By Pranjali Pandya
India had framed the Insider Regulations way back in the year 1992. Further, the legislative
framework was primarily adopted from the United Kingdom and the United States of America
securities law. Despite this, there have been multiple cases in the United States and a few in
United Kingdom where the companies and the insiders have been booked for insider trading and
other securities frauds. However, in India, there has not been a single case of conclusive
conviction of an insider for the violation of the insider regulations by the SEBI.
There could be multiple reasons for the laxity in the enforcement of the securities fraud cases.
One of the reasons could be that India has not yet realized the need to regulate such offences
because such offences were not regarded as a serious crime. This is so because in the securities
fraud, there are no clearly identifiable victims and the impact of the offence is not so severe to
motivate an individual to pursue the prosecution or authorities in this regard. However, these
reasons are unjustifiable because there are victims to the securities fraud who suffer significant
monetary losses. But these victims are rarely identified because the victims do not have the right
to take private actions against the offenders. The securities law as well as the Insider Regulations
does not provide private actions against the offender. In India, the law requires that any action
against the offender in a securities fraud must be initiated by the SEBI itself.
Although the victim may file a complaint with the SEBI based on which the SEBI can act against
the offender, such complaints appear to be rare. The reason could be the lack of awareness on the
victim`s behalf or the lack of initiative by the SEBI after receiving the complaint. As regards the
impact of the securities fraud, the nature of the crime is such that there are far reaching effects of
the securities fraud. Insider trading in India does not appear to be prosecuted as a crime by the
SEBI, although under the SEBI Act, Section 24 empowers SEBI to initiate prosecution for
violations of the provisions of the SEBI Act, Rules and the Regulations framed under it. 1
The procedure to establish the trader as an insider and the offence of insider trading is
complicated and cumbersome. For example, the SEBI has very high burden of proof to establish
beyond doubt that the person who has traded is an insider; the insider has traded while in
1 Arya Krishnakumar and Sreeparvathy K. Shaji, Corporate Crime – A critical analysis, The Lex – Warrier: Online
Law Journal, ISSN(O): 2319-8338.
possession of the UPSI, the information involved is UPSI and such other factors, to conclusively
prove the violation of the Insider Regulations. However, civil remedies are available to SEBI,
where there is no requirement to prove the men’squ rea and the standards of proof are also easier.
The SEBI has the power to debar a trader temporarily or permanently from dealing in the
securities market under Sections 11B and 11 (4) of the SEBI Act, to pass cease and desist
orders against the market participants under Section 11D, to impose penalty of Rs.25 Crores or
three (3) times the profits, whichever is higher, under Section 15G of the SEBI Act.
THE POWER OF SEBI AND ITS ABILITY TO EXERCISE DISCRETION
The quasi – judicial powers of SEBI are broadly exercised under two parallel processes: Sections
11 and 11B of the SEBI Act and the adjudication mechanism.
Proceedings under Section 11 and 11B
Sections 11 and 11B permit the regulator to undertake any measures that it deems fit, for the
protection of the interests of investors, and the development and regulation of the securities
market. While elaborating on the scope of Section 11B in the case of SEBI v. Pan Asia Advisors
Limited and Others 2 , the Supreme Court noted that the specific provisions of the SEBI Act
provided SEBI with necessary powers, casting a duty on it to protect the interests of Indian
investors as well as the stock market in India whenever it finds any fraud or other such misdeeds
committed by any person which worked against the interests of Indian investors in
securities. Similar provisions, giving ample decision-making powers to SEBI, can also be
observed in the SCRA. 3 In Sahara India Real Estate Corporation Limited and Others v. SEBI 4 ,
as well, the Supreme Court held that, the measures to be adopted by SEBI in carrying out its
obligations are couched in open-ended terms and have no prearranged limits.
2 SEBI v. Pan Asia Advisors Limited and Others, (2015) 14 SCC 77.
3 Under Section 12A of the SCRA, SEBI has been empowered to, inter alia, issue appropriate directions in the
interests of investors in securities and the securities market, to stock exchanges, clearing corporations, any agency or
person so stated, or to any company whose securities are listed or proposed to be listed in a recognized stock
4 Sahara India Real Estate Corporation Limited and Others v. SEBI, (2013) 1 SCC 1.
The adjudication process
The adjudication process on the other hand, is helmed by the adjudicating officer (AO),
appointed in terms of Section 15I of the SEBI Act, who is required to comply with certain
specific criteria, 5 while adjudging the quantum of penalty being imposed. The Hon`ble Supreme
Court though, in the Shriram Mutual Fund case 6 , recognized that SEBI may not always be able
to adopt a very discerning approach in this regard and held that as soon as the contravention of
the statutory obligation as contemplated by the Act and the Regulation is established, the
intention of the parties committing such violation becomes wholly irrelevant. Hence, once the
contravention is established then the penalty is to follow. As a consequence, the distinction
between violations and culpable violations often blurred before the enforcement authorities,
resulting in an automatic levy of significant monetary penalties, without considering its
proportionality to the transgression in question.
