It is a well-known fact that detecting insider trading is one of the most difficult tasks for any securities regulator. The anonymity of trades executed on stock exchanges provides a veil for individuals undertaking such actions. Prosecution against insider trading is of paramount importance, as it is directly linked to investors, both retail and institutional, having more faith in the securities market and thus investing more, thereby bypassing the ills identified in the famous lemons market theory. However, over the past few decades, instances of successful prosecution against insider trading have increased in India. SEBI has employed multiple investigative methods to identify and penalise the perpetrators, thus ensuring continued confidence in the Indian stock market.  

Recent instances of SEBI penalising for insider trading include꞉  




Prosecuting insider trading is not an easy task. Apart from anonymity, there are questions of intention and actions. The SEBI (Prevention of Insider Trading) Regulations, 2015 (“2015 Regulations”) and the erstwhile SEBI (Prevention 

of Insider Trading) Regulations, 1992 (“1992 Regulations”) do not specify mens rea (i.e. guilty mind) as a component in determining insider trading in the Indian securities market. Regulations 3 and 4 of 2015 Regulations are clear – neither insiders can communicate, provide or allow access to any unpublished price sensitive information (“UPSI”), nor can people procure such UPSI from insiders; and no insider, when in receipt of UPSI, can trade in securities listed or proposed to be listed, unless so exempted. The list of exceptions is peppered along Regulations 3 to 5, including takeovers, block trades, and trades made pursuant to trading plans by such insiders.  

However, the situation varies across jurisdictions.

In 2001, the SAT noted that, pursuant to the penal consequences for insider trading, it is relevant to consider the intention or motive of the persons indulging in insider trading. Thus, if a person indulged in insider trading without having any intention to gain an undue advantage, then such a person cannot be charged with insider trading. In the last few years, the Hon’ble Supreme Court has also doubled down, stating that the motive for making a gain is essential for a charge of insider trading. However, in such cases, the motive is linked to the corporate purposes, i.e. only if the trades were undertaken for a “legitimate  purpose”.

However, this inclusion of motive in determining guilt under the insider trading regulations has not always been accepted. In a subsequent case in 2005, the SAT agreed with SEBI’s argument that a purposive interpretation of the 1992 Regulations cannot be undertaken, and legitimate corporate purpose cannot be read into the legislation. Similarly, in 2006, the Supreme Court also noted that mens rea is not an essential ingredient since insider trading is a civil legislation, and proving mens rea is not a prerequisite before levying any penalty. 

The absence of mens rea from the regulations by the Indian regulator is deliberate, and not a drafting oversight. This can be evidenced from the Note to Regulation 4 of the 2015 Regulations, which inter alia provides that the ‘reason for undertaking 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 regulations’. 

Some argue that by including the exception of ‘legitimate purpose’ in Regulation 3, SEBI has implicitly agreed that mens rea is a relevant factor in determining guilt under the 2015 Regulations. However, we contradict this. The mere inclusion of the ‘legitimate purpose’ exception does not take away the restrictions imposed on trading based on UPSI under Regulation 4 of the 2015 Regulations. What this exception allows is for UPSI to be communicated to facilitate legislate business transactions. India follows the principle of “limited parity of information theory”, which expounds that if certain conditions are fulfilled, insiders are permitted to selectively disclose UPSI. Thus, the core principle subsists - that even if UPSI is received by a person for a legitimate purpose, they cannot use the UPSI to trade, whether or not a profit is made pursuant to such a trade.  

Thus, the question remains open for our consideration. We aim to review all case laws under the insider trading regime to determine the current position of the law on a year-by-year basis, determining the percentage of persons who have been found guilty even in the absence of mens rea, i.e., the judicial bodies refused to accept the absence of mens rea as a legitimate defence to insider trading. This also includes consideration of the jurisdiction of the SAT and the Hon’ble Supreme Court to determine the law of the land. This will assist SEBI in investigating and prosecuting more persons who may have indulged in insider trading. This will increase market confidence in investors (both retail and institutional), at a time when we are seeing many foreign portfolio investors (FPIs) exiting the Indian stock markets, causing losses to the companies and the indices. 

