The July 29, 2025, order passed by an Adjudicating Officer (“AO”) of SEBI pertains to the trading activity of Rupesh Satish Dalal HUF in the shares of HDFC Ltd. and HDFC Bank Ltd. just before the announcement of their merger. SEBI concluded that Mr. Dalal’s son (referred to as Mr. Y) had received Unpublished Price Sensitive Information (“UPSI”) regarding the merger from Mr. X, a member of the valuation team of Deloitte Touche Tohmatsu India LLP (“Deloitte”) that was appointed as a valuer of the merger. On receipt of the UPSI, Mr. Dalal strategically executed significant trades distinct from his usual trading pattern in both stocks through his HUF account.

Based primarily on the timing of the meeting, the call, and the trading pattern, the AO inferred that Mr. Y procured UPSI from Mr. X and communicated the same to his father, Mr. Dalal. On this basis, the HUF was held liable for violating Regulations 3(2) and 4(1) of the SEBI (Prohibition of Insider Trading) Regulations, 2015 (“PIT Regulations”), and Sections 12A(d) and 12A(e) of the SEBI Act, 1992.

However, no direct evidence, viz., emails, messages, or testimony, was produced to establish that UPSI had in fact been communicated. The AO instead relied on the “preponderance of probability” standard and concluded that the circumstantial evidence was sufficient to infer communication of UPSI.

As per the order, the proceedings initiated by SEBI against Mr. X and Mr. Y were settled pursuant to a Settlement Order.

In stark contrast, SEBI’s Whole Time Member (“WTM”) order dated August 25, 2023, in the matter of United Spirits Ltd. (USL) (involving the Jashnani family), adopted a far more rigorous evidentiary standard. There, SEBI had alleged that Mr. Nishat Gupte, Global Business Development Manager (M&A) of Diageo PLC, one of the acquirers of USL’s shares, had communicated UPSI regarding the acquisition to Harish, Poonam, and Varun Jashnani, who traded profitably in stock.

The order highlighted a significant shift in the legal standard for proving UPSI communication. While SEBI’s earlier orders relied on SEBI vs. Kishore Ajmera ruling, which allowed inferences based on surrounding circumstances, the WTM clarified that the Supreme Court’s later decision in Balram Garg v. SEBI had altered this position. The Balram Garg judgment tightened the evidentiary threshold, holding that inferences of UPSI communication must be drawn only from proven foundational facts, not merely from trading patterns or relationships. The order confirmed that this stricter Balram Garg test now governs SEBI proceedings as reproduced below:

“However, in the matter of Balram Garg (supra), the Hon’ble Supreme Court has differentiated its decision in Kishore R. Ajmera (supra), by stating that a reasonable expectation can only be based on reasonable inference drawn from foundational facts and merely because a person was related to the connected person cannot by itself be a foundational fact to draw an inference of communication of UPSI. In view of the above, as on date, the test laid down by Hon’ble Supreme Court in the matter of Balram Garg (supra) is in force."

The WTM held that SEBI had failed to demonstrate how Mr. Gupte communicated UPSI to the Jashnanis. The absence of messages, phone records indicating suspicious activity, or direct testimony led the WTM to dismiss the charges, noting that UPSI could not be presumed solely on the basis of familial relationships or coordinated trading.

Similarly, in another precedent set out by the Securities Appellate Tribunal in the case of Manoj Gaur vs. SEBI, it held that:

“Mr. Manoj Gaur became privy to it when trial balances were considered on October 11, 2008, and therefore, he was in possession of UPSI on that date. However, the Board has not brought any evidence on record, direct or circumstantial, to show that he has passed on this information. We, therefore, set aside the impugned order and allow all the three appeals with no order as to costs.”

The WTM’s approach in United Spirits was relying upon and consistent with the binding precedent set by the Hon’ble Supreme Court in Balram Garg v. SEBI. There, the Hon’ble Supreme Court emphasized that insider trading violations require “cogent and convincing evidence” to prove that UPSI was communicated.

The Balram Garg ruling affirmed the necessity of clear evidentiary trails, such as emails, call records, or testimony, to sustain insider trading charges. Speculative inferences based solely on timing or proximity were deemed insufficient.

The recent AO order diverges from the above legal standards in several key respects:

Lack of Direct Evidence: No messages, recordings, or witness statements establish that Mr. Y communicated UPSI to Mr. Dalal. The AO acknowledged this gap but proceeded to “reasonably conclude” based on circumstantial factors.

Overreliance on Inference: The AO inferred that since Mr. Y met Mr. X (an insider) and then spoke to Mr. Dalal, he must have passed UPSI. But as the WTM in United Spirits rightly cautioned, correlation is not causing.

Contradiction with Precedent: By penalizing a party solely on inferred communication, the AO's order contradicts both SEBI’s own WTM ruling in United Spirits and the Supreme Court’s judgment in Balram Garg.

Such inconsistency within SEBI’s own adjudicatory framework raises serious concerns about regulatory certainty and fairness to noticees, especially when civil penalties carry reputational and financial consequences.

The Rupesh Dalal HUF order marks a departure from SEBI’s own recent jurisprudence and Supreme Court mandated standards. While SEBI is right to pursue insider trading with vigour, such efforts must be anchored in evidence, not inference.

To maintain the integrity of the securities law regime, SEBI must harmonize its evidentiary standards across its quasi-judicial wings. Until SEBI’s adjudicatory team adopt a consistent approach to evidentiary standards, such contradictions will continue to erode confidence in regulatory processes.

About the authors: KC Jacob is a Partner, Tanya Gupta is a Senior Associate and Aarya Padhye is an Advocate with Economic Laws Practice.

Disclaimer: The opinions expressed in this article are those of the author(s). The opinions presented do not necessarily reflect the views of Bar & Bench.

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