“More Likely Than Not”: Preponderance Of Probabilities In Indian Securities Law

For SEBI, finding a smoking gun (direct evidence) in the form of a damning message, a recorded call, a confessional slip is nearly impossible. White-collar wrongdoers don't leave fingerprints. What they leave behind is a trail of coincidences: trades timed too perfectly, networks that overlap too often, profits that defy probability. The Regulator, given the aforestated, ought to curate a mosaic from the circumstances and clues that remain scattered like shards of glass.

"But, can the mosaic be proved?" - This question hangs in the air, as the Indian Evidence Act, 1872, directs us to what can be "proved" under Section 3, meaning what is believed to be “probable.” Enter the doctrine of 'preponderance of probabilities', best regarded as a legal compass in civil enforcement. It doesn't demand absolute certainty. Instead, it asks: Based on the available clues, is it “more likely than not” that a violation occurred? The scales of proof rest on a wafer-thin balance: push too hard, and innocent actors get caught in a net of suspicion; hesitate, and real offenders vanish without a trace.

Circumstantial evidence, therefore, becomes the heartbeat of such cases. Patterns replace confessions. Irresistible inference, not direct proof, becomes the standard threshold. Time after time, as the jurisprudence of Securities Law bloomed, the Supreme Court and the Securities Appellate Tribunal (“SAT”), in a series of landmark decisions, have walked this tightrope with precision thereby developing a jurisprudence that assesses the probative value on coherency and cogency while resisting the temptation of assumption.

And ultimately, what is the 'test' that the Indian Judiciary applies when preponderance of probabilities is the standard of proof? Does it rely on 'Mathematical Precision' or 'Prudent Accuracy'? Lastly, is there a checklist for the Regulator to satisfy for 'closing the circle' and resurrecting the mosaic which satisfies the test of Preponderance of Probabilities?

The Pith of Preponderance

In essentia, the preponderance of probabilities means that when two versions of a fact are presented, the one that appears more natural, consistent, and probable based on human conduct, ordinary experience, and the totality of circumstances will be accepted over the one which does not conform to those, for the said test is not about mathematical precision.

In the words of the then Former CJI Y.V. Chandrachud in Narayan Ganesh Dastane v. Sucheta Narayan Dastane^[1], the normal rule which governs civil proceedings is that a fact is said to be established if it is proved by preponderance of probabilities. The first step in this process is to fix the probabilities, the second to weigh them. The impossible is weeded out in the first stage, the improbable in the second. Within the wide range of probabilities, the Court has often a difficult choice to make but it is this choice which ultimately determines where the preponderance of probabilities lies.

To borrow Lord Denning's terminology from Miller v. Minister of Pensions^[2], preponderance of probabilities would distill to “more probable than not”. Naturally, one may ask: how elastic is the fabric of probability before it is stitched into the robe of legal proof? The observation of the Supreme Court in State of UP v. Krishna Gopal^[3] may marry this inquiry with an explanation reiterated hereinunder:

“The concepts of probability and the degrees of it, cannot obviously be expressed in terms of units to be mathematically enumerated as to how many of such units constitute proof beyond reasonable doubt. There is an unmistakable subjective element in the evaluation of the degrees of probability and the quantum of proof. Forensic probability must, in the last analysis, rest on a robust common sense and, ultimately, on the trained intiuitions of the judge.”

But this flexibility is a double-edged sword. Without restraint, inferences can morph into speculation, ensnaring the innocent. In a balancing act, the Court/Tribunal counter this with a bedrock maxim: “Suspicion, however strong, cannot take the place of proof.”

Shards of the 'Mosaic'

But why preponderance? Well, securities crimes are chameleons of deception. Insider trading unfolds in clandestine corners: a tip about a merger whispered over a dimly lit dinner, a profit reaped before the market stirs. Market manipulation is subtler, with trades choreographed to feign demand, invisible on the faceless screens of the Stock Exchange. Naturally, direct proof (a signed confession or a paper trail) is a fantasy in this digital age. This is exactly where 'Preponderance' empowers SEBI to curate a mosaic out of the shards of circumstances: trade timings, familial or professional relationships, abnormal profit spikes; into a coherent narrative of culpability.

The aforestated can be better illuminated, through decided cases and judgments that have delved into the standard of preponderance of probabilities.