While mens rea is a significant issue, SEBI's enforcement effectiveness is also challenged by other substantive defences that have gained traction in appellate forums꞉

1. The Counter-Trade Defence꞉ For instance, in SEBI v. Abhijit Rajan, the Supreme Court considered the defence of counter-trades, where the accused argued that they had undertaken both buy and sell transactions, resulting in net losses, thereby negating any profit motive. This defence raises critical questions꞉ Should overall trading patterns negate individual trades made with UPSI? Does the absence of profit undermine the strict liability framework of the 2015 Regulations?

2. The Legal Necessity Defence꞉ In Rajiv B.Gandhi v. SEBI, the defence of legal necessity was raised that trades were undertaken not to profit from UPSI but to meet urgent financial obligations such as debt payments or discharge of existing liabilities. Courts have shown varying degrees of sympathy to such defences, potentially creating enforcement uncertainty. The question arises꞉ Should urgent financial necessity constitute a valid defence under a strict liability regime?

3. Evidentiary Presumptions and Burden of Proof (Balram Garg v. SEBI)꞉ The 2015 Regulations contain presumptions to assist enforcement - particularly the presumption that a person in possession of UPSI is deemed to have traded on the basis of such information unless proven otherwise. However, the effectiveness of these presumptions in actual litigation remains unclear. Are these presumptions being rebutted easily? Is the burden of proof being diluted during appellate proceedings? Are evidentiary standards being applied inconsistently across SAT and Supreme Court? 

These defences, individually or in combination with mens rea arguments, may be creating significant gaps in SEBI's prosecution efforts.  

Understanding their prevalence, success rates, and judicial reasoning is essential for determining whether the problem lies in꞉ 

• Legislative gaps - the regulations themselves need amendment 

• Regulatory gaps - SEBI's enforcement approach or evidence gathering needs strengthening 

• Judicial interpretation gaps - courts are reading defences into strict liability provisions that the legislature did not intend

Pursuant to such determination, the other question to be considered is whether SEBI needs to amend the 2015 Regulations to include mens rea as a component and amend the note to Regulation 4. This would align with SEBI’s intention to bring the 2015 Regulations in line with international standards.  

This will also assist in the following꞉  

• Counter-Trade Cases꞉ Frequency and success rate of counter-trade defences; judicial reasoning for accepting/rejecting such defences; impact on overall deterrence 

• Legal Necessity Cases꞉ Pattern of cases invoking financial necessity/debt discharge defences; standards applied by courts to evaluate legitimacy of such claims 

• Presumption Analysis꞉ Effectiveness of statutory presumptions under Regulation 4; rate at which these presumptions are rebutted; evidentiary standards required to overcome presumptions; consistency across judicial forums

• No Profit/Benefit cases.  

• Combined Defence Strategies꞉ Cases where multiple defences (mens rea + counter-trade + necessity) are raised together and their cumulative impact on prosecution success 

The research will span over a period of 1 year, commencing from February 2026. We will commence with analysing cases under the 1992 Regulations, which will take 2 months, and then proceed with analysing case laws under the 2015  Regulations. As the analysis is proposed to be undertaken on year-on-year basis, we anticipate that analysing case laws from each year under the 2015 Regulations will approximately take 2-3 weeks. We will also continue our monthly discussions to discuss our preliminary findings and the views from each party.  

Expected role of NISM꞉ Assist in the interpretation of case laws, analyse their impact on a yearly basis, and include their recommendations. 

Expected role of SEBI꞉ Discuss their viewpoints on the matter, and why they are against the inclusion of mens rea in insider trading. This may include sharing with us and NISM of the arguments made before the relevant tribunals and/or courts, informal guidance issued to stakeholders, Committee reports, and any other resources as they deem fit.