BALRAM GARG versus SECURITIES AND EXCHANGE BOARD OF INDIA on 19 April 2022

SUPREME COURT REPORTS

[2022] 4 S.C.R.

A

BALRAM GARG

v.

SECURITIES AND EXCHANGE BOARD OF INDIA

(Civil Appeal No. 7054 OF 2021)

B

APRIL 19, 2022

[VINEET SARAN AND ANIRUDDHA BOSE, JJ.]

SEBI (Prevention of Insider Trading Regulations), 2015 –Regulation 2(1)(d) and 2(1)(f) – Securities and Exchange Board ofCIndia Act, 1992 – ss.11(2)(g), 11(4), 12A(c), 15G and 15Z – InsiderTrading – On receipt of Unpublished Price Sensitive Information(UPSI) – “Connected persons” and “immediate relatives” –Respondent/SEBI alleging that P.C. Gupta and his brother appellant‘B’, who were respectively the Chairman and Managing Directorof PCJ, a public limited company, were inter alia “connected person”Din terms of Regulation 2(1)(d)(i) and appellants in C.A. No.7590/2021, traded on basis of UPSI received by them on account of theiralleged proximity to P.C. Gupta and appellant ‘B’ in view of theirclose family relationship – Claim of estrangement byappellants in C.A. No.7590 of 2021 – Rejected by Whole TimeEMember (WTM) of SEBI and also the Securities Appellate Tribunal(SAT) – Held: WTM and SAT wrongly rejected the claim ofestrangement without appreciating the facts and evidence producedbefore them – The records and facts adequately establish that thethere was a breakdown of ties between the parties, both at personaland professional level and that the said estrangement happenedFmuch prior to the two UPSI – Appellants are neither “connectedpersons” under regulations 2(1)(d) nor “immediate relatives” under2(1)(f) – Even assuming that the family arrangements did not resultin complete estrangement of social relations between the parties,the SAT could not, by virtue of this very fact, discharge SEBI of theGonus of proof placed on them to prove that Appellants were inpossession of UPSI – SEBI failed to place on record any material toprove that appellants in C.A. No.7590/2021 were “connectedpersons” to appellant ‘B’ as required by Regulation 2(1)(d)(ii)(a)read with Regulation 2(1)(f) as none of the appellants in C.A.No.7590/2021 were financially dependent on appellant ‘B’ or evenH

BALRAM GARG v. SECURITIES AND EXCHANGE BOARD OFINDIA

alleged to have consulted him in any decision related to trading insecurities – Appellants in C.A. No.7590 of 2021 were not “immediaterelatives” and had nothing to do with appellant ‘B’ in any decisionmaking process relating to securities or even otherwise.

SEBI (Prevention of Insider Trading Regulations), 2015 –Regulation 2(1)(g) and 3 – Securities and Exchange Board of IndiaAct, 1992 – ss.11(2)(g), 11(4), 12A(c), 15G and 15Z – Insider Trading– On receipt of Unpublished Price Sensitive Information (UPSI) –Circumstantial evidence (trading pattern and timing of trading) –Relevance of – Respondent/SEBI alleging that P.C. Gupta and hisbrother ‘B’, who were respectively the Chairman and ManagingDirector of PCJ, a public limited company, were inter alia “insider”under Regulation 2(1)(g) and that appellants in C.A. No.7590/2021,traded on basis of UPSI received by them on account of their allegedproximity to P.C. Gupta and ‘B’ in view of close family relationship– Whether appellants in C.A. No.7590 of 2021, could be held to be“insiders” in terms of regulation 2(1)(g)(ii) on basis of circumstantialevidence (trading pattern and timing of trading) – Held: Regulation3, which deals with communication of UPSI, does not create adeeming fiction in law – Hence, it is only through producing cogentmaterials (letters, emails, witnesses etc.) that communication of UPSIcould be proved and not by deeming the communication to havehappened owing to the alleged proximity between the parties – Inthe present case, the foundational facts were not proved which couldraise the alleged presumption – Trading pattern of appellants inC.A. No.7590 of 2021 cannot be the circumstantial evidence to provethe communication of UPSI to them by appellant ‘B’ – There was nocorrelation between the UPSI and the sale of shares undertaken bythe appellants in C.A. No.7590 of 2021 – Decisions of selling theshares and the timings thereof were purely a personal andcommercial decision undertaken by them and nothing more can beread into those decisions – In absence of any material available onrecord to show frequent communication between the parties, therecould not have been a presumption of communication of UPSI byappellant ‘B’ – SAT erred in holding the appellants in C.A. No.7590of 2021 to be “insiders” in terms of regulation 2(1)(g)(ii) on basisof their trading pattern and their timing of trading (circumstantialevidence).

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BCDE

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AShares and Securities – Securities Appellate Tribunal (SAT) –On facts, SAT was exercising jurisdiction of a First Appellate Courtand was bound to independently assess the evidence and materialon record, which it evidently failed to do – The SAT order was amere repetition of facts stated by WTM and suffered from non-application of mind – Appeal – First Appellate Court – Jurisdiction.B

Allowing the appeals, the Court

Conclusion

HELD: The entire case of the Respondents was premisedon two important propositions, that firstly, there existed a closerelationship between the appellants; and secondly, that based onCthe circumstantial evidence (trading pattern and timing of trading),it could be reasonably concluded that the appellants inC.A.No.7590 of 2021 were “insiders” in terms of Regulation2(1)(g)(ii) of the SEBI (Prevention of Insider Trading Regulations),2015. However, the WTM and SAT wrongly rejected the claim ofestrangement of the Appellants in C.A.No.7590 of 2021, withoutDappreciating the facts and evidence as was produced before them.The records and facts adequately establish that the there was abreakdown of ties between the parties, both at personal andprofessional level and that the said estrangement happened muchprior to the two UPSI. Secondly, the SAT erred in holding theEappellants in C.A. No.7590 of 2021 to be “insiders” in terms ofregulation 2(1)(g)(ii) of the Regulations on the basis of theirtrading pattern and their timing of trading (circumstantialevidence). There is no correlation between the UPSI and thesale of shares undertaken by the appellants in C.A. No.7590 of2021. Moreover, in the absence of any material available on recordFto show frequent communication between the parties, there couldnot have been a presumption of communication of UPSI by theappellant ‘B’. The trading pattern of the appellants in C.A.No.7590 of 2021 cannot be the circumstantial evidence to provethe communication of UPSI by the appellant ‘B’ to the otherGappellants in C.A. No.7590 of 2021. There is no material on recordfor the WTM and the SAT to arrive at the finding that both lateP.C. Gupta and the appellant ‘B’ communicated the UPSI to theother appellants in C.A. No.7590 of 2021. The said appellants inC.A. No.7590 of 2021 were not “immediate relatives” and werecompletely financially independent of the appellant ‘B’ and hadH

AB

nothing to do with the him in any decision making process relatingto securities or even otherwise. The submission of therespondent regarding the same residential address of theappellants also falls flat as admittedly the parties were residingin separate buildings on a large tract of land. Lastly, the SATorder suffers from non-application of mind and the same is a mererepetition of facts stated by the WTM. The Appellate Tribunalwas exercising jurisdiction of a First Appellate Court and wasbound to independently assess the evidenced and material onrecord, which it evidently failed to do. [Para 48][924-A-H]

SEBI v. Kishore R. Ajmera (2016) 6 SCC 368 : [2016]1 SCR 1118 and Dushyant N. Dalal v. SEBI (2017) 9SCC 660 : [2017] 11 SCR 448 – distinguished.

C

H.K.N. Swami v. Irshad Basith (2005) 10 SCC 243;UPSRTC v. Mamta (2016) 4 SCC 172 : [2016]2 SCR 71; Hanumant v. State of Madhya Pradesh AIR1952 Supreme Court 343 : [1952] SCR 1091;Chintalapati Srinivasa Raju v. Securities and ExchangeBoard of India (2018) 7 SCC 443 : [2018] 5 SCR 785;Seema Silk & Sarees v. Directorate of Enforcement(2008) 5 SCC 580 : [2008] 8 SCR 201; Tarlochan DevSharma v. State of Punjab (2001) 6 SCC 260 : [2001]3 SCR 1146 and Hindustan Lever Ltd. vs. DirectorGeneral (Investigation and Registration) (2001) 2 SCC474 : [2001] 1 SCR 318 – referred to.

E

United States of America v. Raj Rajaratnam andDanielle Chiesi 09 Cr 1184 (RJH) – referred to.

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H

[2022] 4 S.C.R.

