SEBI's decision to close insider trading proceedings against Raj Kumar Agarwal may be remembered less for the facts of the case and more for what it says about the evidentiary threshold required to prove insider trading. In a detailed order, the regulator effectively identified several circumstances that, while capable of raising suspicion, are not by themselves enough to establish possession or communication of unpublished price sensitive information, or UPSI.
The case arose from trading in shares of RHI Magnesita India ahead of its announcement of a Rs. 1,708 crore acquisition of Dalmia OCL. SEBI had alleged that Agarwal, who purchased Rs. 8.62 crore worth of shares before the announcement and allegedly made gains of around Rs. 1.59 crore, was in possession of UPSI.
The adjudicating officer ultimately disagreed, finding that the circumstances relied upon by investigators did not form a complete chain proving access to unpublished information.
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A key takeaway from the order is that mere communication with company officials is not insider trading. Investigators relied on multiple calls, messages and VOIP interactions between Agarwal and RHI Managing Director Parmod Sagar. However, SEBI held that communication alone is insufficient unless there is evidence that the interactions either involved UPSI or were of a nature reasonably expected to provide access to UPSI.
In this case, the communications had a legitimate business explanation tied to a separate transaction between RHI and Hi-Tech Chemicals.
The order also makes clear that business relationships do not automatically create insider status. Agarwal's connection with RHI arose because RHI had acquired Hi-Tech Chemicals' refractory business for Rs. 621 crore.
SEBI found that the relationship was transaction-specific and did not by itself demonstrate access to confidential information relating to an entirely separate acquisition. A commercial counterparty is not automatically an insider merely because it interacts with company management.
Another notable finding concerns common advisors across transactions. Investigators pointed out that both the Hi-Tech acquisition and the Dalmia OCL acquisition involved firms such as Deloitte and Khaitan & Co. Yet the order held that the existence of common advisory firms was insufficient evidence of information sharing.
SEBI noted there was no evidence that the same individuals were involved in both mandates, nor any evidence that confidentiality obligations were breached. The presence of the same law firms or consultants on multiple deals, by itself, does not establish leakage of UPSI.
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Similarly, the regulator rejected the proposition that overlapping deal timelines imply sharing of confidential information. The fact that both acquisitions progressed during roughly the same period was found to be insufficient. According to the order, concurrent transactions involving the same company do not create a reasonable inference that participants in one transaction were informed about the other.
The order is also significant for its treatment of business interactions during a UPSI period. SEBI acknowledged that personnel from RHI and Hi-Tech remained in contact while the Dalmia OCL deal was underway. But it found those communications equally consistent with post-acquisition integration work, regulatory approvals and operational transition requirements arising from the Hi-Tech transaction.
Continued interaction between two businesses involved in a legitimate commercial transaction cannot automatically be treated as evidence of insider trading.
Another important principle relates to inferences drawn from calls and meetings. SEBI's case relied heavily on a Nov. 8, 2022 VOIP call between Agarwal and Sagar. Yet the order noted there was no recording, transcript, email or witness evidence revealing the contents of the conversation.
Without evidence of what was actually discussed, the regulator said the allegation required a chain of assumptions rather than proof. Suspicious timing alone was not enough.
The order further suggests that trading patterns alone cannot prove communication of UPSI. Investigators highlighted that Agarwal sold Tata Steel shares, deployed the proceeds into RHI stock and later exited after the acquisition announcement.
The adjudicating officer, however, relied on Supreme Court and SAT precedents to reiterate that trading behaviour may be a relevant circumstance but cannot, by itself, establish possession or communication of unpublished information.
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SEBI was equally reluctant to treat investment decisions that appear commercially unusual as evidence of insider trading. Investigators argued Agarwal bought RHI shares despite weaker quarterly results. The order countered that investors make decisions based on multiple variables, including valuation, industry outlook and long-term prospects. A trade that seems irrational in hindsight is not necessarily evidence of access to UPSI.
Perhaps the broadest legal lesson from the order is that insider trading cases built on circumstantial evidence must establish a complete chain leading to a compelling inference of possession of UPSI. Suspicious communications, overlapping transactions, common advisors, business relationships, travel arrangements and unusual trading patterns may individually raise questions.
But unless those circumstances are linked by evidence showing actual access to or possession of unpublished information, they remain suspicions rather than proof.
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