Commencing with Dilip S. Pendse v. SEBI^[4] (“Dilip Pendse”) wherein SEBI brought insider trading charges against Dilip S. Pendse, [former MD of Tata Finance Ltd. (“TFL/Company”)], the accusation rested on a seemingly damning claim that Pendse, armed with UPSI, had orchestrated the sale of 40,000 shares through his wife and a closely held entity at the tail-end of March 2001. Yet, as the SAT peeled back the layers of the case, the scaffolding of SEBI's argument began to creak under scrutiny. The Appellants produced contract notes dated 11 September 2000 issued in Form B, befitting off-market, proprietary trades alongside a broker's letter sent to the BSE and acknowledged on 19 September 2000. Though the reporting was late, the evidence was corroborated by ledger entries, demat statements, and broker bills reflecting credits due from trades clinched in September.

SEBI, however, latched onto the March 2001 delivery and payment dates, brushing aside a settled principle of accrual versus receipt. The Tribunal firmly drew from the observations of Denning, L.J. in Bater v. Bater^[5] as well as that of Hodson, L.J. in Hornal v. Neuberger Products Ltd.^[6], emphasizing that in serious civil offenses like insider trading, the standard of preponderance of probabilities must scale with the gravity of the charge. SEBI's rejection of consistent, contemporaneous documentation based on trivial notations and serial numbers was lambasted as a “non-application of mind”. Even SEBI's own SCN had acknowledged the September trades. The Tribunal found no credible thread linking Pendse's access to UPSI with the execution of the trades and ultimately held that the entire edifice of insider trading had collapsed not because the facts weren't serious, but because the proof failed to surpass the degree of probability which is commensurate with the occasion.

In the end, SEBI failed to 'close the circle' building a case on a temporal assumption focusing on when the shares were delivered and paid for without disproving the prior contractual execution. It dismissed documentary evidence with flippant reasoning, ignored corroborative institutional records, and never confronted the Appellants with the revised theory that the trades were purchases, not sales. The burden of proving causation between possession of UPSI and actual misuse was never met. In trying to draw a straight line from access to information to insider trading, SEBI left too many gaps, each one enough to let doubt seep through and break the chain of probability required to uphold a charge so grave.

If Pendse exposed the perils of mistaking proximity for proof, the matter of Manoj Gaur v. SEBI^[7] (“Manoj Gaur”) further illustrated how mere access to information and familial ties cannot, by themselves, sustain the weight of an insider trading charge. When SEBI accused Gaur, Executive Chairman of Jaiprakash Associates Ltd., of insider trading, the charge rested on the premise that Gaur, having access to UPSI, had passed it on to his wife and brother, who then purchased shares during a period when the company's trading window was shut. On paper, the case looked tightly drawn: trial balances had arrived at the corporate office by October 10, 2008; the trading window closed on October 11; trades followed on October 13, 14, and 16. To SEBI, the sequence signaled an irresistible inference.

But the SAT, dismantling the linearity of this timeline, reminded SEBI that timing alone doesn't prove motive or transmission. Insider trading is not presumed, it must be proved. SAT approached the case with the caution it demanded. It reiterated what it had earlier ruled in Dilip Pendse's noting that insider trading allegations, though civil in form, carry a criminal gravity, and must be proved with a heightened degree of probability.

The Tribunal acknowledged Gaur's access to trial balances, but stressed that access alone doesn't establish transmission. It is one thing to suspect that an insider “could have” shared information quite another to prove that they did, especially when the trades were not timed with tell-tale urgency or disproportionate volume.

“17…Looking at the trading pattern, the number of shares purchased and going by their status, it seems highly improbable that trading was done by them on the basis of UPSI. On the other hand, it is more probable that they traded in the normal course of business. If the intention of Mrs. Urvashi Gaur and Mr. Sameer Gaur had been to capitalize on the UPSI allegedly communicated by Mr. Manoj Gaur, the quantum of purchase would not have been so small. Both the Appellants are financially independent and trade independently which is clear from their trading pattern that they have been buying the shares in similar quantities in the immediate past as well as on later dates.”