B

CIVIL APPELLATE JURISDICTION: Civil Appeal No.7054 of2021.

From the Judgment and Order dated 21.10.2021 of the SecuritiesAppellate Tribunal at Mumbai in Appeal (AT) No.375 of 2021.

WithC

Civil Appeal No.7590 of 2021.

Dhruv Mehta, V. Giri, Sr. Advs., Mehul M. Gupta, AbhishekMishra, Ms. Arunima Dwivedi, Krishna Dev Jagarlamudi, Ms. AnkitaGupta, Sai Kaushal, Advs. for the Appellant.

D

Arvind Datar, Sr. Adv., Dhaval Mehrotra, Sudhanshu Sikka, M/sK. Ashar & Co., Advs. for the Respondent.

The Judgment of the Court was delivered by VINEET SARAN, J.

E

1. The present Civil Appeals arise out of a common judgementand order dated 21.10.2021 passed by the Securities Appellate Tribunal(for short “SAT”), wherein the Tribunal dismissed the Appeals No.375and 376 of 2021 filed by the Appellants herein and upheld the orderdated 11.05.2021 passed by the Whole Time Member (for short “WTM”)Fof Securities and Exchange Board of India (for short “SEBI”)

2. Brief facts relevant for the purpose of the present appeals arethat P. Chand Jeweller Pvt. Ltd. was incorporated on April 13, 2005under the Companies Act, 1956 as a Private Limited Company. However,pursuant to a resolution passed by the shareholders on July 5, 2011, thecompany was converted into a Public Limited Company, following whichGthe name of the company was changed to “PC Jeweller Ltd.” (for short“PCJ”) and a fresh certificate of incorporation was issued.

3. The genesis of the present dispute is rooted in the action ofRespondent/SEBI against the appellants vide an impounding order dated17.12.2019 and a show-cause notice dated 24.04.2020. The crux of theH

allegations of the impounding order and the show-cause notice are asfollows:

i.Padam Chand Gupta (P.C. Gupta) was the Chairman ofPCJ during the relevant period and was a “connectedperson” in terms of Regulation 2(1)(d)(i) and an “insider”under Regulation 2(1)(g) of the SEBI (Prevention of InsiderTrading Regulations), 2015 (for short “PIT Regulations”).

ii.Balram Garg, who is the brother of P.C. Gupta and theManaging Director of PCJ is also a “connected person” interms of Regulation 2(1)(d)(i) and an “insider” underRegulation 2(1)(g) of the PIT Regulations.

iii.That allegedly, the appellants in C.A. No.7590/2021, namely,Sachin Gupta, Smt. Shivani Gupta and Amit Garg traded onthe basis of Unpublished Price Sensitive Information (forshort “UPSI”) received by them on account of their allegedproximity to P.C. Gupta and Balram Garg between theperiod from 01.04.2018 to 31.07.2018.

iv.The above proximity was alleged on the basis of the factthat Sachin Gupta and Smt. Shivani Gupta are the son anddaughter-in-law of Balram Garg’s deceased brother lateP.C. Gupta. Moreover, Amit Garg is the son of Amar Garg,who was also the brother of Balram Garg. It was alsoalleged that all the appellants shared the same residence.

4. Balram Garg, the appellant in C.A. No.7054/2021, filed hisreply (dated 07.08.2020) to the allegations made against him, whereinhe stated the following:

i.That the foundational facts were not there to prove or raisethe alleged presumption. SEBI failed to place on recordany material to prove that the appellants in C.A. No.7590/2021 were “connected persons” to Mr. Balram Garg asrequired by Regulation 2(1)(d)(ii)(a) read with Regulation2(1)(f) of the PIT Regulations, as none of the appellantsC.A. No.7590/2021 were financially dependent on BalramGarg or consulted Balram Garg in any decision related totrading in securities. Presumption is a rule of evidencewhich cannot be drawn unless and until such foundationalfacts are proved.

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DE

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Aii. That no material was brought on record to prima facieshow any transfer of information to the appellants in C.A.No.7590 of 2021

iii.That merely being a family/relative cannot by itself be aground for the offence of insider trading, especially whenin furtherance of a family agreement, the family waspartitioned in 2011 and there had been no connectionbetween them ever since.

B

iv.Moreover, Sachin Gupta resigned from the post of President(Gold Manufacturing) held by him in the company onC31.03.2015 pursuant to the family partition. Since then,neither Sachin Gupta nor his wife Mrs. Shivani Gupta hadanything to do with the business of the PCJ.

5. After granting an opportunity of personal hearing to the appellanton 24.12.2020, the Whole Time Member of SEBI passed final orderdated 11.05.2021, imposing a penalty of Rs.20 lakhs on the AppellantsDalong with restraining the appellants from accessing the securities marketand buying, selling or dealing in securities, either directly or indirectly, inany manner for a period of 1 year from the date of the order and alsorestrained the appellants from dealing with the scrip of PCJ for a periodof 2 years.E

6. Aggrieved by the order of the WTM of SEBI, the Appellantsfiled appeals before the SAT. The Tribunal, vide its common judgementand order dated 21.10.2021, dismissed the Appeals preferred by theAppellants and held that:“Upon hearing both the sides, in our view, the reasoning ofFthe Ld. WTM cannot be faulted with. The facts as highlightedby the Ld. WTM would show that though there was a familyarrangement within the family on two occasions, there wasno estrangement, as can be seen from the facts highlightedby the Ld. WTM (supra). Additionally, in our view, the veryfact that appellant Shivani had authorized her cousin brother-Gin-law i.e. appellant Amit to trade on her behalf, would beliethe case of the appellants that family settlements means familyestrangement. It cannot be gainsaid that the appellants areresiding at the same address and even appellant Mr. BalramGarg’s address is ‘the front side’ of the premise. The tradingHpattern of the concerned appellant i.e. withholding of the selling of trade once buy back talk started within the companyand again selling spree the shares by them once the buy backoffer was made public till the rejection of the proposal by theState Bank of India was made known to the public, wouldclearly show that the concerned appellants were aware ofboth the UPSI.

It is true that there is no direct evidence as to who haddisseminated this insider information to the appellants inAppeal no. 376 of 2021. Late Shri Padam Chand Gupta wasthe father of the appellant Mr. Sachin Gupta and father-in-law of the appellant Ms. Shivani Gupta and uncle of appellantMr. Amit Garg. Similarly, appellant Mr. Balram Garg is theuncle of appellant Mr. Sachin Gupta and appellant Mr. AmitGarg. All of them were residing in the same address. AppellantMr. Sachin Gupta had financial transactions with the companyof which appellant Mr. Balram Garg was Managing Director.Considering all of the above facts, on preponderance ofprobability, it can very well be concluded that Late PadamChand as well as appellant Mr. Balram disseminated bothUPSI to the appellants in appeal no. 376 of 2021.”

7. Aggrieved by the above order of the SAT dated 21.10.2021,the appellants filed the present appeals (C.A. No.7054/2021 by BalramGarg and C.A. No.7590/2021 by Mrs. Shivani Gupta, Sachin Gupta,Amit Garg and Quick Developers Pvt. Ltd.) under section 15Z of theSecurities and Exchange Board of India Act, 1992. Since, P.C. Guptaexpired in January 2019 after the notices were issued, hence the casewas dropped as against him.

8. Mr. Dhruv Mehta, learned Senior Counsel for the AppellantBalram Garg (in C.A. No.7054 of 2021) has submitted that the WTMhas held that the appellants no.1 to 3 in C.A. No.7590 of 2021, namely,Mrs. Shivani Gupta, Sachin Gupta and Amit Garg (also referred to asNoticee no.1 to 3 in the show-cause notices) were not “connectedpersons” or “immediate relatives” qua the appellant Balram Garg andthat this finding of the WTM has become final. It was further submittedthat the appellant Mr. Balram Garg was found to have violated onlyRegulation 3 of PIT Regulations, 2015 and that unlike Regulation 4(2) ofPIT Regulations, there is no provision to raise any presumption underthe said Regulation 3.

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A9. It was also contented that to prove the violation of Regulation 3of PIT Regulations, the burden of proof was on SEBI to establish any“communication” of UPSI by placing on record cogent evidence viz.call details, emails, witnesses etc. It was submitted that the Respondentin this case has failed to place any such evidence on record. Moreover,it was submitted that the presumption against “immediate relative” isBprovided in the Regulations to ensure that relatives who are financiallyor otherwise under the complete control of a connected person are notused for insider trading. However, in this case, no such possibility existedin relation to the appellant Mr. Balram Garg and the other appellants inC.A. No.7590 of 2021, namely, Mrs. Shivani Gupta, Sachin Gupta andCAmit Garg.