The ambit of the AO`s discretion has been a subject matter of some debate judicially, with
sufficient precedent to support that factors outside of what the SEBI Act itself empowered the
authority to consider, were irrelevant for determination of penalty amounts. Through its decision
in SEBI through its Chairman v. Roofit Industries Ltd. the Supreme Court held that the AO did
not possess any discretionary power for considering the factors other than those specified in
Section 15J 7 of the SEBI Act, which were exhaustive. 8
A significant change, however, has come about post the matter of Adjudicating Officer, SEBI vs.
Bhavesh Pabari 9 , wherein the Apex Court has clarified that conditions specified in Section 15J
are not exhaustive and are merely illustrative in nature, and, hence, are not required to be
mandatorily fulfilled for the imposition of a penalty by the AO. Consequently, this has led to the
5 Under Section 15J of the SEBI Act, while adjudging the amount of penalty, the AO is required to consider the, (i)
amount of disproportionate gain made; (ii) amount of loss caused to the investors; and (iii) repetitive nature of the
6 The Chairman of SEBI v. Sjriram Mutual Fund, AIR 2006 SC 2287.
7 Section 15J of the SEBI Act deals with the factors to be taken into consideration while adjudging the quantum of
8 This was again brought before the Hon`ble Supreme Court in the matter of Siddharth Chaturvedi v. Securities and
Exchange Board of India, which however, referred the issue to a larger bench.
9 Adjudicating Officer, SEBI vs. Bhavesh Pabari, (2016) 12 SCC 125.
widening of the scope the AO has at its disposal, enabling him to make a full and fair assessment
of the penalties that can be imposed.
A Growing Emphasis on Proportionality
Accordingly, a sharp change of tone is evident in the SEBI / AO orders that are being issued
subsequently, which acknowledge the varying degrees of culpability in any specific situation and
avoid the temptation of doling out standardized penal action. In the adjudication order in the
matter of JM Financial Institution Securities Limited 10 , it was held that a violation caused on
account of oversight and not deliberately, did not deserve penal consequences. Likewise, in the
matter of Kotak Mahindra Mutual Fund a SEBI whole time member upheld the AO`s view of
non-imposition of penalty in the case of a procedural and venial default and also held that a
minor and non-serious violation of a circular did not warrant an imposition of monetary penalty.
Even at the appellate level, proportionality of regulatory action is emerging as a resounding
theme – hence the underlying emphasis on SEBI, as a quasi – judicial authority, to exercise its
discretion in its capacity as the court of first instance. This is evident from multiple Securities
Appellate Tribunal (SAT) orders recently such as M/s. DSE Financial Services Ltd. v. SEBI 11
wherein SAT quashed an AO`s order taking punitive action, against violations committed, which
were either mostly technical in nature, or solitary instances or those for which corrective
measures had been taken/initiated. Similarly, in the case of Piramal Enterprises Limited v. SEBI 12
SAT held that SEBI should function in its capacity of a watchdog and not a bulldog and stated
that, in a case of an infraction of a rule, remedial and not punitive measures should be taken at
the first instance. A similar sentiment was echoed in P.G. Electroplast Ltd. & Others vs. SEBI 13
wherein SAT held that a penalty burden to the extent of INR 1 Crore for a mere technical and
venial violation was grossly disproportionate.
10 JM Financial Institution Securities Limited v. SEBI, 2019 (2) Bom CR 517.
11 M/s. DSE Financial Services Ltd. v. SEBI, SAT order September 11, 2012.
12 Piramal Enterprises Limited v. SEBI, SAT order, dated May 15, 2019.
13 P.G. Electroplast Ltd. & Others v. SEBI, SAT Order, dated August 2, 2019.
A WAY FORWARD AND CONCLUSION
It can be deduced from the above analysis that though SEBI has power under Section 11 of SEBI
Act, 1992 to investigate insider trading matter but it has failed miserably. SEBI regulations are
not inclusive and are loosely drafted. The work is not done by simply bringing the laws into the
books, they are of nullity until implemented or executed properly to achieve the aim for which
they were drafted. It`s high time that the government should look into this matter seriously by
strengthening the existing regulations and making new framework of rules to prohibit menace of
insider trading in stock market. Investigation process should be smoothened by making the
necessary tools of inspection available to the regulating body. By taking into considering the
above discussed lacuna, authorities should work to fix them. This crime should be eradicated
from Indian financial economy at any cost.