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2022 (4) TMI 945 - SC - SEBIInsider trading - Whether existed a close relationship/immediate relation between the appellants? - circumstantial evidence (trading pattern and timing of trading) - HELD THAT - In the present case, as rightly argued by the learned counsel of the appellant, the foundational facts were not proved which could raise the alleged presumption. SEBI failed to place on record any material to prove that the appellants were connected persons to Balram Garg as required by Regulation 2(1)(d)(ii)(a) read with Regulation 2(1)(f) of the PIT Regulations as none of the appellants were financially dependent on Balram Garg or even alleged to have consulted Balram Garg in any decision related to trading in securities. In light of the above principles of law laid down by this Court, it was imperative on the Respondent/SEBI to place on record relevant material to prove that the appellants namely, Mrs. Shivani Gupta, Sachin Gupta, Amit Garg and Quick Developers Pvt. Ltd. were immediate relatives who were dependent financially on appellant Balram Garg or consult Balram Garg in taking decisions relating to trading in securities . However, SEBI failed to do so as has been already recorded by the WTM in its order dated 11.05.2021. The said appellants were not immediate relatives and were completely financially independent of the appellant Balram Garg and had nothing to do with the said Balram Garg in any decision making process relating to securities or even otherwise. In the context of appellant no. namely Quick Developers Pvt. Ltd., the record clearly reveals that it is neither a holding company or an associate company or a subsidiary company of PCJ nor the appellant Balram Garg has ever been the Director of Quick Developers Pvt. Ltd. Therefore, Quick Developers Pvt. Ltd. cannot be held to be a connected person vis vis the appellant Balram Garg. Reliance of the Respondent/SEBI on transactions between appellant Sachin Gupta and PCJ and the subsequent payments of rent by PCJ is against the principles of natural justice as these allegations were not part of the Show Cause Notices There is no material on record for the WTM and the SAT to arrive at the finding that both late P.C. Gupta and the appellant Balram Garg communicated the UPSI to the other appellants. The said appellants were not immediate relatives and were completely financially independent of the appellant Balram Garg and had nothing to do with the him in any decision making process relating to securities or even otherwise. The submission of the learned counsel of the respondent regarding the same residential address of the appellants also falls flat as admittedly the parties were residing in separate buildings on a large tract of land. Lastly, in our opinion, the SAT order suffers from nonapplication of mind and the same is a mere repetition of facts stated by the WTM. 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. Accordingly, the appeals are allowed and the impugned judgement and final orders of WTM and SAT are set aside. The deposits made by the appellants in both the appeals in terms of the impugned orders or interim orders of this Court shall be refunded to the respective appellants.
Issues Involved:
1. Allegations of insider trading against the appellants. 2. Determination of whether the appellants were "connected persons" or "insiders" under SEBI regulations. 3. Examination of the relationship and alleged estrangement between the parties. 4. Analysis of the circumstantial evidence and trading patterns. 5. Burden of proof and the role of SEBI in establishing the communication of UPSI. Detailed Analysis: 1. Allegations of Insider Trading: The Securities and Exchange Board of India (SEBI) initiated action against the appellants based on an impounding order and a showcause notice alleging that the appellants traded on the basis of Unpublished Price Sensitive Information (UPSI) received due to their proximity to key individuals within PC Jeweller Ltd. The Whole Time Member (WTM) of SEBI imposed penalties and restrictions on the appellants, which were upheld by the Securities Appellate Tribunal (SAT). 2. Determination of "Connected Persons" or "Insiders": The WTM found that the appellants, Mrs. Shivani Gupta, Sachin Gupta, Amit Garg, and Quick Developers Pvt. Ltd., were not "connected persons" under Regulation 2(1)(d)(i) of the SEBI (Prevention of Insider Trading Regulations), 2015. The SAT, however, concluded on the "preponderance of probability" that the appellants were insiders based on their trading patterns and timing of trades. 3. Relationship and Alleged Estrangement: The appellants claimed estrangement from the family, citing family arrangements and resignations from PCJ. The Supreme Court found that the WTM and SAT failed to appreciate the evidence of estrangement, which demonstrated a breakdown of ties both personally and professionally much before the UPSI periods. The Court noted that the appellants were not financially dependent on Balram Garg and did not consult him for trading decisions. 4. Circumstantial Evidence and Trading Patterns: The Supreme Court analyzed the trading patterns in three phases: - Phase I (Pre-UPSI1 Period): Mrs. Shivani Gupta sold a large number of shares before the UPSI period, indicating no internal knowledge of the impending buyback offer. - Phase II (Pre-UPSI2 Period): Shares were sold even before the UPSI2 came into existence, undermining the argument that the appellants had insider information. - Phase III (UPSI2 Period): Only a small number of shares were sold during this period, and a significant number of shares were still held, contradicting the claim that the appellants sold shares based on UPSI. The Court concluded that the trading decisions were personal and commercial, with no correlation to the UPSI. 5. Burden of Proof and SEBI's Role: The Supreme Court emphasized that SEBI failed to provide cogent evidence of communication of UPSI between the parties. The burden of proof was on SEBI to show that the appellants were in possession of UPSI, which they did not discharge. The Court noted that the SAT's reliance on circumstantial evidence without foundational facts was legally unsustainable. Conclusion: The Supreme Court allowed the appeals, setting aside the judgments of the WTM and SAT. It held that the appellants were not "immediate relatives" or "connected persons" and were financially independent of Balram Garg. The trading patterns did not correlate with the UPSI, and there was no evidence of communication of UPSI. The SAT's order was found to lack independent assessment and was merely a repetition of the WTM's findings. The deposits made by the appellants were ordered to be refunded.
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