10. The learned Senior Counsel further contented that the relianceof the respondent on the transactions between appellant Sachin Guptaand the Company (PCJ) is against the principles of natural justice asthese allegations were not part of the show cause notices. It was alsoDsubmitted that the name of the appellant Balram Garg has been usedinter-changeably with that of late P.C.Gupta and there is no material onrecord for the WTM and the SAT to arrive at the finding that both lateP.C.Gupta and the appellant Balram Garg communicated the UPSI tothe appellants in C.A. No.7590 of 2021.

E

11. Mr. V. Giri, learned Senior Counsel for the appellants in C.A.No.7590 of 2021, namely, Mrs. Shivani Gupta, Sachin Gupta, Amit Gargand Quick Developers Pvt. Ltd., has contended that the entire case ofinsider trading is set up against these appellants only on the basis of theclose relationship between the parties. However, he submitted that theFappellants have placed sufficient material on record to demonstrate thatthere was a complete breakdown of ties between the parties, both atpersonal and professional level and that the said estrangement was muchprior to the UPSI having coming into existence.

12. The learned Senior Counsel has further contented that evenGassuming that the appellants have not been able to demonstrate a completebreakdown of ties between the parties, it was not open for the SAT toturn the Statute on its head by reversing the burden of proof on theappellants by conveniently ignoring the fact that the onus was actuallyon SEBI to prove that the appellants were in possession or having accessto UPSI.H

13. It was also contended that the charges against the appellantsin C.A. No.7590 of 2021 have been sustained solely on the basis ofcircumstantial evidence viz. trading patterns and timing of trades by theappellants. Moreover, it was not open to the WTM and SAT to hold theappellants guilty of the offence of insider trading in the absence of anyother concrete evidence as SEBI failed to produce such evidence. Thelearned Senior Counsel also emphasized on the fact that the chargesagainst the appellants that they were “connected persons” within themeaning of Regulation 2(1)(d) of the PIT Regulations was expresslyrejected by the WTM and that the burden of proving that the appellantsare “insiders” by invoking Regulation 2(1)(g)(ii) of PIT Regulationswas completely upon the SEBI and that they failed to discharge thisburden.

14. Per contra, Mr. Arvind Datar, learned Senior Counsel for theRespondent has submitted that on April 25, 2018, PCJ initiated discussionsregarding buy-back of fully paid up equity shares. On 10.05.2018, pursuantto the discussion and approval by the Board, the company, after markethours, informed the stock exchange of their offer of buy-back of1,21,14,285 fully paid up equity shares of Rs. 10/- each at a price of Rs.350/- per equity share. As before this date, the information about buy-back was not disclosed, and since the information pertained to change incapital structure of the company, this information qualified as UnpublishedPrice Sensitive Information-1 (for short “UPSI-1”). Accordingly, theperiod from April 25, 2018 to May 10, 2018 has been taken as the periodof UPSI-1.

15. It was further submitted that on July 7, 2018, the lead Bankerof PCJ, State Bank of India (for short “SBI”), refused to give NoObjection Certificate (for short “NOC”) for the buy-back of equityshares. Hence, on July 13,2018, the Board approved the withdrawal ofthe buy-back offer and the same was informed to the Exchanges aftermarket hours. It was submitted that this information has been consideredas Unpublished Price Sensitive Information-2 (for short “UPSI-2”) asthe same was likely to materially affect the price of the shares of thecompany. Moreover, the information pertaining to proposed buy-back ofequity shares of the company came into existence on July 7, 2018 andbecame public on July 13, 2018. Accordingly, the period from July 7,2018 to July 13, 2018 has been taken as period of UPSI-2.

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A16. It has been contended that appellant Balram Garg contravenedRegulation 3(1) of the PIT Regulations and Section 12A(c) of the SEBIAct, 1992, by communicating the UPSI to the appellants in C.A. No.7590of 2021, by being an “insider” and “connected person” within the meaningof PIT Regulations, and by being privy to discussions and communicationspertaining to buy-back and withdrawal of equity shares. Additionally, byBvirtue of being the Managing Director (MD) of the PCJ, Balram Gargwas in possession of UPSI-1 and UPSI-2.

A

17. Mr. Datar has contended that during the period 02.04.2018 to31.07.2018, trades were executed by Appellants in C.A. No.7590 of2021 while in possession of UPSI and that they made unlawful gainsCand avoided losses. Trades were executed from the trading account ofMrs. Shivani Gupta from 02.04.2018 and continued till 24.04.2018. Notrades were undertaken in May and June 2018 and then sell trades wereundertaken from July 6, 2018 till July 13, 2018 i.e. during UPSI-2.Appellant Mrs. Shivani Gupta had 100% concentration in the scrip ofDPCJ and these trades were executed by Mrs. Shivani Gupta, SachinGupta and Amit Garg, i.e. Appellant No. 1,2, and 3 respectively in C.A.No.7590 of 2021.

18. The learned Senior Counsel further contented that the AppellantNo. 4 (in C.A. No.7590 of 2021) i.e. Quick Developers Pvt. Ltd, tookshort position on 13.07.2018 i.e. just before information pertaining toEwithdrawal was communicated to the Exchanges. It is submitted thatsuch short positions were taken in anticipation of a price fall. AppellantAmit Garg and his wife are 100% shareholders of Quick DevelopersPvt. Ltd., hence they, through the trades executed from the account ofQuick Developers Pvt. Ltd., avoided losses and also made profit.F19. In the context of the family settlement, learned Senior Counsel F19. In the context of the family settlement, learned Senior Counselhas contended that such a settlement, at best, was an internal divisionand does not imply that all ties between the family members were severedor that relationship of appellant Balram Garg with appellants in C.A.No.7590 of 2021 was estranged. It was further argued that the appellantsdid not cease to have association with each other, which is establishedGby the following facts:

i.Sachin Gupta continued to have business transactions withPCJ. PCJ even paid rent to Sachin Gupta to the tune ofRs.4 lakhs for Financial Year 2015-16, Rs.77 lakhs for theFinancial Year 2016-17 and Rs.78 lakhs for the financialHYear 2017-18.

ii.Sachin Gupta was the nominee of the Demat Account oflate P.C. Gupta and after his death, the holdings of P.C.Gupta in the company were held by Sachin Gupta. Hence,it cannot be said that the father and son relationship wasestranged.

iii.Appellant Balram Garg and the Appellants No. 1,2, and 3in C.A. No.7590 of 2021 i.e. Mrs. Shivani Gupta, SachinGupta and Amit Garg share the same residential address.

20. Reliance was placed on the SAT order in Utsav Pathak vs.SEBI (order dated 12.07.2020 in Appeal No. 430 of 2019) whereinthe SAT had laid down the following ratio by relying upon the judgementof this court in SEBI vs. Kishore R. Ajmera [(2016) 6 SCC 368] andUS District Court’s order in United States of America vs. RajRajaratnam and Danielle Chiesi [09 Cr 1184 (RJH)]:

“From the aforesaid foundational facts, the circumstantialevidence or on a preponderance of probability by a logicalprocess of reasoning from the totality of the attending factsand circumstances as stated aforesaid, an irresistible inferencecan be drawn that the appellant had passed on the pricesensitive information regarding the open offer to the Tippees.Such inference taken from the immediate and proximate factsand circumstances surrounding the events is reasonable andlogical which any prudent man would arrive at such aconclusion. The Supreme Court in Kanhaiyalal Patel (supra)held that an inferential conclusion from proved and admittedfacts would be permissible and legally justified so long asthe same is reasonable.”

The learned Senior Counsel also submitted that the abovementionedproposition has been followed by the SAT in Navin Kumar Tayal &Anr. Vs SEBI in order dated 02.08.2021 in Appeal No. 08 of 2018.

21. Mr. Datar concluded his submissions by stating that the closerelationship of the appellants in C.A. No.7590 of 2021 with the appellantBalram Garg, especially in view of the trading pattern makes it abundantlyclear that the appellants Mrs. Shivani Gupta, Sachin Gupta and AmitGarg were in possession of UPSI-1 & 2, who could not have got it fromanywhere else except Balram Garg, who by virtue of being the MD ofthe company, possessed the crucial UPSI.

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A22. For ready reference, the relevant provisions of the concernedActs and Regulations are extracted below:

Section 11(2)(g) of the Securities and Exchange Board ofIndia Act, 1992

“11. (1) Subject to the provisions of this Act, it shall be theBduty of the Board to protect the interests of investors insecurities and to promote the development of, and toregulate the securities market, by such measures as it thinksfit.

