The Securities and Exchange Board of India (SEBI) performs a protective, regulatory, and developmental function as the regulator of the securities market. SEBI is expected to maintain a symmetry between investments in the securities market, whilst also protecting the interests of the investors. Over the years, the Insider Trading Regulations (currently in the form of SEBI (Prohibition of Insider Trading) Regulations, 2015) have undergone several amendments to align with the contemporary issues arising in the securities market and primarily deal with elements of, and restrictions on insider trading. The question of existence of intent of insiders to make profits or mens rea of insiders, to establish commission of insider trading has been entrusted with the judicial bodies. In this article, we would be discussing the conundrum in deciding cases of commission of insider trading, by analysing the nature of proof, the evidentiary value thereof and the presence of intent.
An allegation of insider trading has always been a challenge for SEBI to prove. Insider trading is primarily based on classified information that is usually shared via private channels, which may be difficult to access freely or obtain in a timely manner. In 2019, SEBI introduced the framework of a Structured Digital Database (i.e., internal database of details of insiders and the nature of unpublished price sensitive information (UPSI)), for organizations, fiduciaries and intermediaries dealing in UPSI, to enable SEBI to trace the unlawful dissemination of the same. However, data privacy and technological issues, such as the inability to trace the source of information shared via encrypted chats1, has limited SEBI's ability to discover direct evidence against commission of an offence.
Any allegation of commission of an offence has to be proven beyond reasonable doubt and the burden of proof to establish the offence is on the prosecutor or the regulator, being SEBI, in insider trading cases. In 2016, the Supreme Court2 took into consideration circumstantial evidence "which may have to be inferred by a logical process of reasoning from the circumstances surrounding the allegations". However, in 2022, the Supreme Court3, held that "circumstantial evidence such as the trading pattern of the individual(s) or proximity between the parties is not enough, SEBI has to prove insider trading charges only using cogent materials such as, emails, witnesses etc." The acceptability of such stringent standards is yet to be determined.
Interestingly, the jurisprudence in relation to consideration of mens rea, in cases of insider trading has always been unsettled. For example, in certain matters; insider trading has been considered to be a 'statutory offence', thereby making mens rea an essential element to establish the same; while in certain cases, offences under the SEBI Act, 1992 which would include insider trading, have been considered as a civil wrong, and the significance of mens rea to prove such a wrong has been discounted. In 2022, a monumental shift was seen, wherein, the profit-making intention was considered by the regulators and as there was a personal loss in the transaction in a case, it was held that there was "no motive or intention to make undeserved gains by encashing on the unpublished price sensitive information."4
The outcome of the cases of insider trading appears to be unpredictable, as there may be different issues that have to be assessed on a case to case basis in accordance with the facts in hand. In order to ease the burden on the judiciary and reinforce the principles of fairness, justice, and equity, it is important to ensure that, classification of circumstances in which mens rea should be considered by the regulator as well as the insider, as a key element of commission of insider trading, while deciding criminal or civil charges levied against the insider.
Footnotes
1. Order dated March 03, 2021, in Appeal No. 308 of 2020 before the Hon'ble Securities Appellate Tribunal, Mumbai.
2. SEBI v Kishore R Ajmera, [2016] 6 SCC 368.
3. Balram Garg v. SEBI, [2022] 9 SCC 425.
4. SEBI v. Abhijit Rajan, [2022] SCC OnLine SC 1241.
Authored by Bhavin Gada, Senior Partner & Mehak Gupta, Associate Partner. The contents of this article do not necessarily reflect the views/position of Stratage Law Partners but remain solely those of the author(s). This article is meant for general information and shall not be deemed to be a legal advice or opinion. This article is neither intended to be an advertisement nor solicitation.
