[Insider-trading] Supreme Court sets aside SEBI, SAT order in PC Jewellers case

The Supreme Court on Tuesday set aside orders of the Securities and Exchange Board of India (SEBI) and the Securities Appellate Tribunal (SAT) that held the Managing Director of PC Jewellers and some of his relatives guilty of insider-trading [Balram Garg and Shivani Gupta vs SEBI]..A Bench of Justices Vineet Saran and Aniruddha Bose held that the SAT order re-affirming the findings of the SEBI suffered from a non-application of mind as it merely regurgitated the latter. "The Appellate Tribunal was exercising jurisdiction of a First Appellate Court and was bound to independently assess the evidenced and material on record, which it evidently failed to do," the top court said. .The present appeals were moved against the SAT order that ruled that the petitioners were insiders as per the Prevention of Insider Trading Regulations. This was given the fact that apart from the Managing Director, the other appellants are his brother's children and in-laws.The SEBI had fined the appellants ₹20 lakh and restrained them from accessing the securities market and buying, selling or dealing in securities directly or indirectly for a year. It also restrained them appellants from dealing with the scrips of their company for two years.This was based on the finding of the Whole Time Member (WTM) of SEBI that the family members concerned had traded on the basis of 'Unpublished Price Sensitive Information' (UPSI) received on account of their alleged proximity to the company and its Managing Director, between April and July 2018.The SAT upheld the same after noting the the order cannot be faulted with the submission of family estrangement was not made out given they resided on the same plot. .The counsel for the appellants submitted that the family members were not connected persons or immediate relatives and it was on the SEBI to prove that any UPSI was communicated towards insider trading. No such evidence was placed on record, and the family members were not under the complete financial control of the Managing Director, it was contended. The counsel also argued that the SEBI relying on transactions not mentioned in the show-cause notices issued violated the principles of natural justice. The complete breakdown of ties was ignored and only circumstantial evidence was used in the rulings, it was submitted. The present petitioners had submitted before the earlier fora that presumption is a rule of evidence that cannot be drawn unless and until foundational facts are proved. In this case, no material was brought on record to prima facie show any transfer of information to the appellants and moreover, the SEBI had said that the family members of the Managing Director were not 'connected persons' as per the PIT Regulations. Even so, merely being a family/relative cannot by itself be a ground for the offence of insider trading, especially when the same saw strained ties and a partition of sorts, they argued.Counsel for the respondent submitted that information of issuing and then revoking the buy-back of paid up capital shares was what was considered the UPSI in the matter. The time period between the same was the window for the insider-trading in question as sell trades were done by one of the appellants then, and all the appellants were party to these decisions, it was argued.On the breakdown of ties, counsel stated that it was at best an internal division as they continued to pay rent among themselves in the shared residential address. .The Supreme Court at the outset observed that the submission regarding the first respondent (Managing Director) being an “insider” and “connected person” within the meaning of PIT Regulations is 'not worthy of acceptance'. Coming down on the SAT for the manner in which it upheld the order of the SEBI, the Bench observed," ... it has failed to independently assess the evidence and material on record while exercising its jurisdiction as the first appellate court. As reiterated by this Court in a catena of judgments, it is the duty of the first court of appeal to deal with all the issues and evidence led by the parties on both, the questions of law as well as questions of fact and then decide the issue by providing adequate reasons for its findings. Unfortunately, the SAT failed to apply its mind on the issues raised by the parties and routinely affirmed the findings of the WTM without dealing with the issues at hand."The top court took objection to the SAT concluding on mere “preponderance of probability” that it was the Managing Director and his brother who communicated the UPSI though there was no direct evidence of the same.The Bench proceeded to reexamine the following issues: Whether the WTM and SAT rightly rejected 32 the claim of estrangement of the appellants namely, Shivani Gupta, Sachin Gupta and Amit Garg? Could the aforementioned appellants be rightly held to be “insiders” in terms of Regulation 2(1)(g)(ii) of the PIT Regulations, only and entirely on the basis of circumstantial evidence?.The top court found that the material on record 'adequately demonstrated' a breakdown of relations between the parties and given the SEBI's findings, the question of ipso facto relying on the nature of relationship between the parties towards insider trading, was legally unsustainable."The approach adopted by the SAT turns the SEBI Act on its head as it places the burden of proving that there was a complete breakdown of ties between the parties on the Appellants in C.A. No.7590 of 2021 while conveniently ignoring the fact that the onus was actually on SEBI to prove that the appellants were in possession of or having access to UPSI. The legislative note to Regulation 2(1)(g) makes the above position of law explicitly clear," the judgment said.On the allegedly suspicious stock trading, the Court observed that there was no correlation between the UPSI and the share trading." ... data reveals that the share price of the PCJ shares consistently fell during the investigation period and therefore it would be incorrect to say that the price of the shares fell only upon announcement of the withdrawal of the buyback offer. In fact, the records reveal that even after the announcement of the buyback offer, there was no increase in the share prices of the company. Resultantly, the appellants stopped selling shares on 13.07.2018 because they believed that the market price continued to fall so badly that the shares possessed by them were not being valued accurately," the Bench observed. In the absence of material to show frequent communication between the parties, there could not have been a presumption of communication of UPSI by the appellants, the Court made it clear. Relying on its decision in Chintalapati Srinivasa Raju, the top court reiterated that merely because a person was related to connected persons cannot by itself be a foundational fact to draw inferences.On the SEBI's contention of the related parties living together, the Court stated that it 'falls flat' as the parties reside in separate buildings on a large tract of land.The appeals were accordingly allowed and the money deposited by the petitioners was ordered to be refunded. .Senior Advocates Dhruv Mehta and V Giri appeared for the appellants. Senior Advocate Arvind Datar represented the SEBI. [Read Judgment]