(2) Without prejudice to the generality of the foregoingprovisions, the measures referred to therein may providefor—

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(a) ...

(b) ...

(c) ...

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(d) ...

(e) ...

(f) ...

(g) prohibiting insider trading in securities; (h)…

E………….

………….”

Section 11(4) of the Securities and Exchange Board of IndiaAct, 1992

-F“[(4) Without prejudice to the provisions contained in subsections (1), (2), (2A) and (3) and section 11B, the Boardmay, by an order, for reasons to be recorded in writing, inthe interests of investors or securities market, take any ofthe following measures, either pending investigation orinquiry or on completion of such investigation or inquiry,Gnamely:—

(a) suspend the trading of any security in a recognisedstock exchange; (b) restrain persons from accessing the securities marketand prohibit any person associated with securities marketto buy, sell or deal in securities; H

(c) suspend any office-bearer of any stock exchange orself-regulatory organisation from holding such position; (d) impound and retain the proceeds or securities in respectof any transaction which is under investigation; (e) attach, after passing of an order on an applicationmade for approval by the Judicial Magistrate of the first class having jurisdiction, for a periodnot exceeding one month, one or more bank account oraccounts of any intermediary or any person associatedwith the securities market in any manner involved inviolation of any of the provisions of this Act, or the rulesor the regulations made thereunder:

Provided that only the bank account or accounts or anytransaction entered therein, so far as it relates to the proceedsactually involved in violation of any of the provisions of thisAct, or the rules or the regulations made thereunder shall beallowed to be attached; (f) direct any intermediary or any person associated withthe securities market in any manner not to dispose of oralienate an asset forming part of any transaction which isunder investigation:

Provided that the Board may, without prejudice to theprovisions contained in sub-section (2) or sub-section (2A),take any of the measures specified in clause (d) or clause (e)or clause (f), in respect of any listed public company or apublic company (not being intermediaries referred to in section12) which intends to get its securities listed on any recognisedstock exchange where the Board has reasonable grounds tobelieve that such company has been indulging in insidertrading or fraudulent and unfair trade practices relating tosecurities market.

Provided further that the Board shall, either before or afterpassing such orders, give an opportunity of hearing to suchintermediaries or persons concerned.]”

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Section 12A of the Securities and Exchange Board of IndiaAct, 1992

“Prohibition of manipulative and deceptive devices, insidertrading and substantial acquisition of securities or control.

12A. No person shall directly or indirectly—

(a) use or employ, in connection with the issue, purchaseor sale of any securities listed or proposed to be listed ona recognized stock exchange, any manipulative ordeceptive device or contrivance in contravention of theprovisions of this Act or the rules or the regulations madethereunder; (b) employ any device, scheme or artifice to defraud inconnection with issue or dealing in securities which arelisted or proposed to be listed on a recognised stockexchange;

(c) engage in any act, practice, course of business whichoperates or would operate as fraud or deceit upon anyperson, in connection with the issue, dealing in securitieswhich are listed or proposed to be listed on a recognisedstock exchange, in contravention of the provisions of thisAct or the rules or the regulations made thereunder; (d) engage in insider trading; (e) deal in securities while in possession of material ornon-public information or communicate such material ornon-public information to any other person, in a mannerwhich is in contravention of the provisions of this Act orthe rules or the regulations made thereunder; (f) acquire control of any company or securities more thanthe percentage of equity share capital of a company whosesecurities are listed or proposed to be listed on a recognisedstock exchange in contravention of the regulations madeunder this Act.]”

Section 15G of the Securities and Exchange Board of IndiaAct, 1992

“Penalty for insider trading.

BALRAM GARG v. SECURITIES AND EXCHANGE BOARD OFINDIA [VINEET SARAN, J.]

15G.If any insider who,—

A

(i) either on his own behalf or on behalf of any otherperson, deals in securities of a body corporate listed onany stock exchange on the basis of any unpublished price-sensitive information; or B

(ii) communicates any unpublished price-sensitiveinformation to any person, with or without his request forsuch information except as required in the ordinary courseof business or under any law; or

(iii) counsels, or procures for any other person to deal inany securities of any body corporate on the basis ofunpublished price-sensitive information, C

shall be liable to a penalty 81[which shall not be less thanten lakh rupees but which may extend to twenty-five crorerupees or three times the amount of profits made out of insidertrading, whichever is higher].

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Securities and Exchange Board of India (Prohibition ofInsider Trading) Regulations, 2015

Definitions.

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2. (1) In these regulations, unless the context otherwiserequires, the following words, expressions and derivationstherefrom shall have the meanings assigned to them asunder:–

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(a) “Act” means the Securities and Exchange Board ofIndia Act,1992 (15of 1992); (b)“Board” means the Securities and Exchange Boardof India;

(c) “compliance officer” means any senior officer,Gdesignated so and reporting to the board of directorsor head of the organization in case board is not there,who is financially literate and is capable ofappreciating requirements for legal and regulatorycompliance under these regulations and who shall beresponsible for compliance of policies, procedures,H

904SUPREME COURT REPORTS

Amaintenance of records, monitoring adherence to therules for the preservation of unpublished pricesensitive information, monitoring of trades and theimplementation of the codes specified in theseregulations under the overall supervision of theboard of directors of the listed company or the headBof an organization, as the case may be.

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(d) “connected person”means,-

(i) any person who is or has during the six monthsprior to the concerned act been associated witha company, directly or indirectly, in any capacityincluding by reason of frequent communicationwith its officers or by being in any contractual,fiduciary or employment relationship or by beinga director, officer or an employee of the companyor holds any position including a professionalor business relationship between himself and thecompany whether temporary or permanent, thatallows such person, directly or indirectly, accessto unpublished price sensitive information or isreasonably expected to allow such access.

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(ii) Without prejudice to the generality of theforegoing, the persons falling within the followingcategories shall be deemed to be connectedpersons unless the contrary is established, - E

(a) an immediate relative of connectedpersons specified in clause (i); or F

(b) a holding company or associate companyor subsidiary company; or

(c) an intermediary as specified in section 12of the Act or an employee or directorthereof; or G

(d) an investment company, trustee company,asset management company or anemployee or director thereof; or (e)an official of a stock exchange or ofclearing house or corporation; or H

(f) a member of board of trustees of a mutualAfund or a member of the board of directorsof the asset management company of amutual fund or is an employee thereof; or (g)a member of the board of directors or anemployee, of a public financial institutionBas defined in section 2 (72) of theCompanies Act, 2013; or (h)an official or an employee of a self-regulatory organization recognised orauthorized by the Board; or C

(i) a banker of the company; or

(j) a concern, firm, trust, Hindu undividedfamily, company or association of personswherein a director of a company or hisDimmediate relative or banker of thecompany, has more than ten per cent. ofthe holding or interest; NOTE: It is intended that a connected person is one who hasa connection with the company that is expected to put him inpossession of unpublished price sensitive information.Immediate relatives and other categories of persons specifiedabove are also presumed to be connected persons but such apresumption is a deeming legal fiction and is rebuttable. Thisdefinition is also intended to bring into its ambit persons whomay not seemingly occupy any position in a company but arein regular touch with the company and its officers and areinvolved in the know of the company’s operations. It isintended to bring within its ambit those who would have accessto or could access unpublished price sensitive informationabout any company or class of companies by virtue of anyconnection that would put them in possession of unpublishedprice sensitive information.

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(e) “generally available information” means informationthat is accessible to the public on a non-discriminatorybasis; H

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NOTE:It is intended to define what constitutes generallyavailable information so that it is easier to crystallize andappreciate what unpublished price sensitive information is.Information published on the website of a stock exchange,would ordinarily be considered generally available.

(f) “immediate relative”means a spouse of a person, andincludes parent, sibling, and child of such person or ofthe spouse, any of whom is either dependent financiallyon such person, or consults such person in takingdecisions relating to trading in securities;

NOTE:It is intended that the immediate relatives of a“connected person” too become connected persons forpurposes of these regulations. Indeed, this is a rebuttablepresumption.

