Insider Trading, Corporate Purpose and the Supreme Court

A recent judgment of the Supreme Court on August 11, 2026 - Securities and Exchange Board of India v. Rajeev Vasant Sheth (Tara Jewels Judgment), has substantively re-visited insider trading enforcement.

To understand its impact, one also must go back to September 2022, to a decision of the Apex Court in another matter involving one Abhijit Rajan. Most securities law practitioners will recall the facts well. Abhijit Rajan, chairman of Gammon Infrastructure Projects Limited, involved the sale of a substantial block of shares in August 2013 by him, shortly before GIPL disclosed to the exchanges that two shareholder agreements with Simplex Infrastructure had been terminated. SEBI treated this as textbook insider trading — UPSI in possession, trades executed. SAT overturned SEBI’s order on the grounds that funds from the share sale were used to meet the promoter contribution component for a debt restructuring package and hence, no profit motive was attributable.

SEBI took this on appeal, where the Supreme Court upheld SAT’s order, and in doing so, brought forth a proposition that had, until then, seen sporadic application in the past: an insider’s motive to profit from UPSI is not incidental to an insider trading charge but essential to it. It recognised that the absence of a profit motive was not only evident from the timing of the trades, but from resultant funds being used for a debt restructuring obligation.

The Court observed that the termination of contracts ought to have strengthened GIPL's position and, on ordinary expectation, its share price — so a rational profiteer would have waited for the price to rise, not sold beforehand. Because Rajan sold rather than waited, the Court inferred an absence of a profit motive in relation to the UPSI and treated his stated financial imperatives compulsion, i.e., repaying debt, as a defence. The judgment cast two important jurisprudential frames (i) look into the “why” of a trade; and (ii) the nature of the trade must be aligned with the nature of the information. Inside access to positive news should compel a purchase in advance, whereas negative news should spur a sale.

Interestingly though, neither the 1992 Regulations (which Rajan’s case was based on), nor in the 2015 Regulations (which what applies to the Tara Jewels facts) that succeeded them and are currently the law, contains any textual foothold that mandates authorities to examine motive/necessity or any such scienter in insider trading.

When read simply, the offence of insider trading under Regulation 4 of the 2015 Regulations, has been mapped on the dual test of :-

• Possession; and

• trade,

not on the post facto reconstruction of the state of mind by the defendant, the regulator or the courts. In 2022, the Supreme Court, through Abhijit Rajan, modified that discourse by creating jurisprudence that looked beyond possession simpliciter. It converted a binary regime designed around information parity, into a subjective, case specific assessment that the regulator was bound to undertake before foisting an insider trading charge. 

This judicial exception was even more vital to enforcement, given the way knowledge attribution mechanics work in the insider trading regulations. Knowledge of non-public information is not always directly proven by the regulator and this is critical to understand why wide amplitude of defences are needed.  The 2015 Regulations permit SEBI to assume possession of information. This can be done by virtue of relationships with the company, its key employees or other service providers. With such a legal fiction in place, which spans across various degrees of separation that allow the regulator to presume information access, once a person finds himself within the fold of the deemed knowledge construct, there is no way to exit the regulatory chakravyuh, without the intent and purpose defence. Which is why in cases spanning across decades right from Rakesh Agarwal, Rajiv Gandhi and many others, the Tribunal has gone into the question of personal gain and the underlying intent of the trades in question.

The Tara Jewels Judgement changes that considerably. The facts, on their face, invited some sympathy: Tara Jewels Limited was losing money – increasing losses per quarter, falling sales- and its chairman and promoters sold heavily during this distress to access funds that was then infused in the company for expenses and working capital purposes. SAT, applying the Abhijit Rajan logic, accepted that their actions lacked an intention to profit and was a fit exonerating circumstance, not qualifying as insider trading.

At the Supreme Court, Justices Karol and Kotiswar Singh reversed this decision of the Tribunal and held that per their order last week, that the 2015 Regulations do not allow for a foray into state of mind inferences. To anchor this, they refer to the note to Regulation 4(1), which reads as follows: -

“NOTE: When a person who has traded in securities has been in possession of unpublished price sensitive information, his trades would be presumed to have been motivated by the knowledge and awareness of such information in his possession. The reasons for which he trades

or the purposes to which he applies the proceeds of the transactions are not intended to be relevant for determining whether a person has violated the regulation. He traded when in possession of unpublished

price sensitive information is what would need to be demonstrated at the outset to bring a charge. Once this is established, it would be open to the insider to prove his innocence by demonstrating the circumstances mentioned in the proviso, failing which he would have violated the prohibition.”

Based on this, the Supreme Court holds that the purposes for which the proceeds are employed is an irrelevant consideration. The Court’s treatment of Regulation 4(1)’s “including” as denoting a non-exhaustive but ejusdem generis-adjacent list of defences is a useful, if secondary, clarification — it tells the market that ingenuity in constructing new defences will only succeed if the defence is genuinely next of kin to the six specified circumstances.

The key finding in the Tara Jewels Judgement is that the respondents had indulged in the trades at the relevant point in time, when they were in possession of unpublished material information and this, is sufficient to conclude that they had indulged in insider trading. Resultant profits etc. are no consequence to such conclusion. In the previous judgement of Abhijit Rajan, the Court distinguishes, the applicable law was the 1992 Regulations, which contained no such note. Therefore, the motive-centric approach advocated in that judgement does not survive in the 2015 framework.

The corporate purpose defence has now clearly been rendered null and its impact will be felt both in terms of risk assessment for information sharing in listed companies as well as trading. The purpose to which proceeds are put — debt repayment, NPA avoidance, family necessity — are now not permitted to enter the analysis. What matters is possession and trade, nothing beyond. In fact, to ensure there is no room for doubt, the Tara Jewels Judgement closes with a reference to the 2003 Tribunal decision of Rakesh Agarwal (one of the earliest proponents of the legitimate corporate purpose defence) and states that the Note to Regulation 4 of the 2015 Regulations no longer allows for such a defence to be afforded.

The Abhijit Rajan principles are not entirely done away with, but its gravitational pull has been reduced substantially. It is important to remember that there were two limbs to the Court’s assessment there – the why (what was the underlying intention or motive of the trades) and the “why would” (was the nature of the information aligned with the nature of the trade and was it compelling to a reasonable investor trading in the manner that he eventually did). The latter is still open and available and remains good law.

Shruti Rajan is a Partner at Trilegal.