Inequitable Decision Making: SEBI's ruling in the HDFC Ltd and HDFC Bank Ltd case challenges its past judicial decisions
In a recent order, an Adjudicating Officer (AO) of the Securities and Exchange Board of India (SEBI) penalised Rupesh Dalal HUF for insider trading based on circumstantial evidence, contradicting SEBI's own Whole Time Member (WTM) ruling in the United Spirits case and the Supreme Court's judgment in Balram Garg.
The AO's order relies on a "preponderance of probability" standard, accepting timing of meetings, calls, and trading patterns as evidence to infer Unpublished Price Sensitive Information (UPSI) communication, despite the absence of direct evidence like emails, messages, or testimony. This approach marks a lower evidentiary threshold focused on what is more likely than not.
In stark contrast, SEBI's WTM order in the United Spirits Ltd (USL) matter adopted a stricter evidentiary approach, requiring clearer proof of UPSI communication—either direct records or compelling corroborative evidence showing actual possession and intentional misuse of UPSI. This higher standard often emphasizes more concrete or documentary proof rather than primarily circumstantial inference.
The key difference between the two cases lies in the reliance on direct versus circumstantial evidence and the threshold of proof established. The WTM order in USL highlighted a shift in the legal standard for proving UPSI communication, requiring inferences to be drawn only from proven foundational facts, not merely from trading patterns or relationships.
The inconsistency within SEBI's adjudicatory framework raises concerns about regulatory certainty and fairness to noticees. To maintain the integrity of the securities law regime, SEBI must harmonize its evidentiary standards across its quasi-judicial wings.
The Rupesh Dalal HUF order marks a departure from SEBI's own recent jurisprudence and Supreme Court mandated standards. The WTM dismissed charges against the Jashnanis in the USL matter due to the absence of messages, phone records, or direct testimony proving UPSI communication. In Balram Garg v. SEBI, the Hon'ble Supreme Court emphasised that insider trading violations require "cogent and convincing evidence" to prove that UPSI was communicated.
The proceedings against Mr. X and Mr. Dalal's son were settled pursuant to a Settlement Order. SEBI concluded that Rupesh Satish Dalal's son received UPSI about the merger from a member of Deloitte Touche Tohmatsu India LLP. The Adjudicating Officer inferred that the UPSI was communicated from Mr. X to Mr. Dalal's son and then to Mr. Dalal.
The authors of this viewpoint, KC Jacob, Tanya Gupta, and Aarya Padhye, are Partners, Senior Associate, and Advocate with Economic Laws Practice, respectively. They argue that the AO's order can have reputational and financial consequences for the parties involved and that the order's reliance on circumstantial factors to "reasonably conclude" that UPSI was communicated is questionable.
In summary, the Rupesh Dalal HUF order diverges from the legal standards set by SEBI and the Supreme Court in several ways, particularly in its reliance on circumstantial evidence and lower evidentiary threshold compared to the stricter standards adopted by SEBI's WTM orders. Until SEBI's adjudicatory team adopt a consistent approach to evidentiary standards, such contradictions will continue to erode confidence in regulatory processes.
References
- SEBI (Prohibition of Insider Trading) Regulations, 2015
- SEBI Act, 1992
- SEBI v. Jashanmal Industries Ltd., WTM Order dated 22nd March 2022
- Balram Garg v. SEBI, (2019) 1 SCC 656
- SEBI v. United Spirits Ltd., WTM Order dated 1st July 2022 (not fully detailed in search results)
The authors argue that the Rupesh Dalal HUF order, which relies on a lower evidentiary threshold focused on what is more likely than not, contradicts the stricter evidentiary approach taken by SEBI's Whole Time Member (WTM) in the United Spirits Ltd (USL) matter, which emphasizes more concrete or documentary proof rather than primarily circumstantial inference.
This inconsistency within SEBI's adjudicatory framework, according to KC Jacob, Tanya Gupta, and Aarya Padhye, raises concerns about regulatory certainty and fairness to noticees and could potentially have reputational and financial consequences for the parties involved.
