No Profit? Still Liable: Supreme Court Clarifies Insider Trading Liability

The Supreme Court of India (“Supreme Court”), while deciding on an appeal preferred by the Securities and Exchange Board of India (“SEBI”), in Securities and Exchange Board of India v. Rajeev Vasant Sheth, Civil Appeal No. 4905 of 2022, 2026 INSC 826., held on August 11, 2026 that insider trading shall be presumed if: (i) the person is in possession of Unpublished Price Sensitive Information (“UPSI”); (ii) trade(s) has/have taken place during the period when the information remains unpublished; and (iii) such trade(s) is/are not covered under any of the defences available. It would be immaterial whether or not the person derived any gain from such trade(s) and no defence of legitimate corporate purpose can be claimed.

Brief Facts

Tara Jewels Limited (“TJL”) was a listed company where Mr. Rajeev Vasant Sheth (“R1”), was the Chairman and Managing Director, while Ms. Aarti Sheth (“R2”) and Ms. Divya Sheth (“R3”), his daughters, were Promoters and Vice Presidents. TJL had entered into liquidation pursuant to an order dated July 30, 2019 passed by the National Company Law Tribunal. During the quarter ended September 2017, TJL incurred huge losses and its net sales had fallen approximately 69% (sixty-nine percent), and such information was treated as UPSI for the period from October 2, 2017 to November 29, 2017 (“UPSI Period”). During such UPSI Period, the respondents sold large portions/ entirety of their shareholding as a result of which the respondents collectively avoided a loss of approximately Rs. 13,800,000 (Rupees Thirteen Million Eight Hundred Thousand).

In light of the above, SEBI issued an impounding order-cum-show cause notice, and subsequent thereto, the Whole Time Member (“WTM”) held the respondents guilty of insider trading in violation of Sections 12A(d) and 12A(e) of the Securities and Exchange Board of India Act, 1992 (“SEBI Act”) and Regulations 3(1) and 4(1) of the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 (“PIT Regulations”), and also found a breach of Clause 6 of the Minimum Standards for Code of Conduct under Schedule B read with Regulation 9(1) of the PIT Regulations. Accordingly, monetary penalties under Sections 15G and 15HB of the SEBI Act were imposed, disgorgement order passed with interest at 12% (twelve percent) per annum, and an order was also passed restraining access to the securities market and dealing in securities for 1 (one) year by R1 and for 6 (six) months by R2 and R3.

The Respondents filed an appeal before the Securities Appellate Tribunal (“SAT”) against such order wherein SAT set aside the WTM’s order by treating the explanation of legitimate corporate purpose as a valid defence under Regulation 4(1) of the PIT Regulations and based on the finding that it could not be observed that the sale of the shares was for the purpose of avoiding further losses.

Accordingly, an appeal was preferred by SEBI before the Supreme Court contending that the respondents do not fall within any of the defences provided under the PIT Regulations, and therefore, the SAT had erred. Per contra, the respondents contended that: (i) the present case would be covered by the judgment of the Supreme Court in SEBI v. Abhijit Rajan, (2024) 11 SCC 645., given its similarity on facts; and (ii) that the respondents gained nothing from the trades.

Issue for consideration

Whether the trades executed while in possession of UPSI would attract presumption of insider trading under Regulation 4(1) of the PIT Regulations, irrespective of the stated purpose of the trades or the use of proceeds, and whether the SAT was justified in recognising “legitimate corporate purpose” as a defence to insider trading?

Legal framework discussed by the Supreme Court

The Supreme Court while stating that the concept of insider trading gains its genesis from the Securities Exchange Act of 1934, observed that the SEBI Act does not define insider trading and explained the concept as dealing in a company’s securities while in possession of UPSI, thereby amounting to a breach of fiduciary duty. Drawing reference to Chapter VA of the SEBI Act and specifically Section 12A, the Supreme Court stated that the law prohibits any person from engaging in insider trading, whether directly or indirectly.

The Supreme Court then proceeded to review the scheme of the SEBI Act discussing key provisions in relation to the facts of the case, namely: (i) Section 11, which casts duty on SEBI to prohibit insider trading; (ii) Section 30, which empowers SEBI to frame regulations; (iii) Section 15G, which prescribes penalties for insider trading; (iv) Section 15J, which provides for the factors to be considered while imposing penalty; (v) Section 11B, which empowers SEBI to pass disgorgement order; and (vi) Section 15T and Section 15Z, which lay down the appeal mechanism.

