Navigating the murky waters – SC redefining the scope of mens rea in insider trading cases

With regard to India’s Insider Trading regime, it is governed by the SEBI (Prohibition of Insider Trading) Regulations, 2015 [superseded SEBI (Prohibition of Insider Trading) Regulations, 1992]. Owing to the difficulties faced by the regulator (SEBI) in identifying the instance of insider trading and the same being totally based on circumstantial evidence, the investigation of insider trading cases is a time-consuming process such that some cases took years to complete investigation. As a result, the culpability of the uncompleted investigations (before 2015) shall be determined from the lens of SEBI (Prohibition of Insider Trading) Regulations, 1992. Against this backdrop, it is imperative to analyse the conundrums in the 1992 Regulations and how the recent judgment of SEBI v. Abhijit Rajan resolves the same.

Insider trading is the practice of dealing in the securities of a listed company, by a person in possession of “unpublished price-sensitive information” (UPSI).  It lacks a precise definition as neither the SEBI (Prohibition of Insider Trading) Regulations, 2015 (2015 Regulations) nor the SEBI (Prohibition of Insider Trading) Regulations, 1992 (1992 Regulations) define the term. However, a thorough reading of the Insider Trading Regulation identifies the following activities as insider trading:

  1. Buying or selling shares of a third party by obtaining and utilising UPSI for personal gain;
  2. Disclosing any UPSI to outsiders or use of such information for personal advantage constitutes a breach of trust.


The underlying premise on which insider trading is prohibited is that when an insider is in such possession of UPSI, he would be assumed to be influenced by the nature of the UPSI in his possession, which others in the market would not have. Thus, placing the insider on a higher pedestal than the remaining market thereby creating a situation for him to make unlawful gains by utilizing UPSI.

The 1992 Regulations was enacted to protect innocent investors’ interest in the securities market, however, a look at the 1992 Regulations portrays a different picture. [1]  As a corollary, it outlaws the bona fide transactions consummated by the insiders in the regular course of business.

As evident by the language employed in Regulation 3(i) of the 1992 Regulations, India’s insider trading regime is based on “parity of information”[2] approach whereby an insider can be convicted for mere possession of UPSI while dealing in the securities of a company, irrespective of the fact whether there was any intention to make a profit or to avoid any loss as a result of that transaction.

By using vague terms such as ‘dealing in securities’, the 1992 Regulation encompasses bona fide transactions devoid of any gainful objective in its wide ambit. Deviating from its intention, the 1992 Regulations were intended to protect the interest of innocent investors by ensuring information parity and not to disrupt or outlaw bona fide transactions. The regulator has lost sight of the true intention of the legislature, thereby inflicting unintended and unwarranted restrictions on each and every transaction in possession of UPSI. Penal provisions ought to be precise and shouldn’t place an unfair burden on the courts by assuming that any anomalies would be resolved over the course of the legal process.

Such vague laws may trap the innocent by not providing fair warning[3] and results in regulatory overreach. As witnessed in the Udayant Malhotra case, SEBI rendered a bona fide transaction of pledging the securities for the purpose of paying back the loan within the stipulated time as insider trading, for mere possession of UPSI while transacting. However, the said transaction was done on account of Corporate Debt Restructuring devoid of any gainful objective on the part of the insider.

On a conjoint reading of Section 15G and Section 24 of the SEBI Act, 1992 along with Regulation 3 of 1992 Regulations, it can be deciphered that for the offence of insider trading not only a civil penalty of 25 Cr. or three times the amount of profits (whichever is higher) but also criminal sanctions up to 10 years imprisonment could be imposed, rendering it a quasi-criminal offence. Non-affixation of profit motive in such offence would cause deterrence among the stakeholders in possession of UPSI as it may attract criminal sanctions. This hampers the corporate structure and profit maximization motive of corporations. Thus, in order to strike a balance between the protection of innocent investors and ease of doing business, it is important to inculcate profit motive in insider trading. If an insider (in possession of UPSI) transacts in securities devoid of any gain to him over others, the same cannot be implied to be prejudicial to genuine investors’ interest.[4]

In addition to the same, the 1992 Regulation imposes strict liability on the insiders such that they have no resort to defences. The defence of due diligence is only available to a company and not to an insider. By imposing strict liability on the insiders, the 1992 Regulations put a blanket ban on transactions dealing in securities in possession of UPSI. A situation may arise wherein it becomes essential for a person to deal in securities, otherwise as a direct consequence, the company would not be able to survive or it may cause extreme loss to stakeholders (as witnessed in the case of Rakesh Agrawal v. SEBI). Such cases result in regulatory overreach thereby deferring from the intention of the legislature.