(g) “insider” means any person who is:

(i) a connected person; or

(ii) in possession of or having access to unpublishedprice sensitive information; NOTE:Since “generally available information” is defined,it is intended that anyone in possession of or having accessto unpublished price sensitive information should beconsidered an “insider” regardless of how one came inpossession of or had access to such information. Variouscircumstances are provided for such a person to demonstratethat he has not indulged in insider trading. Therefore, thisdefinition is intended to bring within its reach any personwho is in receipt of or has access to unpublished pricesensitive information. The onus of showing that a certainperson was in possession of or had access to unpublishedprice sensitive information at the time of trading would,therefore, be on the person leveling the charge after whichthe person who has traded when in possession of or havingaccess to unpublished price sensitive information maydemonstrate that he was not in such possession or that hehas not traded or or he could not access or that his tradingwhen in possession of such information was squarely coveredby the exonerating circumstances.

(h) “promoter”…………………………………

(i) “securities”………………………………...

(j) “specified”………………………………….

(k) “takeover regulations” ………………….

(l) “trading” means and includes subscribing,buying, selling, dealing, or agreeing to subscribe,buy, sell, deal in any securities, and “trade” shallbe construed accordingly; NOTE:Under the parliamentary mandate, since the Section12A (e) and Section 15G of the Act employs the term ‘dealingin securities’, it is intended to widely define the term “trading”to include dealing. Such a construction is intended to curbthe activities based on unpublished price sensitive informationwhich are strictly not buying, selling or subscribing, such aspledging etc when in possession of unpublished price sensitiveinformation.

(m) “trading day” ……………………………

(n) “unpublished price sensitive information”meansany information, relating to a company or itssecurities, directly or indirectly, that is notgenerally available which upon becominggenerally available, is likely to materially affectthe price of the securities and shall, ordinarilyincluding but not restricted to, informationrelating to the following: –

(i) financial results;

(ii) dividends;

(iii) change in capital structure;

(iv) mergers, de-mergers, acquisitions, delistings,disposals and expansion of business andsuch other transactions;

(v) changes in key managerial personnel.

(vi) material events in accordance with thelisting agreement A

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NOTE:It is intended that information relating to a companyor securities, that is not generally available would beunpublished price sensitive information if it is likely tomaterially affect the price upon coming into the public domain.The types of matters that would ordinarily give rise tounpublished price sensitive information have been listedabove to give illustrative guidance of unpublished pricesensitive information.

(2) Words and expressions used and not defined in theseregulations but defined in the Securities and Exchange Boardof India Act, 1992 (15 of 1992), the Securities Contracts(Regulation) Act, 1956 (42 of 1956), the Depositories Act, 1996(22 of 1996) or the Companies Act, 2013 (18 of 2013) andrules and regulations made thereunder shall have the meaningsrespectively assigned to them in those legislation.

CHAPTER – II

RESTRICTIONS ON COMMUNICATION AND TRADINGBY INSIDERS

Communication or procurement of unpublished price sensitiveinformation.

3. (1) No insider shall communicate, provide, or allow accessto any unpublished price sensitive information, relating to acompany or securities listed or proposed to be listed, to anyperson including other insiders except where suchcommunication is in furtherance of legitimate purposes,performance of duties or discharge of legal obligations.

NOTE:This provision is intended to cast an obligation on allinsiders who are essentially persons in possession ofunpublished price sensitive information to handle suchinformation with care and to deal with the information withthem when transacting their business strictly on a need-to-know basis. It is also intended to lead to organisationsdeveloping practices based on need-to-know principles fortreatment of information in their possession.

(2) No person shall procure from or cause the communicationby any insider of unpublished price sensitive information,relating to a company or securities listed or proposed to belisted, except in furtherance of legitimate purposes,performance of duties or discharge of legal obligations.

NOTE: This provision is intended to impose a prohibition onunlawfully procuring possession of unpublished pricesensitive information. Inducement and procurement ofunpublished price sensitive information not in furtheranceof one’s legitimate duties and discharge of obligations wouldbe illegal under this provision.

(3) Notwithstanding anything contained in this regulation,an unpublished price sensitive information may becommunicated, provided, allowed access to or procured, inconnection with a transaction that would:–

(i) entail an obligation to make an open offer underthe takeover regulations where the board of directorsof the 9[listed] company is of informed opinion that10[sharing of such information] is in the bestinterests of the company; NOTE:It is intended to acknowledge the necessity ofcommunicating, providing, allowing access to or procuringUPSI for substantial transactions such as takeovers, mergersand acquisitions involving trading in securities and changeof control to assess a potential investment. In an open offerunder the takeover regulations, not only would the same pricebe made available to all shareholders of the company butalso all information necessary to enable an informeddivestment or retention decision by the public shareholders isrequired to be made available to all shareholders in the letterof offer under those regulations.

(ii) not attract the obligation to make an open offer underthe takeover regulations but where the board ofdirectors of the 11[listed] company is of informedopinion 12 [that sharing of such information] is inthe best interests of the company and the informationthat constitute unpublished price sensitive information A

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is disseminated to be made generally available at leasttwo trading days prior to the proposed transactionbeing effected in such form as the board of directorsmay determine 13[to be adequate and fair to coverall relevant and material facts].

NOTE: It is intended to permit communicating, providing,allowing access to or procuring UPSI also in transactionsthat do not entail an open offer obligation under the takeoverregulations 14[when authorised by the board of directors ifsharing of such information] is in the best interests of thecompany. The board of directors, however, would cause publicdisclosures of such unpublished price sensitive informationwell before the proposed transaction to rule out anyinformation asymmetry in the market.

(4) For purposes of sub-regulation (3), the board of directorsshall require the parties to execute agreements to contractconfidentiality and non-disclosure obligations on the part ofsuch parties and such parties shall keep information soreceived confidential, except for the purpose of sub-regulation(3), and shall not otherwise trade in securities of the companywhen in possession of unpublished price sensitive information.

Trading when in possession of unpublished price sensitiveinformation.

4. (1) No insider shall trade in securities that are listed orproposed to be listed on a stock exchange when in possessionof unpublished price sensitive information:

Provided that the insider may prove his innocence bydemonstrating the circumstances including the following: –

(i) the transaction is an off-market inter-se transferbetween 18[insiders] who were in possession ofthe same unpublished price sensitive informationwithout being in breach of regulation 3 and bothparties had made a conscious and informed tradedecision.

(ii) in the case of non-individual insiders:- a.the individuals who were in possession ofAsuch unpublished price sensitive informationwere different from the individuals takingtrading decisions and such decision-makingindividuals were not in possession of suchunpublished price sensitive information whenBthey took the decision to trade; and b.appropriate and adequate arrangementswere in place to ensure that these regulationsare not violated and no unpublished pricesensitive information was communicated bythe individuals possessing the information tothe individuals taking trading decisions andthere is no evidence of such arrangementshaving been breached; C

(iii) the trades were pursuant to a trading plan setup in accordance with regulation 5.

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NOTE: When a person who has traded in securities has beenin possession of unpublished price sensitive information, histrades would be presumed to have been motivated by theknowledge and awareness of such information in hispossession. The reasons for which he trades or the purposesto which he applies the proceeds of the transactions are notintended to be relevant for determining whether a person hasviolated the regulation. He traded when in possession ofunpublished price sensitive information is what would needto be demonstrated at the outset to bring a charge. Once thisis established, it would be open to the insider to prove hisinnocence by demonstrating the circumstances mentioned inthe proviso, failing which he would have violated theprohibition.

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(2) In the case of connected persons the onus of establishing,that they were not in possession of unpublished price sensitiveinformation, shall be on such connected persons and in othercases, the onus would be on the Board.

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A(3) The Board may specify such standards and requirements,from time to time, as it may deem necessary for the purpose ofthese regulations.

23. We have heard learned counsel for the parties at length andhave carefully perused the record.B

24. The submission of the Respondent that appellant Balram Gargcontravened Regulation 3(1) of the PIT Regulations and section 12A(c)of the SEBI Act, by communicating the UPSI to the appellants in C.A.No.7590 of 2021, being an “insider” and “connected person” within themeaning of PIT Regulations is not worthy of acceptance. The SecuritiesCAppellate Tribunal has erred in upholding the order of the Whole TimeMember of SEBI as it has failed to independently assess the evidenceand material on record while exercising its jurisdiction as the first appellatecourt. As reiterated by this Court in a catena of judgements, it is the dutyof the first court of appeal to deal with all the issues and evidence led bythe parties on both, the questions of law as well as questions of fact andDthen decide the issue by providing adequate reasons for its findings.Unfortunately, the SAT failed to apply its mind on the issues raised bythe parties and routinely affirmed the findings of the WTM without dealingwith the issues at hand. In this context, this Court has held in H.K.N.Swami v. Irshad Basith [(2005) 10 SCC 243] that:

E“The first appeal has to be decided on facts as well as onlaw. In the first appeal parties have the right to be heard bothon questions of law as also on facts and the first appellatecourt is required to address itself to all issues and decide thecase by giving reasons. Unfortunately, the High Court, in thepresent case has not recorded any finding either on facts orFon law. Sitting as the first appellate court it was the duty ofthe High Court to deal with all the issues and the evidenceled by the parties before recording the finding regarding title.”