Yes, Gaur had access to trial balances, but SAT clarified that access does not equate to misuse, and possession does not prove communication. SEBI had no direct or circumstantial evidence to show that Gaur passed on the UPSI. More crucially, the trading behavior of his wife and brother told a different story. Mrs. Urvashi Gaur's purchase of a mere 1,000 shares was negligible against her existing holding of nearly 39,000 and Mr. Sameer Gaur had already held over 1.1 lakh shares.

In the end, the case fell not for lack of seriousness, but for lack of substantiation. The Tribunal held that no credible chain of causation between Gaur's access to UPSI and the trades in question was established. The standard of preponderance of probabilities, rightly scaled to the gravity of insider trading, was never met. SEBI, in building a mosaic out of the shards of inference, forgot to bridge the glaring evidentiary gaps. The presumption of communication was rebutted, the inference of misuse was unproven, and the burden of proof remained where it started; with SEBI.

If there were to be a case that gives fodder to an “irresistible conclusion”, it would be none other than V.K. Kaul v. Adjudicating Officer, SEBI^[8] (“V.K. Kaul”). In V.K. Kaul, the SAT upheld findings of insider trading based entirely on circumstantial evidence, affirming that direct proof is not a prerequisite where the pattern of facts supports a strong inference of wrongdoing. Applying the civil standard of preponderance of probabilities, the Tribunal pieced together a factual mosaic demonstrating Mr. Kaul's (“Appellant”) access to UPSI and his misuse of that information through trades executed in his wife's (Mrs. Bala Kaul) account. The Tribunal emphasized that while the insider trading charge demands a higher degree of probability within the civil standard given the gravity of it; this threshold was amply met through a combination of objective records, inconsistencies in the Appellant's defence, and the contextual sequence of events. Mr. Kaul, an independent director of Ranbaxy and member of their audit and compensation committees, was found to have facilitated the purchase of 35,000 shares of Orchid Chemicals (“Orchid”) in his wife's name on March 27–28, 2008 just days before Solrex (a Ranbaxy-controlled entity) began bulk purchases in the same scrip. These trades followed board resolutions passed by Solrex's constituent firms on March 20, 2008 to invest in Orchid and by Ranbaxy on March 28, 2008 authorizing large fund flows. Crucially, Mr. Kaul was in frequent telephonic contact with senior executives of Ranbaxy involved in these decisions from March 24–26, despite initially denying such contact. The same broker was used for both Mrs. Kaul and Solrex, the funds for trading were entirely provided by Mr. Kaul, and the profits were routed back to him, clearly pointing to a coordinated act.

The Tribunal observed:

“The sequence of events… leads to an irresistible conclusion that the trading done by Mr. V. K. Kaul on behalf of his wife was based on the UPSI in his possession.”
It further clarified that insider trading charges, while civil in nature, merit rigorous scrutiny and reaffirmed the principle that “higher must be the preponderance of probabilities in establishing the same.”

To rebut the Appellant's argument that only direct evidence could sustain an insider trading charge, the Tribunal relied on established jurisprudence, quoting Denning, L.J. in Bater v. Bater^[9]:

“The case may be proved by a preponderance of probability, but there may be degrees of probability within that standard… The degree depends on the subject-matter.”

Finally, citing its own ruling in Dilip Pendse and referencing the decision in United States v. Rajaratnam^[10], the Tribunal reiterated:“Having regard to the gravity of this wrongdoing, higher must be the preponderance of probabilities in establishing the same.”

The narrative surges forward with SEBI v. Kishore R. Ajmera (“Ajmera”), a landmark ruling of the Supreme Court that involved brokers inter alia Kishore Ajmera, accused of market manipulation under the SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003 (“PFUTP Regulations”), in the scrip of Adani Exports Ltd. (now Adani Enterprises) between April 2003 and March 2004. SEBI alleged that Kishore Ajmera and others engaged in synchronized trades, placing buy and sell orders at near-identical times and prices to create artificial volumes, inflating the stock's price by 120% (from ₹50 to ₹110).

Shards of SEBI's mosaic (circumstantial evidence) revealed: trade logs showed 85% of trades were synchronized (e.g., a buy order for 5,000 shares at ₹75 at 10:01:02 a.m. matched a sell order at 10:01:03 a.m.), Ajmera's firm handled 40% of the scrip's volume (2 crore shares), and the brokers had prior business ties through a Mumbai trading syndicate. SEBI's forensic analysis revealed abnormal liquidity: Adani Exports' daily volume surged from 1 lakh to 10 lakh shares during the period, with no corresponding corporate news. SEBI imposed a ₹25 lakh penalty and a two-year ban, arguing that these patterns met the preponderance threshold.