Thereafter, certain definitions laid down under the PIT Regulations were emphasised by the Supreme Court, namely: (i) connected person, as defined under Regulation 2(1)(d), being any person associated with a company in any capacity allowing such person access to UPSI, which is deemed to include the immediate relative of such a person; (ii) insider, as defined under Regulation 2(1)(g), which includes any person in possession of or having access to UPSI, regardless of the mode of acquisition of such information; and (iii) unpublished price sensitive information, as defined under Regulation 2(n), being any information which is likely to materially affect the price of the securities, which explicitly covers financial results and change in capital structure.

It was stated that Regulation 3 of the PIT Regulations expressly prohibits communication of UPSI, other than in furtherance of legitimate purposes or discharge of, inter alia, legal obligations. Regulation 4(1), along with the note thereto, was then emphasised to state that trading while in possession of UPSI is prohibited and that there is a rebuttable presumption that trades done, while in possession of UPSI, are motivated by that information, and once established, a charge of insider trading can be brought and the intention and/or the purpose for which the proceeds of the transactions are applied would be irrelevant. However, innocence can be demonstrated by any of the following circumstances:

1. If the transaction carried out is an off-market inter-se transfer between insiders who were in possession of the same UPSI, without being in breach of Regulation 3 of the PIT Regulations, and both parties had made a conscious and informed trade decision, subject to Regulation 3(3) of the PIT Regulations and the notification requirements; or

2. If the transaction has been carried out through the block deal window mechanism between persons who were in possession of the same UPSI, not being in violation of Regulation 3; subject to Regulation 3(3), and such persons have made an informed and conscious decision; or

3. If the transaction was in furtherance of statutory/ regulatory obligations in connection with a bona fide transaction; or

4. If the transaction was in exercise of stock options and the price thereof was predetermined in accordance with applicable laws; or

5. In case of non-individual investors, the person making the trade and the person in possession of the UPSI are different, subject to adequate arrangements being in place to prevent the communication of the UPSI and there being no breach of such arrangements; or

6. If the trade(s) has/have been carried out in accordance with trading plans as formulated under Regulation 5 of the PIT Regulations.

Decision

The Supreme Court held that it was undisputed that the respondents were insiders, were in possession of UPSI, and that they had sold large portions/ entirety of their holdings during the UPSI Period, and accordingly, the statutory presumption in the note to Regulation 4(1) squarely applied, and the purposes for which the proceeds were employed would be irrelevant.

It discussed on the rule of ejusdem generis to state that the same cannot be made applicable in the present case but observed that as the defences mentioned under the PIT Regulations follow the general word “including”, the other defences that may be covered would be of the same and similar nature to those already provided under the PIT Regulations.

Thereafter, the Supreme Court distinguished the case of Abhijit Rajan (supra) on two grounds: (i) that case involved trades governed by the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992 whereunder there was no note appended, i.e., under the extant Regulations, there was no specific bar against the consideration of the issue of where the proceeds of such insider trading transactions were used; and (ii) in that case the shares were sold before an anticipated increase in the price of shares, as opposed to a fall in the prices in the present case.

The Supreme Court further proceeded to hold that it was not open to the SAT to import a “legitimate corporate purpose” defence into the PIT Regulations in view of the note appended to Regulation 4(1).

On the above analysis, the Supreme Court concluded that the fact that the respondents indulged in trades while in possession of UPSI is sufficient to conclude insider trading, irrespective of limited or no profit which was of no legal consequence. Accordingly, the Supreme Court restored the order passed by the WTM of SEBI, however, considering that the quantum of penalty of Rs. 2,500,000 (Rupees Two Million Five Hundred Thousand) imposed on R1 under Section 15G of the SEBI Act was excessive, it reduced the penalty to Rs. 1,000,000 (Rupees One Million).

Argus Comment

From a doctrinal perspective, the Supreme Court’s decision confirms that Regulation 4(1) of the PIT Regulations operates as a presumption?based regime: once an insider is shown to have traded while in possession of UPSI, the trade is presumed to be motivated by such information, and neither the stated purpose of the transaction nor the application of the proceeds can defeat liability unless a specific defence recognised in Regulation 4(1) is established, thereby significantly narrowing the room for equitable or motive-based defences in insider trading matters.

While the Supreme Court declined to apply the rule of ejusdem generis, it held that any additional defences must be of a similar nature to those expressly listed and that ‘legitimate corporate purpose’ does not qualify. The decision underscores that adjudicatory bodies cannot create broader equitable defences that are not textually anchored in the statutory framework itself.

For promoters, directors, key management personnel and all connected persons, this ruling serves as a vital reminder that trading windows must be strictly adhered to, pre-clearances maintained, and reliance should be placed exclusively on formal trading plans approved under Regulation 5 of the PIT Regulations while dealing in securities.

Please find attached a copy of the Judgment, here.