Supreme Court Restores Insider Trading Liability Against Tara Jewels Promoters; Holds Motive Irrelevant When Trading With UPSI, Orders ₹1.38 Crore Loss Disgorgement
Supreme Court Rejects Financial Distress Defence to Insider Trading; Tara Jewels Promoters’ Share Sales While Possessing UPSI Attract SEBI Liability
Facts
Tara Jewels Limited (“TJL”), a listed jewellery company, was headed by Rajeev Vasant Sheth as Chairman and Managing Director, while his daughters Aarti Sheth and Divya Sheth were promoters and Vice Presidents. The company subsequently entered liquidation pursuant to an NCLT order dated 30 July 2019.
TJL’s financial position deteriorated substantially during 2017. Its loss increased from ₹6.62 crore in the quarter ending June 2017 to ₹166.80 crore in the quarter ending September 2017, while net sales declined by approximately 69%.
During the Unpublished Price Sensitive Information (“UPSI”) period from 2 October 2017 to 29 November 2017, Rajeev Sheth sold 30,93,948 shares, representing approximately 12.56% of TJL’s shareholding, followed by another 29,75,000 shares. Aarti and Divya Sheth sold their entire holdings of 1,14,440 shares each. These transactions collectively enabled the respondents to avoid losses of approximately ₹1.38 crore.
SEBI initiated proceedings and, by its Whole Time Member’s order dated 24 May 2021, found all three respondents guilty of insider trading under the SEBI Act and the SEBI (Prohibition of Insider Trading) Regulations, 2015 (“PIT Regulations”). Rajeev was barred from the securities market for one year, while his daughters were barred for six months. Disgorgement of the losses avoided with interest was ordered, along with monetary penalties.
The Securities Appellate Tribunal (“SAT”) set aside SEBI’s order. SAT accepted the respondents’ explanation that TJL faced the risk of its account being downgraded to a non-performing asset and treated this as sufficient justification for the transactions. It also noted that there was little difference between TJL’s closing share price immediately before and after disclosure of the information.
SEBI challenged SAT’s decision before the Supreme Court under Section 15Z of the SEBI Act.
Issues
The principal issues before the Supreme Court were:
- Whether an insider who admittedly trades in securities while possessing UPSI can escape liability by showing a legitimate commercial or corporate purpose for selling the shares.
- Whether the purpose for which the proceeds of the share sale were utilised, or the absence of actual profit, is relevant under Regulation 4(1) of the 2015 PIT Regulations.
- Whether the defences expressly identified in the proviso to Regulation 4(1) are exhaustive or whether other analogous defences may be recognised.
- Whether the earlier Supreme Court decision in SEBI v. Abhijit Rajan, rendered in the context of the 1992 PIT Regulations, applied to transactions governed by the materially different 2015 Regulations.
- Whether SEBI’s directions concerning penalty and disgorgement should be restored.
Appellant’s Arguments
SEBI contended that it was undisputed that the respondents were insiders possessing UPSI and had sold substantial portions, or the entirety, of their shareholdings during the UPSI period.
SEBI argued that none of the recognised defences under Regulation 4(1) applied to them.
Most importantly, SEBI relied upon the Note appended to Regulation 4(1), which creates a presumption that when a person trades while possessing UPSI, the trade is motivated by knowledge and awareness of that information. The reasons for trading and the purposes for which the proceeds are ultimately used are expressly rendered irrelevant.
SEBI therefore contended that SAT had committed an error in accepting the respondents’ financial-distress or corporate-purpose explanation as a defence to insider trading.
Respondents’ Arguments
The respondents contended that their case was covered by the Supreme Court’s earlier decision in SEBI v. Abhijit Rajan.
They argued that the transactions were undertaken because of TJL’s financial difficulties and the threat of its account being classified as a non-performing asset.
They further submitted that the proceeds had been used for the purposes of the company and that they had obtained no real gain from the transactions.
Accordingly, they sought to justify the trades as having been undertaken for a legitimate corporate purpose rather than with an intention to exploit UPSI.
Analysis of the Law
The Supreme Court examined the statutory framework governing insider trading under the SEBI Act and the 2015 PIT Regulations.
Regulation 4 prohibits an insider from trading in securities while possessing UPSI. Critically, the Note appended to Regulation 4(1) provides that where a person possessing UPSI trades in securities, the trade is presumed to have been motivated by the knowledge and awareness of that information.
The Note expressly provides that the reasons for which the insider trades or the purposes for which the transaction proceeds are applied are irrelevant for determining the violation.
