Insider Trading: SC Stops SEBI’s Regulatory Overreach in Abhijit Rajan Case
In a repeat of the Udayant Malhoutra case, the Supreme Court of India (SC), on 19th September, rejected the market regulator’s interpretation of what constitutes insider trading and acquitted Abhijit Rajan, former chairman of Gammon India Ltd. The two insider trading cases, and some others, smack of regulatory overreach that does no credit to the Securities and Exchange Board of India (SEBI) and calls for some introspection on how it decides an already hard-to-prove area of regulation.
The Abjijit Rajan case goes back to 2013 when Mr Rajan, then chairman and managing director of Gammon Infrastructure Projects Ltd (GIPL) sold shares just before a material event was conveyed to the stock exchanges. The share sale followed the termination of agreement with Simplex Infrastructure under which both had investments in each other’s special purpose vehicles.
SEBI accused Mr Rajan of insider trading for having sold just ahead of the announcement, based on unpublished price sensitive information (UPSI). In this case, the termination of the agreement benefited GIPL and led to a gain in price, so Mr Rajan did not profit from the action. More pertinently, the shares were sold as part of the corporate debt restructuring (CDR) of GIPL’s parent company Gammon India Ltd. The entire proceeds went to lenders, to stop them from initiating bankruptcy proceedings against the parent company. But SEBI was unconcerned by these facts.
In arguing before the securities appellate tribunal (SAT) in 2019, SEBI contended that it had only sought disgorgement of Rs1.09 crore and did not initiate punitive action because the sale was to fulfil a CDR-related obligation. But it wasn’t so simple. Although GIPL’s price rose after the action, Mr Rajan alleged that SEBI had deliberately chosen to make it appear that he had profited by selecting a particular date for its calculations. Unfazed by SAT rejecting its stand, SEBI approached the SC (Civil Appeal No.563 of 2020), which has again upheld Mr Rajan’s acquittal in a well-explained judgement.
Notably, SEBI’s action inflicted irreparable reputational damage lasting six years. In July 2014, SEBI barred Mr Rajan and two other directors in an interim order; on 23 March 2015, it confirmed the order; at the end of March 2016, it issued a show-cause notice followed by an order of whole-time member (WTM) S Raman, who let off the other two directors but confirmed the disgorgement order against Abhijit Rajan (read: 1468409889156.pdf).
I am told there were suggestions from ‘consultants’ that Mr Rajan should opt for a settlement process, before the matter became public. This would let him off by making a payment and contain the damage; but he insisted on fighting the case. In November 2019, SAT set aside SEBI’s order and ordered a refund of the money impounded from Mr Rajan and now he has won again in the apex court.
On 19th September, a two-judge bench of justice Indira Banerjee and justice V Ramasubramanian noted that “the sale by the respondent, of the shares held by him in GIPL would not fall within the mischief of insider trading, as it was somewhat similar to a distress sale, made before the information could have a positive impact on the price of the shares…” It also noted the rise in share price after the sale as being beneficial to shareholders with no benefit derived by Mr Rajan.
Why shouldn’t SEBI officials, who investigate insider trading cases all the time, show the same clarity of thinking in deciding insider trading? What makes this case more curious, as noted in the SC order, is that “SEBI itself exonerated the co-noticee, namely, Consolidated Infrastructure Company Private Limited, on the ground that its sale of shares was on account of a pressing need to meet a margin shortfall to its stock broker.” The strange benevolence to the co-noticee has not been discussed or explained. Then, again, this is not the first time SEBI had acted in a seemingly vindictive manner.
Udayant Malhoutra Case 
On 15 June 2020, in the middle of the COVID lock-down, SEBI’s WTM Anant Barua issued an ex-parte order against Udayant Malhoutra, the managing director of Dynamatic Technologies, impounding alleged gains over Rs3.83 crore for an ‘insider trading’ transaction that happened in 2016 (Read SEBI’s Insider Trading Orders: Is There Any Method in the Madness?).
