The Securities and Exchange Board of India (SEBI) has petitioned the Supreme Court (SC) to review its April 2022 decision in the PC Jeweller insider trading case. The apex court had overturned the capital markets regulator's ruling that separated/estranged family members of a promoter must be regarded as related individuals for purposes of the insider trading laws if they reside at the same address. The promoter family of PC Jeweller is involved in the lawsuit.
According to SEBI and the securities appellate tribunal (SAT), there is a 'preponderance of possibility' that parties could share price-sensitive information at the common location. However, in April this year, a two-judge SC panel held that both, SEBI and SAT, were wrong because they failed to consider and take into account family disputes.
Securities lawyers have pointed out that the judgement is expected to have a broader impact on the insider trading rules, since it would set a precedent. The regulator and appellate tribunal are also concerned because if this SC judgement holds, it may provide a loophole for perpetrators in the future.
PC Gupta, Amar Chand Garg and Balram Garg, who are brothers, are said to have created PC Jeweller, according to numerous court filings. The Amar Chand Garg family severed relations with PC Jeweller in 2011 and decreased its holding to 0.7%. Due to a family disagreement, PC Gupta's son Sachin and daughter-in-law Shivani left the company in 2015 and stepped down from their positions at PC Jeweller. They did, however, receive 16 million PC Jeweller shares as payment from the company's founder PC Gupta. All the family members continued to reside on the same property in various structures even after the breakup.
The PC Jeweller board began deliberations on a share buyback from public investors on 25 April 2018. On 10 May 2018, the board approved the proposal. According to insider trading regulations, the news of the buyback qualified as unpublished price-sensitive information (UPSI) because the proposal was not made public until 10th May. The lead banker declined to provide a ‘no objection’ certificate on 7 July 2018, which forced PC Jeweller to announce its withdrawal on 13 July 2018. Any withdrawal-related tips received between 7th July and 13th July were considered as UPSI.
Since the noticees in both cases related to the promoter family and lived at the same address, SEBI determined that, in all likelihood, they had access to UPSI regarding the company, and their trading during this time was an attempt to profit from this.
In its investigation, SEBI found that Shivani Gupta and related entities sold some of the PC Jeweller shares between 2 April 2018 and 13 July 2018. Also, an entity 100% owned by Amar Chand Garg's son Amit Garg took short positions in the PC Jeweller stock just before 13th July, when the company announced the withdrawal. Additionally, Amit Garg and Sachin Gupta executed certain trades on behalf of Shivani Gupta. SEBI held that in both cases, since the accused belonged to the promoter family and shared the same address, it was likely that they were in possession of UPSI regarding the company and their trades during this period were an attempt to capitalise on this.
On 11 May 2021, SEBI passed an order
which held that three had violated insider trading rules and restrained them from accessing public markets or dealing with PC Jeweller shares for a period of one year. The regulator also asked the accused to pay about Rs10 crore in disgorgement and penalties for violating insider trading rules. This order was upheld by SAT on 21 October 2021.
"It cannot be gainsaid that the appellants are residing at the same address," SAT had said. "In our view, the reasoning of of the Ld. WTM (whole-time member of SEBI) cannot be faulted with. The facts as highlighted... would show that... there was no estrangement... Additionally, in our view, the very fact that appellant Shivani had authorised her cousin brother-in-law i.e. appellant Amit to trade on her behalf, would belie the case of the appellants that family settlements means family estrangement."
SC, in its decision on 19 April 2022, rejected this view and criticised SAT for not undertaking a separate evaluation. Court ruled that SEBI and SAT incorrectly disregarded the family members' claim of estrangement "without acknowledging the facts and supporting documentation that had been put forth. The WTM and SAT should have recognised the necessary information for determining the parties' actual connection."
We had covered this case a couple of months back in two separate study reports by Moneylife Foundation on Review of Indian Insider Trading Cases and An Analysis of the Orders Passed By SEBI and SAT, and Their Impact on Investor Confidence.