Critiquing the Evidentiary Burden Jurisprudence vis-a-vis Insider Trading Regime in India

[By Aditya Mehrotra]

The author is a student of Symbiosis Law School, Pune.



Insider trading is essentially the unlawful trading of stocks having access to non-public information that, if published, would alter the market price of shares. In light of prior rulings on insider trading, the Supreme Court and SAT have rejected the use of circumstantial evidence in identifying insider trading offences, however they have given due weight to circumstantial evidence when exonerating corporations. In their own way, these instances constitute the establishment of a “new standard of proof” to be upheld by SEBI in insider trading cases, but they also cause doubt over the application of the law. To identify insider trading violations, it is necessary to do further assessments of the stated UPSI’s relevance, its application, and the trading behaviour of the companies.

Curiously, the SEBI Rules, 2015 do not define the term “insider trading,” but a person is found guilty of insider trading if all of the following conditions are met: (i) this person is an insider of a firm whose listed securities he trades; and (ii) this person traded directly or indirectly in the listed securities with respect to which he holds unpublished price-sensitive information (“UPSI”). If these two conditions have been satisfied, the duty of establishing innocence shifts to the insider, who may use any of the permitted defences.

In this study, the author will thus give a basic criticism of the current Insider Trading Regulation in India while assessing its legitimacy. In addition, the author will investigate the basis of Judicial Dictums on Insider Trading and provide proposals and recommendations for their proper implementation.


Indian securities rules ban insider trading, which happens when a person “possesses” unpublished price-sensitive information (“UPSI”) on a publicly listed company’s shares and then trades in those equities. The restriction is triggered by “possession,” which does not require “use,” of the information. This regulation is meant to maintain “even playing fields” in securities trading. In other words, it aims to prevent an insider from gaining an unfair advantage over public investors by just holding UPSI, which is referred to as “information asymmetry” in the context of insider trading.

Insider trading is defined as “the use of material non-public knowledge to trade business shares by a corporate insider or any other person having a fiduciary duty to the firm.” Hence, the 2015 SEBI (Prohibition of Insider Trading) Regulation has superseded the 1992 SEBI (Prohibition of Insider Trading) Regulation. SEBI enacted these limits upon the proposal of a high-level committee. Former head of the Securities Appellate Tribunal, Justice Shri N.K. Sodhi presided over the committee (SAT) which elaborated that, “the obvious need and understandable concern about the damage to public confidence that insider dealing is likely to cause, as well as the clear intention to prevent, to the greatest extent possible, what amounts to cheating when those with inside information use that information to profit in dealings with others”.

The Insider Trading Regulations establish two offenses: first, the communication offense, wherein an insider is liable for communicating price-sensitive information to a third party, and second, the trading offense, wherein an insider is liable for trading while in possession of price-sensitive information. The communication violation not only creates an insider trading barrier for the person who communicates the information, but also penalizes anybody who attempts to induce or compel an insider into revealing the information. There are, though, exceptions that must be considered. Although evidence of malicious intent is not required, the trade crime has a high threshold and stringent standard. It presume that a person with the knowledge has traded on it, rather than needing evidence that price-sensitive non-public information was used to trade.

Evidentiary Burden vis a vis Insider Trading Jurisprudence

SEBI as a regulator is unable to garner sufficient support from the language of the Insider Trading Regulations, particularly in terms of evidence presentation, for establishing the insider trading offense. In the case of Mr. V.K. Kaul v. The Adjudicating Officer, SEBI, the Supreme Court of India ruled that relying on circumstantial evidence to establish an insider trading offense is not in conflict with the regulatory framework prescribed by SEBI, and that SEBI/SAT may consider circumstantial evidence when deciding an insider trading case.

While attempting to show the previously enumerated aspects of the breach, the quantity of evidence necessary for a conviction for insider trading is the most important factor to consider. In Samir C. Arora v. SEBI, for instance, the Supreme Court of India ruled that in cases involving securities market breaches, SEBI is not needed to prove its case beyond a reasonable doubt; nonetheless, “legally sustainable evidence” must be present in order to convict an individual of such accusations.

In contrast, in Dilip S. Pendse v. SEBI (‘Pendse’), SAT said that “the charge of insider trading is one of the most serious infractions relating to the securities market, and given the gravity of this breach, the preponderance of likelihood required to prove the same must be larger.”

But, the Supreme Court’s judgement in SEBI v. Kishore R. Ajmera (Ajmera) has ruled in favor of the lower criterion. In this case, while addressing a violation of the SEBI (Prohibition of Fraudulent and Unfair Trading Practices Relating to Securities Market) Regulations, 2003, the Supreme Court said that “the test would always be what inferential approach a reasonable/prudent man would use to reach a conclusion.” In a related case, the Supreme Court determined, based on its own decision in Ajmera, that the appropriate standard of proof would be the preponderance of responsibility rather than proof beyond a reasonable doubt, despite the fact that the relevant violations would result in criminal penalties for the defaulters. The Supreme Court’s announced opinion is incontestable. In circumstances where only a monetary penalty is imposed under the SEBI Act, submitting SEBI to the criminal standard of proof would make the Insider Trading Rules essentially ineffective due to the difficulties of gathering evidence to support an insider trading accusation.

