Supreme Court judgment on Insider Trading Regulations

The Supreme Court of India (“Supreme Court”) in a landmark judgment on insider trading (SEBI v. Abhijit Rajan) has held that to establish a charge of insider trading, the critical test is whether there was an attempt by the ‘insider’ to benefit or gain from unpublished price sensitive information (“UPSI”). JSA represented the Respondent, Abhijit Rajan.

Distinguishing between mens rea and profit motive, the Supreme Court held that while in matters under PFUTP Regulations, it has been held that mens rea is not an indispensable requirement, in respect of matters under the PIT Regulations, the test to be applied is that of profit motive i.e., whether the insider’s actions in dealing in securities represented an effort to gain from or exploit the asymmetrical / unpublished information in his possession. Applying this test, the Supreme Court held that since the Respondent sold his shares before the UPSI became public and before it could have a positive impact on the price of the shares, the sale of shares by the Respondent was akin to a distress sale which was not done with the intent to take advantage of or encash the benefit of the information, and therefore, the Respondent’s action would not amount to the mischief of insider trading.

While insider trading charges will always be decided based on the facts and circumstances of each case, the decision in the present matter will have a far-reaching effect on the manner in which insider trading cases are decided by regulators and courts going forward.

JSA Team comprised Partners – Vikram Raghani and Divyam Agarwal, Principal Associate – Pulkit Sukhramani, and Senior Associate – Vidhi Jhawar.

The matter was argued by Somasekhar Sundaresan, Advocate along with the JSA Team.