The above position was reiterated by this Court in UPSRTC vsMamta [(2016) 4 SCC 172].G

25. The SAT again fell in error when in spite of observing thatthere is no direct evidence which suggests as to who had disseminatedthe insider information to the appellants in C.A. No.7590 of 2021, itconcluded on mere “preponderance of probability” that it was late P.C.Gupta as well as appellant Balram Garg who disseminated both UPSI toHthe appellants in C.A. No.7590 of 2021.

26. Importantly, the WTM arrived at the finding that the appellantsin C.A. No.7590 of 2021, namely, Mrs. Shivani Gupta, Sachin Gupta,Amit Garg and Quick Developers Pvt. Ltd. were not “connectedpersons” qua the appellant Balram Garg. The WTM held that:

“I also note that it is not the case in the SCN that Noticeeno.1, 2 and 3 were in any contractual, fiduciary or employmentrelationship with the company, or were the director or officerof the company, during the past 6 months of the alleged actof insider trading. Noticee No. 1 and 2 seem to be in theemployment of the company but that was way back in 2015. Ialso note that the SCN has also not identified that Noticeeno. 1,2,3 or 4 had any professional or business relationshipwith the company, that allows the said Noticees, directly orindirectly, access to unpublished price sensitive information.In view of the above, I find that Noticee no. 1,2,3 and 4 cannotbe treated as ‘connected persons’ in terms of Reg. 2(1)(d)(i)of PIT Regulations, 2015.”

27. In our opinion, two important findings of the WTM and SATneed to be re-examined by this Court to adequately decide the presentset of appeals. Firstly, Whether the WTM and SAT rightly rejected theclaim of estrangement of the appellants in C.A. No.7590 of 2021, namely,Mrs. Shivani Gupta, Sachin Gupta and Amit Garg? Secondly, could theaforementioned appellants be rightly held to be “insiders” in terms ofRegulation 2(1)(g)(ii) of the PIT Regulations, only and entirely on thebasis of circumstantial evidence?

28. The appellants in C.A. No.7590 of 2021, namely, Mrs. ShivaniGupta, Sachin Gupta and Amit Garg, claimed before the WTM and SATthat they were estranged from the family and did not have the requiredconnection with the appellant Balram Garg, who was the MD of thePCJ at the relevant time period. However, we are of the opinion that theWTM and SAT wrongly rejected this claim of the Appellants in C.A.No.7590 of 2021 without appreciating the facts and evidence as wasproduced before them. The WTM and SAT ought to have appreciatedthe relevant facts for ascertaining the true nature of relationship betweenthe parties.

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A29. To understand the abovementioned relationship, it is pertinentto note that PCJ was promoted in 2005 by three brothers viz. P.C. Gupta[since deceased], Amar Chand Garg and Balram Garg (Appellant inC.A. No.7054 of 2021). Subsequently, due to certain differences, AmarChand Garg and his branch of the family exited the Company by enteringinto a family arrangement dated 01.07.2011 whereby their shareholdingBin the company was reduced to a meagre 0.70%. In September, 2011,Amar Chand Garg also resigned as the Vice Chairman of the companyand disassociated himself from the company. Further, the record revealsthat the son of Amar Chand Garg, i.e. Amit Garg (3[rd] Appellant in C.A.No.7590 of 2021) was never associated with the company. OnC31.03.2015, on account of certain disputes that had arisen between SachinGupta (2[nd] Appellant in C.A. No.7590 of 2021) and his parents P.C.Gupta and Smt. Krishna Devi, Sachin Gupta, so as to exit the companyalong with his family, resigned from his position as President (GoldManufacturing) of the Company and Mrs. Shivani Gupta (1[st] Appellantin C.A. No.7590 of 2021 and wife of Sachin Gupta) also resigned fromDher post of Senior Assistant Manager, Karol Bagh Store of PCJ.Importantly, both Sachin Gupta and Smt. Shivani Gupta were, at no pointof time, Directors of PCJ.

30. Subsequently, late P.C. Gupta and his son Sachin Gupta enteredinto another family arrangement dated 10.04.2015 whereby P.C. GuptaEand his wife agreed to transfer at least 1,60,00,000 shares of the companyto Sachin Gupta and his family, and in lieu thereof Sachin Gupta and hisfamily agreed not to have any right whatsoever in the immovable andmovable property of P.C. Gupta and his wife. However, Sachin Guptaand his wife Smt. Shivani Gupta were permitted to use the property at 1-FC, Court Road, Civil Lines, Delhi for residential purposes only. It ispertinent to note here that the said plot of land is a large tract of land andseparate buildings were constructed thereon. P.C. Gupta and SachinGupta, along with their families, resided in separate floors of the samebuilding, whereas Amit Garg and Balram Garg resided in separatebuildings.G

31. Post the agreed transfer of shares by P.C. Gupta and his wife,Sachin Gupta and his wife Smt. Shivani Gupta inter alia, sold someshares of the company from 02.04.2018 to 13.07.2018. This aforesaidtrade in shares was the subject matter of investigation by the Respondent/SEBI as it was contented by SEBI that the abovementioned trade wasH

based on UPSI and hence was in contravention of SEBI Act and PITRegulations. The WTM and SAT erred in not appreciating theaforementioned facts which adequately establish that the there was abreakdown of ties between both the parties, both at personal andprofessional level, and that the said estrangement happened much priorto the two UPSI. Hence, we are of the opinion that when the two familyarrangements (dated 01.07.2011 and 10.04.2015) are considered in theirright perspective, it adequately demonstrates that there was a breakdownof relations between the parties. Additionally, given the fact that theentire case against the appellants for the offence of insider trading wasbased on the nature of close relationship between the parties, once it hasbeen rightly held by the WTM that the appellants are neither “connectedpersons” within the meaning of Regulation 2(1)(d) nor “immediaterelatives” within the meaning of Regulation 2(1)(f) of PIT Regulation,the question of ipso facto relying on the nature of relationship betweenthe parties to come to the conclusion that they were “in possession of orhaving access to UPSI” while trading with the shares of the company islegally unsustainable.

32. Moreover, we find merit in the submission of the counsel forthe appellants in C.A. No.7590 of 2021 that even assuming that the saidfamily arrangements did not result in complete estrangement of socialrelations between the parties, the SAT could not, by virtue of this veryfact, discharge SEBI of the onus of proof placed on them to prove thatthe Appellants were in possession of UPSI. In our opinion, the approachadopted by the SAT turns the SEBI Act on its head as it places theburden of proving that there was a complete breakdown of ties betweenthe parties on the Appellants in C.A. No.7590 of 2021 while convenientlyignoring the fact that the onus was actually on SEBI to prove that theappellants were in possession of or having access to UPSI. The legislativenote to Regulation 2(1)(g) makes the above position of law explicitlyclear. It states that:

“... The onus of showing that a certain person was inpossession of or had access to unpublished price sensitiveinformation at the time of trading would, therefore, be on theperson leveling the charge after which the person who hastraded when in possession of or having access to unpublishedprice sensitive information may demonstrate that he was notin such possession or that he has not traded or he could not AB

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Aaccess or that his trading when in possession of suchinformation was squarely covered by the exoneratingcircumstances.”

33. The second question before us is that could the appellants inC.A. No.7590 of 2021, be rightly held to be “insiders” in terms ofBregulation 2(1)(g)(ii) of the PIT Regulations, only and entirely on thebasis of circumstantial evidence?

34. In this context, it is important to highlight that the two majorCorporate Announcements, purportedly related to a change in company’scapital structure, which were:

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i.UPSI-1 [Period between 25.04.2018 to 10.05.2018]:The announcement of the Company on 10.05.2018 to buyback up to 1,21,14,285 fully paid up equity shares of Rs. 10/- each at a price of Rs. 350/- per equity share.

ii.UPSI-2 [Period between 07.07.2018 to 13.07.2018]:DThe announcement of the company withdrawing their buy-back offer due to non-receipt of NOC from State Bank ofIndia.