The SAT partially upheld SEBI's order, reducing penalties for some brokers due to procedural issues (e.g., vague show-cause notices). The Supreme Court, however, delivered a transformative verdict, addressing the challenge of proving collusion in screen-based trading, where counterparties are anonymous. Direct proof was absent, as coordination likely occurred off-screen (e.g., in private meetings or calls). In a dramatic pronouncement, the Court endorsed SEBI's circumstantial approach and duly noted:

“26. It is a fundamental principle of law that proof of an allegation levelled against a person may be in the form of direct substantive evidence or, as in many cases, such proof may have to be inferred by a logical process of reasoning from the totality of the attending facts and circumstances surrounding the allegations/charges made and levelled.

While direct evidence is a more certain basis to come to a conclusion, yet, in the absence thereof the Courts cannot be helpless. It is the judicial duty to take note of the immediate and proximate facts and circumstances surrounding the events on which the charges/allegations are founded and to reach what would appear to the Court to be a reasonable conclusion therefrom. The test would always be that what inferential process that a reasonable/prudent man would adopt to arrive at a conclusion.”

Upon attaching the well-needed weight to “The Reasonable Man” test, the Court went a step further to list down the circumstances that would substantially tilt the scales of preponderance of probabilities. The list of circumstances, as duly consolidated (including but not limited to) by the Court is reproduced as:

“31. The conclusion has to be gathered from various circumstances like that volume of the trade effected; the period of persistence in trading in the particular scrip; the particulars of the buy and sell orders, namely, the volume thereof; the proximity of time between the two and such other relevant factors.”

The Court upheld SEBI's findings, detailing the evidence: synchronized trades (e.g., 1,000 trades matched within 1–2 seconds across 60 days), abnormal volumes (10 times the scrip's historical average), and the brokers' syndicate ties, evidenced by shared office spaces and joint accounts. This formed an “irresistible inference” of a “meeting of minds.” Therefore, the Court dismissed the brokers' defense claiming trades reflected market trends as statistically implausible, noting Adani Exports' price surge outpaced sector indices by 80%.

“31. …The fact that the broker himself has initiated the sale of a particular quantity of the scrip on any particular day and at the end of the day approximately equal number of the same scrip has come back to him; that trading has gone on without settlement of accounts i.e., without any payment and the volume of trading in the illiquid scrips, all, should raise a serious doubt in a reasonable man as to whether the trades are genuine.”

Logically, the Court reasoned that demanding a “smoking gun” would paralyze enforcement; manipulators don't document their schemes. The ruling in Ajmera became SEBI's lodestar, particularly for insider trading, where terms like “logical inference” justified findings based on patterns, proximity, and profits. By endorsing inferences from a “totality of circumstances,” Ajmera empowered SEBI to act on convincing and cohesive circumstantial mosaics.

In a similar matter with a different outcome, the Supreme Court in SEBI v. Rakhi Trading (“Rakhi Trading”) unraveled a sophisticated web of market manipulation, wielding the doctrine of preponderance of probabilities to expose Rakhi's audacious scheme. The case crackled with intrigue as the Court spotlighted damning circumstantial evidence that laid bare the traders' deceit. First, the sheer volume and velocity of synchronised trades executed with surgical precision revealed a premeditated plot to fabricate profits for one party while saddling the other with deliberate losses. The Court seamlessly noted, “Nobody intentionally trades for loss. An intentional trading for loss per se, is not a genuine dealing in securities.”

Next, the rapid-fire reversals, choreographed to restore ownership to the original party, betrayed an absence of genuine intent to transfer beneficial ownership, prompting the Court to observe, “If one party consistently makes loss and that too in preplanned and rapid reverse trades, it is not genuine; it is an unfair trade practice.” Further, the traders' cunning placement of orders at unattractive prices when trades failed to synchronise screamed of market manipulation, as the Court incisively remarked, “The fact that when the trade was not synchronizing, the traders placed it at unattractive prices is also a strong indication that the traders intended to play with the market.”