Mr Malhoutra was accused of selling 51,000 shares about six days before the company announced its financial results. As it happened, the shares were pledged with Infrastructure Leasing and Financial Services against a Rs50-crore loan. The sale was in line with an agreement signed by Mr Malhoutra with a consortium of lenders, to reduce his borrowing and pay back the loan at a specific time. He neither profited nor avoided a loss.
When the case wound its way to the Supreme Court, a 3-judge bench of justices Dhananjay Chandrachud, Indu Malhotra and Indira Banerjee upheld the SAT decision to let off Mr Malhoutra.
Shreehas Tambe
A third case that smacks of similar overreach and cited by securities law experts is that of Shreehas P Tambe, senior vice-president of Biocon Ltd. Mr Tambe sold 17,440 shares of the company, after obtaining pre-clearance, in order to make a part-payment for purchase of a residential property in December 2017. SEBI had alleged that Mr Tambe possessed UPSI relating to Biocon’s collaboration with Sandoz and restrained him from on accessing the market and imposed a monetary penalty of Rs2 lakh. The only valid charge against him was that he disclosed the sale after the stipulated 48-hour period under insider trading rules.
Given that insider trading cases are notoriously difficult to prove, it is unclear why SEBI would set itself up for repeated embarrassment by adopting a stand of ‘absolute liability’ even when actions are not motivated by profiting from UPSI, but are in line with other legal or contractual agreements.
There a need for greater restraint and application of mind when the regulator has the power to destroy reputations and inflict a financial damage in a system that hardly ever compensates victims of unjust action by the State or its regulatory, enforcement or investigation agencies.
Earlier this year, Moneylife Foundation published a detailed "Review of Insider Trading Cases" mentored by advocate Ravichandra Hegde, partner of Parinam Law Associates. It studied the interpretation of SEBI rules through a series of landmark judgements after 2015. The study concluded that SEBI has failed to adopt a uniform approach in deciding similar cases, leading to divergent orders that need further adjudication by appellate forums. When such cases are stuck down, do they embarrass the regulator? Is there any internal evaluation and checks & balances against such overzealous action?
The study also concluded that SEBI needs to revisit its regulations and decide the role of mens rea (motive or guilty mind) in deciding matters of insider trading because several contradictory judgements have led to confusion and uncertainty over the applicability of rules. The interpretation issue, it found, also applied to the principle of ‘preponderance of probabilities’ (interpretation of circumstantial evidence) used to decide insider trading cases. For instance, in April 2022, an SC order in the case of Balaram Grag vs SEBI , or the PC Jewellers case, suddenly called into question SEBI’s stand in a plethora of past orders based on circumstantial evidence. In this case, the jeweller family was formally partitioned in 2001, but continued to reside on the same plot of land. SEBI concluded that there was insider trading based on the common residential address. However, SC ruled that SEBI’s conclusion (in this case upheld by SAT) needed to be backed by a higher burden of proof, i.e., the degree of ‘preponderance of probabilities’ must be much higher.
On 13th September, SEBI has gone back to SC on this case with a review petition. While this is certainly one route to prevent previous judgements from getting overturned, wouldn’t it be far better for the regulator to fix its insider trading rules and to put in place a system to evaluate the quality of orders emanating from its investigation and adjudication processes?
2 years ago
It’s getting further muddied as bankers of listed companies handling their loan accounts too are being included in the ambit of “insiders”. This is based on the loan officers being privy to the CMA data submitted by the companies to decide and compute the working capital needs.

Will soon cover the office boy too I suppose since he “handles” the files containing the projections.

Do note that bank employees can in the meantime continue dealing in the bank’s own shares - subject to the period around quaterlies and annual results.
2 years ago
Looks regulations are made to make mischief a rent seeking device
2 years ago
Thank you for properly explaining the issue.
Sebi should be held liable for damages to the victim.
Kamal Garg
2 years ago
SEBI is in fact a complainant, an investigator (probing into various aspects of crime) and an adjudicator. And this role is similar to a police investigation into the crime, wherein the judicial process is defined as "State versus accused". This is also similar to this only.
Free Helpline
Legal Credit