35. After carefully and extensively perusing the records, we havecome to the conclusion that the SAT erred in holding the appellants inEC.A. No.7590 of 2021 to be “insiders” in terms of Regulation 2(1)(g)(ii)of the PIT Regulations on the basis of their trading pattern and theirtiming of trading (circumstantial evidence). The reasoning of the SAT isex facie contrary to the records, as would be evident from the forthcomingdiscussion wherein our analysis of the alleged transactions has beenFdivided into three phases viz. Phase-I [Period from 02.04.2018 to24.04.2018], Phase-II [Period from 22.06.2018 to 06.07.2018] and Phase-III [Period from 07.07.2018 to 13.07.2018].

36. Phase-I [02.04.2018 to 24.04.2018 i.e. Pre UPSI-1Period]: Appellant Mrs. Shivani Gupta sold shares gifted to her by P.C.GGupta and Smt. Krishna Devi (as part of the family arrangement dated10.04.2015) for personal and commercial reasons. The said shares weresold for a price of Rs. 300 per share during the said period. However,since the price of the shares kept falling, Mrs. Shivani decided to stopselling shares on 24.04.2018. Further, if we presume that she had internalknowledge of the company’s affair including the impending buy-backH

offer, it would be reasonable to assume that she would not have soldsuch a large chunk of shares (74,35,071 shares) in the pre-UPSI-1 periodwhen the prices of the shares were falling and would have instead chosento wait for the buy-back offer. This also assumes importance since SEBIitself, vide its show-cause notice dated 24.04.2020 had dropped thecharges with respect to the UPSI-1 period. This would mean that thenotional loss purportedly avoided by appellant Mrs. Shivani Gupta wasonly for the shares traded during the UPSI-II Period, and even accordingto SEBI, there was no case that she made any money or avoided anyloss by trading in the shares of the company during the UPSI-1 Period.

37. Phase-II [22.06.2018 to 06.07.2018 i.e. Pre- UPSI-IIPeriod]:PCJ had requested SBI to issue a NOC for the proposed buy-back offer on 07.07.2018 and the said request was rejected on the sameday by the SBI. However, even before the said refusal by the SBI, theappellant Mrs. Shivani Gupta had sold 1,00,000 shares on 06.07.2018 ata much lower price than the price at which the shares were sold earlier.On the date on which these shares were sold, the UPSI-2 had not evencome into existence. If the arguments of the respondent hold any water,the Appellants should have waited till UPSI-2 and would only havesubsequently offloaded maximum number of shares during the said periodto avoid any notional loss. However, the records undercut the logicadopted by the respondent/SEBI for the reason that the appellants werenot in possession of the UPSI-2 and hence the appellants started sellingthe shares even before the UPSI-2 came into existence.

38. Phase-III [07.07.2018 to 13.07.2018 i.e. UPSI-IIPeriod]: The Appellant Mrs. Shivani Gupta sold only 15,00,000 sharesduring this period as opposed to the 74,35,071 shares that were sold atan earlier point of time (Pre-UPSI-1 Period). Importantly, notwithstandingthe fact that the appellant Mrs. Shivani Gupta sold 15,00,000 shares, shecontinued to hold 12,84,111 shares of the company, out of the total thatwere transferred to her by way of the family arrangement. These abovefactors undercut the argument of SEBI that the appellants sold hugenumber of shares during UPSI-2 period because they had the informationthat once the information of withdrawal of buy-back offer by PCJ wasmade public, the price of the shares would drastically fall. Moreover, thedata reveals that the share price of the PCJ shares consistently fellduring the investigation period and therefore it would be incorrect to saythat the price of the shares fell only upon announcement of the withdrawal AB

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Aof the buyback offer. In fact, the records reveal that even after theannouncement of the buy-back offer, there was no increase in the shareprices of the company. Resultantly, the appellants stopped selling shareson 13.07.2018 because they believed that the market price continued tofall so badly that the shares possessed by them were not being valuedaccurately in the market. Hence, the appellants decided to constitute toBhold their shareholdings.

39. In such view of the matter, we are of the opinion that there isno correlation between the UPSI and the sale of shares undertaken bythe appellants in C.A. No.7590 of 2021. The said decisions of selling theshares and the timings thereof were purely a personal and commercialCdecision undertaken by them and nothing more can be read into thosedecisions. If the appellants did possess the UPSIs, we are unable tounderstand that why would the appellant Mrs. Shivani Gupta sell only15,00,000 shares during this period as opposed to the 74,35,071 sharesthat were sold at an earlier point of time (Pre-UPSI-1 Period) and stillDcontinue to hold 12,84,111 shares of the company that could have alsobeen sold along with the 15,00,000 shares that were sold during theUPSI-2 period.

40. We are also of the opinion that in the absence of any materialavailable on record to show frequent communication between the parties,Ethere could not have been a presumption of communication of UPSI bythe appellant Balram Garg. The trading pattern of the appellants in C.A.No.7590 of 2021 cannot be the circumstantial evidence to prove thecommunication of UPSI by the appellant Balram Garg to the otherappellants in C.A. No.7590 of 2021. It would also be pertinent to notehere that Regulation 3 of the PIT Regulations, which deals withFcommunication of UPSI, does not create a deeming fiction in law. Hence,it is only through producing cogent materials (letters, emails, witnessesetc.) that the said communication of UPSI could be proved and not bydeeming the communication to have happened owing to the allegedproximity between the parties. In this context, even the show-causeGnotices do not allege any communication between the Appellant BalramGarg and the other appellants in C.A. No.7590 of 2021. This is evidentfrom the following extract of the order of the WTM:

“A perusal of the SCNs shows that allegations of Noticeesno. 1 to 4 being connected person under Regulation 2(1)(d)(i)

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seems to have been proceeded on the basis of inference drawnthat Noticees no. 1 to 3 being relatives of Late Shri PadamChand Gupta who was promotor and chairman of PCJewellers, and Noticee no. 5 who was the MD of PC Jewellers,would be having frequent communication with Late Shri Guptaand Noticee No. 5. However, here I note that as per Regulation2(1)(d)(i) , association by virtue of frequent communicationwith the officer of the company must be arising in the dischargeof his/her duty towards the company. The SCNs does not allegethat there was any communication between Noticee no. 5 andNoticee no. 1 to 4,arising out discharge of any duty owed byNoticee no. 1,2,3 or 4 to the compoany.” [emphasissupplied]

41. This Court in Hanumant vs. State of Madhya Pradesh [AIR1952 Supreme Court 343] has held that:

“Assuming that the accused Nargundkar had taken thetenders to his house, the prosecution, in order to bring theguilt home to the accused, has yet to prove the other factsreferred to above. No direct evidence was adduced in proofof those facts. Reliance was placed by the prosecution andby the courts below on certain circumstances, and intrinsicevidence contained in the impugned document, Exhibit P-3A.In dealing with circumstantial evidence the rules speciallyapplicable to such evidence must be borne in mind. In suchcases there is always the danger that conjecture or suspicionmay take the place of legal proofand therefore it is right torecall the warning addressed by Baron Alderson, to the juryin Reg v. Hodge ((1838) 2 Lew. 227), where he said :- “The mind was apt to take a pleasure in adaptingcircumstances to one another, and even in straining thema little, if need be, to force them to from parts of oneconnected whole; and the more ingenious the mind of theindividual, the more likely was it, considering such mattersto overreach and mislead itself, to supply some little linkthat is wanting, to take for granted some fact consistentwith its previous theories and necessary to render themcomplete.”

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SUPREME COURT REPORTS

AIt is well to remember that in cases where the evidence in of acircumstantial nature, the circumstances from which theconclusion of guilt is to be drawn should in the first instancebe fully established, and all the facts so established shouldbe consistent only with the hypothesis of the guilt of theaccused. Again, the circumstances should be of a conclusiveBnature and pendency and they should be such as to excludeevery hypothesis but the one proposed to be proved. In otherwords, there must be a chain of evidence so far complete asnot to leave any reasonable ground for a conclusion consistentwith the innocence of the accused and it must be such as toCshow that within all human probability the act must have beendone by the accused.In spite of the forceful argumentsaddressed to us by the learned Advocate-General on behalfof the State we have not been able to discover any suchevidence either intrinsic within Exhibit P-3A or outside andDwe are constrained to observe that the courts below have justfallen into the error against which warning was uttered byBaron Alderson in the above mentioned case.” [emphasissupplied]

42. This Court in Chintalapati Srinivasa Raju vs SecuritiesEand Exchange Board of India [(2018) 7 SCC 443] has further heldthat:

“Further, under the second part of Regulation 2(e)(i), theconnected person must be “reasonably expected” to haveaccess to unpublished price sensitive information. TheFexpression “reasonably expected” cannot be a mere ipse dixit– there must be material to show that such person canreasonably be so expected to have access to unpublished pricesensitive information.

