Purpose of Trade Irrelevant Under PIT Regulations 2015 Once Insider Trades While Possessing UPSI
1. Introduction
The Supreme Court in Securities and Exchange Board of India v. Rajeev Vasant Sheth,
2026 INSC 826, clarified the scope of liability for insider trading under the
SEBI Act, 1992 and the SEBI (Prohibition of Insider Trading) Regulations, 2015.
The appeal was filed by SEBI under Section 15Z of the SEBI Act against a decision of the
Securities Appellate Tribunal, Mumbai, which had set aside SEBI’s order holding the respondents
guilty of insider trading. The respondents were Mr. Rajeev Vasant Sheth, Chairman and Managing
Director of Tara Jewels Limited, and his daughters, Ms. Aarti Sheth and Ms. Divya Sheth, who were
promoters and Vice Presidents of the company.
The central issue was whether insiders who traded while in possession of unpublished price sensitive
information could escape liability by explaining that the sale proceeds were used for a legitimate
corporate purpose or to address financial stress in the company.
2. Summary of the Judgment
The Supreme Court allowed SEBI’s appeal and restored the finding of insider trading recorded by
the Whole Time Member of SEBI. The Court held that once it is shown that an insider traded in
securities while in possession of unpublished price sensitive information, the reasons for the trade
or the use of the sale proceeds are irrelevant under Regulation 4(1) of the PIT Regulations 2015.
The Court rejected the approach of the Securities Appellate Tribunal, which had accepted the
respondents’ explanation that the sale of shares was linked to Tara Jewels Limited being at risk of
being downgraded to a non-performing asset. The Supreme Court held that such a defence could not
override the express note appended to Regulation 4(1).
The Court restored the disgorgement direction of approximately Rs. 1.38 crores, representing the
losses avoided by the respondents. However, it reduced the penalty imposed on Respondent No. 1
under Section 15G from Rs. 25 lakhs to Rs. 10 lakhs, while otherwise maintaining the penalties and
directions issued by SEBI.
3. Analysis
A. Precedents Cited
SEBI v. Abhijit Rajan
The respondents relied heavily on SEBI v. Abhijit Rajan, where the Supreme Court had
considered a case involving sale of shares while the accused was allegedly in possession of UPSI.
In that case, the sale was connected with funding a Corporate Debt Restructuring package, and the
Court examined whether the transaction was genuinely motivated by insider information.
The Supreme Court distinguished that precedent on two important grounds. First, the transactions
in SEBI v. Abhijit Rajan occurred under the earlier 1992 PIT Regulations. Secondly, the
1992 Regulations did not contain a note equivalent to the note under Regulation 4(1) of the 2015
Regulations, which expressly states that the reasons for trading and the use of proceeds are not
relevant.
Therefore, the Court held that the reasoning in SEBI v. Abhijit Rajan could not be applied
mechanically to transactions governed by the 2015 PIT Regulations.
The Court referred to P. Mohanraj v. Shah Bros. Ispat (P) Ltd. while discussing the principle
of ejusdem generis. This precedent was used to explain when general words following specific
words may be restricted in meaning.
In Vikram Singh v. Union of India, the Court had earlier considered the application of the
ejusdem generis rule in statutory interpretation. The judgment was cited to reinforce that the rule
is not automatically applicable in every case involving general and specific words.
The Court also cited Siddeshwari Cotton Mills (P) Ltd. v. Union of India, which explains the
rationale behind the ejusdem generis rule. That rule applies only when the specific words form a
recognizable class and the general words follow them.
Applying this reasoning, the Supreme Court held that Regulation 4(1) uses the word “including”
before listing possible defences. Since the general word precedes the specific instances, strict
application of ejusdem generis was not appropriate. However, the listed defences are illustrative,
and any additional defence must be of a similar nature.
Rakesh Agrawal v. Securities Exchange Board of India
The Court noted that the Securities Appellate Tribunal appeared to rely on a “legitimate corporate
purpose” defence similar to that recognized in Rakesh Agrawal v. Securities Exchange Board of India.
However, that decision was rendered under the 1992 PIT Regulations.
The Supreme Court held that this approach was no longer open under the 2015 Regulations because
Regulation 4(1), through its note, expressly excludes inquiry into the reasons for the trade or the
application of sale proceeds.
B. Legal Reasoning
The Court’s reasoning turned on Regulation 4(1) of the PIT Regulations 2015. The regulation prohibits
an insider from trading in securities while in possession of UPSI. The note appended to the regulation
creates a presumption that such trades are motivated by the UPSI.
The Court emphasized three core points:
- The respondents were insiders and were in possession of UPSI.
- They sold substantial portions, or the entirety, of their shareholding during the UPSI period.
- Once these facts were established, their explanation regarding the use of sale proceeds became irrelevant.
The Court rejected the argument that absence of actual profit, or a minimal price difference immediately
after disclosure, could absolve the respondents. Insider trading liability under Regulation 4(1) is not
confined to actual profit-making; it also extends to loss avoidance.
The Supreme Court also upheld disgorgement under Section 11B of the SEBI Act. The explanation to
Section 11B expressly empowers SEBI to direct a person who has made profit or averted loss through
contravention of the Act or regulations to disgorge the wrongful gain or loss avoided.
C. Impact of the Judgment
This judgment has significant implications for insider trading law in India.
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Stricter liability under the 2015 Regulations: Insiders cannot justify trades by claiming
that the proceeds were used for corporate rescue, debt repayment, or other legitimate purposes.
-
Reduced scope of older precedents: Decisions under the 1992 PIT Regulations, such as
SEBI v. Abhijit Rajan and Rakesh Agrawal v. Securities Exchange Board of India,
must be applied cautiously after the 2015 Regulations.
-
Loss avoidance is enough: SEBI need not show actual profit if it can show that the insider
avoided losses by trading before the UPSI became public.
-
Compliance burden on insiders: Promoters, directors, officers, and connected persons must
avoid trading during UPSI periods unless their case clearly falls within recognized defences.
4. Complex Concepts Simplified
Unpublished Price Sensitive Information
UPSI means important information about a company that is not yet public and that is likely to
materially affect the price of its securities once disclosed. Financial results, mergers, dividends,
changes in capital structure, and changes in key managerial personnel are typical examples.
Insider
An insider is someone connected with the company or someone who possesses or has access to UPSI.
Directors, promoters, senior officers, and close relatives may fall within this category depending on
the facts.
Disgorgement
Disgorgement means giving up wrongful gains or losses avoided through unlawful trading. It is not
merely a penalty; it is a restorative measure to remove the benefit obtained from the violation.
Ejusdem Generis
Ejusdem generis is a rule of interpretation where general words are limited by the specific words
preceding them. The Supreme Court held that this rule did not directly apply to Regulation 4(1)
because the listed defences come after the word “including”.
5. Conclusion
The Supreme Court’s decision establishes a clear principle: under the PIT Regulations 2015, an insider
who trades while in possession of UPSI cannot avoid liability by arguing that the trade was made for
a legitimate or urgent corporate purpose. The motive behind the trade and the use of the proceeds are
not relevant once the foundational facts of insider status, possession of UPSI, and trading are proved.
The judgment strengthens SEBI’s enforcement powers and reinforces the preventive purpose of insider
trading law: maintaining market fairness, eliminating information asymmetry, and protecting investor
confidence in securities markets.