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The Supreme Court has recently set aside the order of the Securities Appellate Tribunal upholding order of the Whole Time Member of Securities and Exchange Board of India imposing a penalty of Rs 20 lakhs and restraining the PC Jewellers Managing Director Balram Garg from accessing the securities market over the allegations of Insider Trading.

A bench of Justice Vineet Saran and Justice Aniruddha Bose noted that the Appellate Tribunal was exercising jurisdiction of a First Appellate Court and was bound to independently assess the evidence and material on record, which it evidently failed to do.

The Managing Director had moved the apex court through Senior Advocate Dhruv Mehta and Advocate Mehul Gupta, challenging the order of SAT which upheld the order levying a penalty of Rs. 20 lakhs along with restraining them from accessing the securities market and buying, selling or dealing in securities, either directly or indirectly, in any manner, for a period of 1 year from the date of the order and also from dealing with the scrip of PCJ for a period of 2 years.

Senior Advocate Dhruv Mehta appearing for Garg had submitted that Garg was found to have violated only Regulation 3 of PIT Regulations, 2015 and that unlike Regulation 4(2) of PIT Regulations, there is no provision to raise any presumption under the said Regulation 3.

It was alleged that Sachin Gupta, Shivani Gupta and Amit Garg traded based on Unpublished Price Sensitive Information received by them on account of their alleged proximity to PC Gupta and Balram Garg between the period from April 1, 2018, to July 31, 2018.

Whereas to prove the violation of Regulation 3 of PIT Regulations, the burden of proof was on SEBI to establish any “communication” of UPSI (Unpublished Price Sensitive Information)  by placing on record cogent evidence viz. call details, emails, witnesses, etc, which SEBI failed to do so.

Senior Advocate V Giri appearing for the Shivani Gupta, Sachin Gupta Amit Garg submitted that the entire case of insider trading is set up against these appellants only based on the close relationship between the parties.

However, he submitted that the appellants have placed sufficient material on record to demonstrate that there was a complete breakdown of ties between the parties, both at a personal and professional level and that the said estrangement was much before the UPSI having coming into existence.

In furtherance of this, Senior Advocate Arvind Datar appearing for SEBI submitted that PCJ initiated discussions regarding buy­back of fully paid up equity shares and before May 10, 2018, information about buy­back was not disclosed. It was argued that since the information pertained to change in capital structure of the company, this information qualified as Unpublished Price Sensitive Information­.

The bench, however, observed that the Securities Appellate Tribunal has erred in upholding the order of the Whole Time Member of SEBI as it has failed to independently assess the evidence and material on record while exercising its jurisdiction as the first appellate court.

The bench opined that, "it is the duty of the first court of appeal to deal with all the issues and evidence led by the parties on both, the questions of law as well as questions of fact and then decide the issue by providing adequate reasons for its findings."

The bench relied upon the Judgment of the Supreme Court in the case of Chintalapati Srinivasa Raju where it is held that “a reasonable expectation to be in the know of things can only be based on reasonable inference drawn from foundational facts”.

It has further been held that merely because a person was related to the connected person cannot by itself be a foundational fact to draw an inference.

Cause Title: Balram Garg Vs. Security Exchange Board of India