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We have already demonstrated that the minority judgment ismuch more detailed and correct than the majority judgmentof the Appellant Tribunal. We accept Shri Singh’s submission H

that in cases like the present, a reasonable expectation to bein the know of things can only be based on reasonableinferences drawn from foundational facts. This Court in SEBIv. Kishore R. Ajmera, (2016) 6 SCC 368 at 383, stated:

“26. It is a fundamental principle of law that proof of anallegation leveled against a person may be in the form ofdirect substantive evidence or, as in many cases, such proofmay have to be inferred by a logical process of reasoningfrom the totality of the attending facts and circumstancessurrounding the allegations/charges made and leveled.While direct evidence is a more certain basis to come to aconclusion, yet, in the absence thereof the Courts cannotbe helpless. It is the judicial duty to take note of theimmediate and proximate facts and circumstancessurrounding the events on which the charges/allegationsare founded and to reach what would appear to the Courtto be a reasonable conclusion therefrom. The test wouldalways be that what inferential process that a reasonable/prudent man would adopt to arrive at a conclusion.”

We are of the view that from the mere fact that the appellantpromoted two joint venture companies, one of which ultimately-merged with SCSL, and the fact that he was a cobrother ofB. Ramalinga Raju, without more, cannot be stated to befoundational facts from which an inference of reasonablybeing expected to be in the knowledge of confidentialinformation can be formed.The fact that the appellant was tobe continued as a director till replacement again does nottake us anywhere. Shri Viswanathan has shown us that twoother independent non-executive directors were appointed inhis place on and from 23.1.2003. What is clear is that theappellant devoted all his energies to the businesses he wasrunning, on and after resigning as an executive director ofSCSL, as a result of which the salary he was being paid bySCSL was discontinued.”

43. This Court has also held in a catena of cases that the foundationalfacts must be established before a presumption is made. In this context, A

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Ain Seema Silk & Sarees vs. Directorate of Enforcement [(2008) 5SCC 580] this Court has held that:

“The presumption raised against the trader is a rebuttableone. Reverse burden as also statutory presumptions can beraised in several statutes as, for example, the NegotiableBInstruments Act, Prevention of Corruption Act, TADA, etc.Presumption is raised only when certain foundational factsare established by the prosecution. The accused in such anevent would be entitled to show that he has not violated theprovisions of the Act.”CIn the present case, as rightly argued by the learned counsel ofthe appellant, the foundational facts were not proved which could raisethe alleged presumption. SEBI failed to place on record any material toprove that the appellants in C.A. No.7590/2021 were “connectedpersons” to Balram Garg as required by Regulation 2(1)(d)(ii)(a) readwith Regulation 2(1)(f) of the PIT Regulations as none of the appellantsDC.A. No.7590/2021 were financially dependent on Balram Garg or evenalleged to have consulted Balram Garg in any decision related to tradingin securities.

44. In light of the above principles of law laid down by this Court,it was imperative on the Respondent/SEBI to place on record relevantEmaterial to prove that the appellants in C.A. No.7590 of 2021, namely,Mrs. Shivani Gupta, Sachin Gupta, Amit Garg and Quick DevelopersPvt. Ltd. were “immediate relatives” who were “dependentfinancially” on appellant Balram Garg or “consult” Balram Garg in“taking decisions relating to trading in securities”. However, SEBIFfailed to do so as has been already recorded by the WTM in its orderdated 11.05.2021. The said appellants in C.A. No.7590 of 2021 werenot “immediate relatives” and were completely financially independentof the appellant Balram Garg and had nothing to do with the said BalramGarg in any decision making process relating to securities or evenotherwise.G

45. In the context of appellant no. 4 (in C.A. No.7590 of 2021),namely Quick Developers Pvt. Ltd., the record clearly reveals that it isneither a “holding company” or an “associate company” or a“subsidiary company” of PCJ nor the appellant Balram Garg has everbeen the Director of Quick Developers Pvt. Ltd. Therefore, QuickH

Developers Pvt. Ltd. cannot be held to be a “connected person” vis-à-vis the appellant Balram Garg.

46. Furthermore, reliance of the Respondent/SEBI on transactionsbetween appellant Sachin Gupta and PCJ and the subsequent paymentsof rent by PCJ is against the principles of natural justice as theseallegations were not part of the Show Cause Notices. To cement thisproposition, reference could be made to Tarlochan Dev Sharma vsState of Punjab [(2001) 6 SCC 260] wherein this Court has heldthat:

“We are, therefore, clearly of the opinion that not only theprinciples of natural justice were violated by the factum ofthe impugned order having been founded on grounds atvariance from the one in the show cause notice, of whichappellant was not even made aware of let alone provided anopportunity to offer his explanation, the allegations madeagainst the appellant did not even prima facie make out acase of abuse of powers of President.”

Similar observations have also been made by this Court inHindustan Lever Ltd. vs. Director General (Investigation andRegistration) [(2001) 2 SCC 474].

47. Lastly, we have given our anxious consideration to thejudgements relied upon by the learned counsel of the Respondent viz.SEBI vs Kishore R. Ajmera [(2016) 6 SCC 368] and Dushyant N.Dalal vs. SEBI [(2017) 9 SCC 660]. Suffice it to hold that these casesare distinguishable on the facts of the present case, as the former is nota case of insider trading but that of Fraudulent/Manipulative TradePractices; and the latter case relates to Interests and Penalty ratherthan the subject matter at hand. Reliance placed on the case of KishoreR. Ajmera (supra) to show that presumption can be drawn on the basisof immediate and relevant facts is contrary to law already settled by thisCourt in the case of Chintalapati Srinivasa Raju (supra) where it isheld that “a reasonable expectation to be in the know of things canonly be based on reasonable inference drawn from foundationalfacts”. It has further been held that merely because a person was relatedto the connected person cannot by itself be a foundational fact to drawan inference.

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A48. To conclude, the entire case of the Respondents was premisedon two important propositions, that firstly, there existed a closerelationship between the appellants herein; and secondly, that based onthe circumstantial evidence (trading pattern and timing of trading), itcould be reasonably concluded that the appellants in C.A. No.7590 of2021 were “insiders” in terms of Regulation 2(1)(g)(ii) of the PITBRegulations. However, as the discussion above would reveal, the WTMand SAT wrongly rejected the claim of estrangement of the Appellantsin C.A. No.7590 of 2021, without appreciating the facts and evidence aswas produced before them. The records and facts adequately establishthat the there was a breakdown of ties between the parties, both atCpersonal and professional level and that the said estrangement happenedmuch prior to the two UPSI. Secondly, as has already been discussed,the SAT erred in holding the appellants in C.A. No.7590 of 2021 to be“insiders” in terms of regulation 2(1)(g)(ii) of the PIT Regulations on thebasis of their trading pattern and their timing of trading (circumstantialevidence). We are of the firm opinion that there is no correlation betweenDthe UPSI and the sale of shares undertaken by the appellants in C.A.No.7590 of 2021. Moreover, in the absence of any material available onrecord to show frequent communication between the parties, there couldnot have been a presumption of communication of UPSI by the appellantBalram Garg. The trading pattern of the appellants in C.A. No.7590 ofE2021 cannot be the circumstantial evidence to prove the communicationof UPSI by the appellant Balram Garg to the other appellants in C.A.No.7590 of 2021. There is no material on record for the WTM and theSAT to arrive at the finding that both late P.C. Gupta and the appellantBalram Garg communicated the UPSI to the other appellants in C.A.No.7590 of 2021. The said appellants in C.A. No.7590 of 2021 were notF“immediate relatives” and were completely financially independent ofthe appellant Balram Garg and had nothing to do with the him in anydecision making process relating to securities or even otherwise. Thesubmission of the learned counsel of the respondent regarding the sameresidential address of the appellants also falls flat as admittedly the partiesGwere residing in separate buildings on a large tract of land. Lastly, in ouropinion, the SAT order suffers from non-application of mind and thesame is a mere repetition of facts stated by the WTM. The AppellateTribunal was exercising jurisdiction of a First Appellate Court and wasbound to independently assess the evidenced and material on record,which it evidently failed to do.H

49. Accordingly, the appeals are allowed and the impugnedjudgement and final orders of WTM and SAT are set aside. The depositsmade by the appellants in both the appeals in terms of the impugnedorders or interim orders of this Court shall be refunded to the respectiveappellants.

50. No orders as to costs.

Bibhuti Bhushan Bose

Appeals allowed.

(Assisted by : Neha Sharma, LCRA)

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