The case pertains to conviction under the 1992 Regulations. The Hon’ble Supreme Court held that in assessing the culpability of an insider, the actual gain of profit or suffering of loss is immaterial, but “the motive for making a gain is essential”. Deviating from the objective criterion of gain/profit and inclining towards the motive of an insider to determine his culpability, the Supreme Court paves the way for bona fide transactions entered in possession of UPSI. As a result, an insider (in possession of UPSI) would not be susceptible to the 1992 Regulations, if he enters into a transaction that is devoid of a profit motive or gainful objective.

By annexing the desideratum of ‘profit motive’, the Supreme Court brought the 1992 Regulations in tune with the intention of the legislature as it was nowhere intended to create hindrance in regular bona fide transactions. In the case of M/S Daiichi Sankyo Company v. Jayaram Chigurupati & Ors, the SC has observed that authors of subordinate legislation ought to articulate what they intended to legislate when writing regulations. For that matter, if an insider deals in securities based on the UPSI for no advantage to him over others, it is not against the interest of investors which the 1992 Regulation seeks to protect.[5] In addition to the same, it brings India’s regulatory regime at par with other developed markets. It may be noted that regulators in developed countries such as UK and USA have mandated mens rea as a prerequisite for imposing liability for the acts of insider trading. Furthermore, through a catena of judgments, the SAT has devised its own interpretation pertaining to profit motive as a requisite for insider trading. At times, it results in conflicting judgments. In view of the same, a judgment by the Division Bench of the Supreme Court brings much clarity to this unsettled position of law.

One may argue that the mandate of profit motive may cause prejudice to the innocent investors as insider trading cases are based on circumstantial evidence making the motive hard to prove. An insider may gain profit as a result of transaction and still shows that he has no gainful motive as a part of transaction. Even though such a mischief is unrealistic and impractical, however, even if one would assume so, the insider would not go scot-free. By using Section 12A of the SEBI Act, 1992, which expressly forbids the use of any scheme or device to enable the direct or indirect circumvention of any provision of the Act or rules made thereunder, or even the direct or indirect commission of insider trading. Therefore, the provisions of Section 12A of the SEBI Act would sufficiently enable enforcement if someone were to create a pledge or an encumbrance as a means of getting around the prohibition on insider trading.


Courts use a variety of evidence, including trading patterns, circumstantial evidence, and connections between the connected party and the trader, to prove that the conduct constituted insider trading. Although there were a number of mitigating circumstances in the Abhijit Rajan case that needed to be taken into account, The absence of a profit motive could be viewed as a powerful defence moving forward in addition to the defined defences made available under the PIT Regulations in the case of insider trading claims. By defining the “attempt by the insider to encash the advantage” as a necessary component of the insider trading offence, the SC has obviously departed from the strict liability strategy used by the SEBI up until this point. It did not, however, include a requirement to establish mens rea for the crime of insider trading and appeared to lean toward a preponderance of probability standard that prevents irrational convictions like those in the Abhijit Rajan case. Indian legislation, committee reports, and court decisions on the matter are not very clear; in fact, the Supreme Court and the SAT have gone against its own precedents when addressing the “intent” of insider trading.

[1] SEBI v. Kishore R. Ajmera, (2016) 6 SCC 368.

[2] Umakant Varotill, res_QB13.pdf (

[3] Shreya Singhal v. Union of India, (2013) 12 SCC 73.

[4] Rakesh Agrawal v. SEBI, (2004) 49 SCL 351 (SAT).

[5] Id.


Rishabh Jain

Rishabh is a penultimate year law student pursuing B.B.A. LL.B. (Hons.) from National Law University, Jodhpur. He is an aspiring judiciary aspirant with a keen interest in criminal law & corporate law.

Rahul Tomar

Rahul is pursuing a B.A. LL.B. (Business Law Honours) from National Law University Jodhpur and is currently in his fourth year. He is a dedicated individual who consistently puts in additional effort to attain his objectives.

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