9992%. But that is exactly what happened in this case.
Moreover, the situation becomes more startling as the Noticees failed to rationalize the
peculiarity of their trading behavior, instead proposing various alternative hypotheses for what
might constitute insider trading conduct.

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Additionally, the Investigation Report unveiled that Smt. Poonam transferred 18.40 lakhs
received from Religare Securities Ltd. as a portion of futures settlement proceeds related to
trades in the symbol of McDowell-N to Shri Haresh on May 09, 2014. Subsequently, upon
1
receiving these funds, Shri Haresh promptly transferred the entire sum to the bank account of
his daughter, Smt. Menka Haresh Jashnani, who is none other than the spouse of Shri Nishat.
This transaction clearly demonstrates the transfer of funds between the Noticees and Shri
Nishant, constituting compelling circumstantial evidence of insider trading.

ANALYSIS

In essence, the final order accepts the fact that there is strong prepondence 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 sets aside all the circumstantial evidences and
held that due to lack of cogent evidence of communication, it could not infer that the peculiar
trading by the noticees was done while in possession of UPSI.

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The Supreme Court in SEBI v. Kishore R. Ajmera (2016) held that mere circumstantial
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evidence is sufficient to establish the existence of insider trading activities. Circumstantial
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evidence means, evidence that can be inferred by a logical process of reasoning from the
circumstances and facts surrounding the allegations. This decision of Supreme court mitigated
SEBI’s extensive burden to prove rising insider trading cases. However, the Supreme Court in
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Balram Garg v. SEBI (2022) distinguished with the above judgement and held that SEBI has
to prove insider trading cases only using cogent evidences 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.

It reality, there is generally no direct evidence available in the cases of insider trading. For
instance, in the present case, even though there were no cogent evidences available but looking
1
from a logical perspective, the SEBI could have directly deduced that the trades were done
while in possession of UPSI. The circumstantial evidences in the present case like, minute odds
of such trading pattern, relation of the noticees with Shri Nishat Gupte and ,transfer of funds
by noticees would have put a strong preponderance of probability to conclude that the noticees
can be regarded as insiders.

Now it is established that the sole reliance on cogent evidence will lead to piling up of insider
trading cases and will make 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 ex. the factors listed by the New York District Court in Rajaratnam provide some useful
guidance on various categories of evidence which 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
majority of cases, there should be an equilibrium between cogent and circumstantial evidence.
For the rest of the cases where no direct evidence is available, in order to ease the burden of
judiciary, the classification of circumstances in which mens rea should be considered by SEBI
and the insider, as a key element of commission of insider trading.

CONCLUSION
 Similarity Report ID: oid:9832:42859807

15% Overall Similarity

Top sources found in the following databases:
13% Internet database 0% Publications database
Crossref database Crossref Posted Content database
4% Submitted Works database

TOP SOURCES
The sources with the highest number of matches within the submission. Overlapping sources will not be
displayed.

bseindia.com
1 11%
Internet

bsmedia.business-standard.com
2 1%
Internet

The WB National University of Juridical Sciences on 2022-03-04

3 1%
Submitted works

NALSAR University of Law Hyderabad on 2022-10-07

4 <1%
Submitted works

scconline.com
5 <1%
Internet

Sources overview