How a mistake by SEBI costed investors 20,000 crores!

We all have made a mistake or two at some points in our lives. Some small, some big, but making a mistake is a part of being human. But, have you ever made a mistake that has costed you a fortune? A fortune as big as 20,000 crores almost, or maybe even more? That’s exactly what the Securities and Exchange Board of India (SEBI) did.

In May 2018, SEBI allegedly accused four officials of PC Jewelers for insider trading. Earlier this year, it announced a fine on Rs. 1 Crores on them. Owing to these allegations and fines, the stock price of PC Jewelers fell heavily and investors lost incredibly. However, when PC Jewelers petitioned against the decision in Supreme Court, the decision was overturned.

In this article, we’re going to explore the case in detail. But, before we move ahead, it is first important to understand what insider trading actually is.

What is Insider Trading?

To put it in very simple terms, insider trading basically is an illegal practice wherein people who work for a company use its inside information to their own advantage in the stock market. Now, they could use the information and benefit themselves or could leak it to some third party so that it does not look like insider trading.

Insider Trading
Credit: NowThis World YouTube

Now that we’ve understood what insider trading is, we’ll move ahead to the case details.

PC Jeweller v/s SEBI explained

PC Jeweller is a huge name in the country’s jewelry line. The company, founded by Mr. Padam Chand Gupta, has about 90 jewelry outlets all across the country. In April 2018, the company’s stock was trading between 280-350. However, this high was not long lived. In May 2018, the Securities and Exchange Board of India made an accusation against the late Shri Padam Chand Gupta and Mr. Balram Garg  of supplying confidential company information to Shivani Gupta, Sachin Gupta, Amit Garg, and Quick Developers Private Limited (QDPL) on the plan for the repurchase of equity shares and its subsequent withdrawal.

PC Jeweller Logo
Credits: PCJ Website

Now, it must be noted that Shivani is the daughter-in-law of Padam Chand Gupta, Sachin is the husband of Shivani and son of Padam Chand; Amit is the nephew of Padam Chand and Balram Garg is a promoter of PC Jeweller. The basis for the aforementioned allegations was that all of the entities and individuals involved traded in the shares of PC Jeweller while fully holding Unpublished Price Sensitive Information (UPSI) that would affect the market price of the company’s stock.

PC Jeweller of course, denied these allegations and demanded fair investigation. SEBI did order an investigation in the case but chaos led into the minds of the investors. These allegations had a severe negative impact on the share price of PC Jeweller. A stock that had once hit a high of Rs. 372 in March, 2018 receded to a mere Rs. 81 by the end of the year.

On the other hand, SEBI continued with its investigation, which continued for about 3 years. Meanwhile, an interim order was passed by the SEBI in December 2019 for impounding of over Rs 6.17 crore jointly and severally from Shivani Gupta, Sachin Gupta and Amit Garg and impounding of over Rs 2.13 crore jointly and severally, from QDPL and Amit Garg. Amit Garg, who is the niece of Balram Garg, was also found indulged in the insider trading.

What did the Investigation yield?

SEBI ran a rigid investigation for more than 3 years and found all the parties involved guilty of the accusations against them. On 11th May 2021, SEBI imposed a total fine of Rs. 1 Crore on individuals Shivani Gupta, Sachin Gupta, Amit Garg and Balram Garg as well as the entity Quick Developers Private Limited.

The regulator also ordered Shivani Gupta, Sachin Gupta, and Amit Garg to forfeit more than Rs 6.17 crore, while Amit Garg and QDPL were had to forfeit more than Rs 2.13 crore, according to a 53-page judgement. The persons in question were expected to disgorge the excess of Rs 6.17 crore either collectively or separately. Regarding the sum of more than Rs 2.13 crore, the other two are headed in a similar manner. The Investor Protection and Education Fund would get the impounded funds (IPEF).

The Securities and Exchange Board of India further stated that Shivani Gupta, Sachin Gupta, Amit Garg, and QDPL were informed of UPSI (Unpublished Price Sensitive Information) on the plan for the buyback of equity shares and its subsequent withdrawal by the late Padam Chand and Balram Garg. Amit Garg controlled 50% of QDPL’s shares and served as its director between August 2015 and April 2018, according to SEBI. Balram Garg shared the knowledge, which led the regulator to infer that the firms had breached insider trading rules. As a result, they each face a punishment of Rs 20 lakh. They were also banned for a year from trading on the open market.

The day this announcement was made, PC Jeweller’s stock was trading at somewhere around Rs. 23. The allegations had already caused all the damage they could have done. A stock, which was going to touch 400 in Feb 2018, was receded to a mere 23 in a span of just 3 years. An almost 95 percent loss. Throughout the entire year, the stock could not go more than Rs. 30. More than 23,000 crore worth of investors’ money was wiped off the market, gone, lost taking PC Jeweller’s image with it.