  • Analysing the Underpinnings of the Recent Balram Garg Dictum

The case Balram Garg v. Securities and Exchange Board of India explains the evidentiary burden in insider trading prosecutions and limits SEBI’s ability to rely on circumstantial evidence. In this case, too, the Supreme Court is aiming to define and restrict the prosecution’s position in insider trading cases involving financial crime. While India continues to promote itself as a financial centre, it is crucial that procedural factors such as the prosecution’s role and the burden of evidence be consistent in instances involving economic crimes. This will provide uniformity and avoid the abuse of laws.

The Supreme Court further rules in Balram that SEBI cannot rely solely on trading patterns to demonstrate the possibility of communication between the tipper and tipper, and that the record must speak to other circumstances and “produce convincing evidence” to establish the possibility of such communication.

In doing so, the Court orders that the SAT must independently evaluate the facts and not rely just on SEBI’s factual assessment. The Supreme Court’s judgement has far-reaching ramifications, despite the fact that it is essentially based on the facts of the case. The prior judgement in Kishore Ajmera aimed to alleviate the substantial burden of SEBI in insider trading proceedings, recognizing the general paucity of direct evidence in such instances. Nevertheless, the current case of Balram Garg restricts the application of Kishore Ajmera and increases the burden of evidence for the regulator. Even while it does not exclude the use of circumstantial evidence, SEBI’s reliance on the pattern and timing of trade in securities is inadequate to meet its burden of proof. To establish communication between the tipper and the tippee, more direct or circumstantial evidence is required. This information often difficult to collect, so making SEBI’s task burdensome, and in some ways excessively so.

In its desire to provide examples of probable evidence, such as letters, emails, and witnesses, the Supreme Court may have restricted the availability of circumstantial evidence. Although the judgement specifically separates Kishore Ajmera on the basis of the facts, the impact of the Court’s recent rule on evidence issues in insider trading cases may have far-reaching ramifications.

Yet, despite the fact that the PIT Rules have undergone many rounds of changes and an overhaul in 2015 to enhance the regulatory machinery, issues pertaining to the burden of evidence in market abuse cases continue to be a source of concern for the regulators. The purpose or mental state of an insider has no influence on a case of insider trading, according to SEBI guidelines.

In demonstrating insider trading, the weight of circumstantial evidence or “preponderance of probability” is an additional crucial factor. The market monitoring software of SEBI generates system-based warnings that initiate insider trading investigations, often resulting in ex-parte rulings that impose tremendous hardships, limit business, and risk lives. In such cases, according to the report, the verdicts are backed by little evidence or a series of contradictory decisions, even at the level of appeal.

It might be claimed that SEBI has always relied on a negative meaning of this word when determining disputes; however, the Supreme Court’s historic ruling in the matter of PC Jewellers (Balram Garg) could make all of these rulings invalid. In this instance, SEBI used a familial relationship based on a shared residence to prove insider trading and levy heavy penalties, notwithstanding the partners’ 2001 divorce. The supreme court determined that circumstantial evidence must be supported by a greater burden of proof, or, to use regulatory lingo, a much higher degree of “preponderance of probability.”

One may argue that the 2019 SEBI Amendment was largely focused on the UPSI and digitization components. Nevertheless, these Rules are not yet completely implemented, and enforcement is missing in many areas. This increases the difficulty of the procedure. It places the burden of evidence entirely on the organization’s highest-ranking officials. There is a possibility that the top management of the firm may participate in insider trading or get contaminated in the workplace, etc., given these circumstances. In spite of this, no institution has a comprehensive structure in place to prevent such professional misconduct. This violation of professional ethics has historically resulted in massive frauds that continue to exist today.


The author contends that when dealing with difficult matters like insider trading, the court must evaluate evidence with objectivity. In this instance, the author agrees with the Court’s ruling about the burden of proof, but he or she disagrees with the Court’s decision to undervalue circumstantial evidence. Regulators often need this safe haven for debate since they have few other choices. Instead, than relying on single pieces of evidence like emails or phone conversations, the author proposes that judges take into account the whole sequence of events and the bigger picture. Taking this approach will improve the thoroughness of probes, safeguard traders and investors, and not have a chilling impact on the market. Because of this ruling, SEBI and other regulatory authorities will have to rethink their approaches to investigating, prosecuting, and penalising those responsible for the present predicament.

Economic offenses in India are not readily traceable, as shown by genuine insider trading convictions. In India, there are rare instances in which an offense has been established and the perpetrator has been successfully prosecuted. The quantity of insider trading instances disclosed suggests that the enforcement system is deficient. The implementation of rigorous insider trading regulations needs an efficient method. The regulator of our securities market, SEBI, is doing its utmost to execute the legislation. SEBI’s commitment for the fight against insider trading is clear by the recent revision to the Insider Trading Rules and its vigorous litigation on the matter.

Strict standards for insider trading legislation may guarantee good company governance. These incidents illustrate that the negative effect of insider trading on corporate governance demands revisions to the current rules in order to resolve the issue. Good corporate governance and the restriction of insider trading are directly related. If corporations adhere to stringent corporate governance standards, insider trading will be decreased.


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