The Supreme Court therefore held that three facts were decisive:
- the respondents possessed UPSI;
- they sold substantial portions or the entirety of their shareholdings while possessing that UPSI; and
- the statutory presumption under Regulation 4(1) consequently operated against them.
Once these circumstances were established, the purpose for which the sale proceeds were used ceased to be legally relevant. Likewise, whether the respondents earned little profit or no profit was of no consequence.
Defences Under Regulation 4(1)
The Court also considered whether the six defences specified in Regulation 4(1) constituted an exhaustive list.
It noted that they are preceded by the word “including”. Accordingly, the specified defences are not exhaustive and other defences may theoretically be available.
However, any additional defence must be of the same or similar nature as those expressly contemplated by the Regulation.
The Court rejected the application of the doctrine of ejusdem generis in the manner suggested because the specific instances followed, rather than preceded, the general expression “including.”
Precedent Analysis
The respondents principally relied upon SEBI v. Abhijit Rajan, (2024) 11 SCC 645.
In Abhijit Rajan, shares had been sold while possessing UPSI to fund a Corporate Debt Restructuring package. The Court had considered the commercial circumstances and purpose underlying those transactions.
The Supreme Court distinguished that decision on a crucial statutory ground.
The transactions in Abhijit Rajan occurred in 2013 and were governed by the 1992 PIT Regulations. Those Regulations did not contain the Note subsequently incorporated into Regulation 4(1) of the 2015 PIT Regulations declaring the reasons for trading and use of proceeds irrelevant.
Therefore, under the earlier regime, there was room to examine why the insider had undertaken the transaction. Under the 2015 regulatory framework, that inquiry is expressly foreclosed once the statutory conditions are satisfied.
The Court also discussed P. Mohanraj v. Shah Bros. Ispat (P) Ltd., Vikram Singh v. Union of India, and Siddeshwari Cotton Mills v. Union of India while considering the proper application of the ejusdem generis principle to the language of Regulation 4(1).
Court’s Reasoning
The Court found it undisputed that the respondents possessed UPSI concerning TJL’s deteriorating financial results and nevertheless disposed of substantial portions or all of their shareholding during the UPSI period.
Under Regulation 4(1), this was sufficient to trigger the presumption against them.
The Supreme Court rejected SAT’s reasoning that the respondents could be exonerated because the transactions were motivated by the company’s financial difficulties. Under the 2015 PIT Regulations, the motive for trading and eventual application of the sale proceeds cannot determine whether insider trading occurred.
The Court further rejected the proposition that the absence of substantial profit could defeat liability. The respondents had avoided approximately ₹1.38 crore in losses, which constituted a sufficient basis for disgorgement under Section 11B of the SEBI Act.
The Supreme Court specifically disapproved SAT’s recognition of a “legitimate corporate purpose” defence, observing that such a defence had been recognised in Rakesh Agrawal v. SEBI under the 1992 regulatory regime. SAT could not import that approach into the 2015 Regulations because of the express Note appended to Regulation 4(1).
Conclusion
The Supreme Court allowed SEBI’s appeal and reversed SAT’s decision.
It restored the finding that Rajeev Vasant Sheth, Aarti Sheth and Divya Sheth had engaged in insider trading while possessing UPSI.
The Court restored SEBI’s disgorgement direction concerning approximately ₹1.38 crore of losses avoided, holding that the Whole Time Member’s order could not be faulted. It also upheld the penalties imposed for violation of the Minimum Standards for Code of Conduct under Schedule B read with Regulation 9(1).
However, the Supreme Court granted limited relief to Rajeev Sheth regarding the monetary penalty under Section 15G of the SEBI Act. It found the ₹25 lakh penalty excessive and reduced it to ₹10 lakh, equivalent to the minimum penalty imposed upon the other two respondents. The modified penalty was directed to be paid within three months if not already paid.
Case Details
Case: Securities and Exchange Board of India v. Rajeev Vasant Sheth & Ors.
Court: Supreme Court of India
Citation: 2026 INSC 826
Case Number: Civil Appeal No. 4905 of 2022
Judges: Hon’ble Mr. Justice Sanjay Karol and Hon’ble Mr. Justice Nongmeikapam Kotiswar Singh
Date: 11 August 2026
Result: SEBI’s appeal allowed; SAT order set aside; insider-trading liability and disgorgement restored; Rajeev Sheth’s Section 15G penalty reduced from ₹25 lakh to ₹10 lakh.