However, the respondents at PC Jewellers were not happy by SEBI’s decision. They believed that SEBI’s accusations were mere hoax and that it had no evidence to actually prove insider trading. Thus, they decided to move to the Supreme Court in order to have a chance at restoring a part of the damage to their economy as well as their image.

PC Jeweller Move to Supreme Court

PC Jeweller tried to resolve the conflict every way possible and when nothing seemed to work their way, they decided to move to the Supreme Court earlier this year. Before that, the case was heard at the Securities Appellate Tribunal (SAT) where the SEBI’s order to fine the parties involved was upheld. However, Supreme Court, upon a detail oriented investigation, had something else to say.

Before the Supreme Court, Senior Counsel Mr. Arvind Datar represented SEBI as the Respondent, Senior Counsel Mr. V. Giri represented Appellants Mrs. Shivani Gupta, Sachin Gupta, Amit Garg, and Quick Developers Pvt. Ltd., and Senior Counsel Mr. Dhruv Mehta represented Appellant Balram Gupta.

Justice Vineet Saran and Justice Aniruddha Bose, sitting as a two-judge panel, ruled that under Regulation 2(1)(g) of the SEBI (Prevention of Insider Trading Regulations), 2015, the person making the allegation has the burden of proving that a specific person had unpublished price sensitive information (UPSI) at the time of trading (PIT Regulations).

“…the SAT order suffers from lack of application of thought and is only a repeat of the data presented by the Whole Time Member” (of SEBI). The bench ordered SEBI to return the deposits that the parties placed towards the fine, saying that the tribunal “was… obligated to independently analyse the facts and information on record, which it plainly failed to do.”

Shivani, Sachin, Amit, and QDPL were informed of the plan for the buyback of equity shares and its subsequent removal from UPSI, according to SEBI’s argument. SEBI had also claimed that the late Padam Chand, the chairman of PC Jeweller, and Balram, the company’s promoter, did the same. While in possession of UPSI, the persons and companies traded PC Jeweller shares, breaking the rules against insider trading.

Senior Counsel Mr. Mehta argued before the Supreme Court that the WTM’s conclusion that Mrs. Shivani Gupta, Sachin Gupta, and Amit Garg were neither “related individuals” or “immediate relatives” of the appellant Balram Garg had become conclusive. Further, it was contended that SEBI had the burden of establishing any communication of UPSI by submitting strong evidence to the record in order to demonstrate the breach of Regulation 3 of the PIT Regulations, but that SEBI had failed to provide any such evidence.

Mr. V. Giri argued that the entire insider trading case against these appellants is based solely on the close relationship between the parties. However, there is enough evidence in the record to demonstrate that there was a complete breakdown of ties between the parties, both personally and professionally, and it occurred well before the UPSI was established. The Apex Court stated that it is not appropriate to accept the Respondent’s argument that the Appellant Balram Garg breached Section 12A(c) of the SEBI Act and Regulation 3(1) of the PIT Regulations by conveying UPSI to the other Appellants while acting as a “insider” and “connected person.”

The Apex Court stated that it is not appropriate to accept the Respondent’s argument that the Appellant Balram Garg breached Section 12A(c) of the SEBI Act and Regulation 3(1) of the PIT Regulations by conveying UPSI to the other Appellants while acting as a “insider” and “connected person.” The Bench further concluded that the SAT erred by maintaining the WTM of SEBI’s order because it failed to independently evaluate the facts and evidence in the record while acting in its capacity as the First Appellate Court. The Court further concluded that SAT had made a mistake when it failed to consider the fact that there was no direct evidence pointing to the source of the insider knowledge provided to the appellants.

It came to the simple “preponderance of probability” conclusion that the late PC Gupta and Balram Garg were the ones who gave the appellants both UPSI. The Bench addressed two key issues: (i)Whether the WTM and SAT correctly dismissed the appellants in C.A. No. 7590 of 2021, namely Mrs. Shivani Gupta, Sachin Gupta, and Amit Garg, claim of alienation. ii) Next, may the aforementioned appellants legitimately be declared “insiders” under the PIT Regulations’ Regulation 2(1)(g)(ii) based solely and completely on circumstantial evidence?

What lies ahead for PC Jeweller?

PC Jeweller had a tremendous loss owing to the case. Not just the company itself, the investors incurred a loss of more than 20,000 crores. As of now, the share price of PC Jeweller is somewhere around Rs. 54 per unit. Thus, we can say that it has made a decent amount of recovery. However, it is nowhere near to where they actually were when this all began. It is certainly hoped that PC continues to make progress in the market and is able to get back its lost money as well as pride.