These orchestrated maneuvers stifled price discovery, excluded legitimate investors, and painted a deceptive picture of trading activity, violating Regulations 3(a), 4(1), and 4(2)(a) of the PFUTP Regulations. By piecing the shards of the Mosaic: trade frequency, volume, and the deliberate infliction of losses, the Court unmasked Rakhi's assault on market integrity.

Further, the matter of Chintalapati Srinivasa Raju v. SEBI (“Chintalapati”) set against the backdrop of the Satyam Computer Services Ltd. (“SCSL/Company”) financial scandal (“Satyam Scam”), the case involved Chintalapati Srinivasa Raju (“Raju”), a promoter and former Executive Director of SCSL, who had formally exited the Company's management back in 2000. Despite his lack of an executive role for nearly a decade, Raju remained on SEBI's radar due to his familial link to the main accused, B. Ramalinga Raju (“Ramalinga”), and his large-scale share sales executed in 2008, just months before the Satyam scam was unearthed. SEBI alleged that Raju, by virtue of being a “connected person” must have been in possession of the information relating to the falsified financials and poor performance metrics of SCSL (“UPSI”).

The trades in question occurred over a span of several months in 2008, not timed with any market-sensitive announcements or board-level decisions. Raju maintained that the sales were for legitimate business reasons and were part of routine portfolio management. Notably, SEBI's case rested not on any documentary or electronic trail linking Raju to the alleged UPSI but rather on the presumption that his status as a promoter and relative of the chairman created an inference of access. There was no evidence that he had attended board meetings, received financial projections, or communicated with insiders around the time of the trades. SEBI had also not produced any record showing that he was briefed on the Company's fraudulent practices before they became public (generally available) in January 2009. Thus, the core issue was whether status and association alone could legally imply possession of UPSI and if so, whether that implication met the required evidentiary threshold to sustain a charge as serious as insider trading.

In a compelling reaffirmation of due process, the Supreme Court refused to let presumption override proof and thereby acknowledged that Raju fell within the definition of a “connected person” but categorically held that being “connected” does not automatically equate to being an “insider” in possession of UPSI. The Court emphasized that SEBI must establish, with cogent material, that the person either possessed or had access to UPSI at the time of trading. Importantly, the Court reiterated the principle articulated earlier in Dilip Pendse, stating that in cases involving serious charges like insider trading, a higher degree of probability is required, even though the standard remains civil in nature. The Court drew from common law jurisprudence to highlight that within the civil standard, there exist degrees of probability, and the graver the allegation, the more convincing the evidence must be.

Crucially, the Court found no plausible evidence linking Raju to UPSI: no boardroom discussions, no internal emails, no privileged access logs, no timing of trades that correlated with sensitive events. SEBI's mosaic curated solely of his status as a promoter and familial ties with the then-chairman did not satisfy the preponderance of probabilities. The Court noted that circumstantial evidence, to be reliable, must form 'a chain so complete' that it leaves no room for any other rational hypothesis while duly observing:.

“31. We are of the view that from the mere fact that the Appellant promoted two joint venture companies, one of which ultimately merged with SCSL, and the fact that he was a co-brother of B. Ramalinga Raju, without more, cannot be stated to be foundational facts from which an inference of reasonably being expected to be in the knowledge of confidential information can be formed.”

Moving on, in Balram Garg v. SEBI (“Balram Garg”) during mid-2018, PC Jeweller Ltd. (“Company”) was preparing for a major buy-back of its own shares, a move that could have significantly impacted the Company's stock price. Balram Garg (“Garg”), the Company's Managing Director, was at the center of this corporate strategy. However, when the Company's principal lender, State Bank of India, declined to issue a no-objection certificate on 7 July 2018, the buy-back proposal began to unravel. The information remained undisclosed to the public until 13 July 2018, when the withdrawal was formally announced. SEBI identified this interregnum as UPSI Period and alleged that Garg had communicated this UPSI to close relatives: his nephew, niece-in-law, and their private company who then traded in the Company's shares during the UPSI Period. A cloud of suspicion hovered over the trades, not just in terms of timing but in their pattern (circumstantial evidence), and SEBI concluded that familial proximity was enough to presume access and transmission of UPSI. But Garg contested this with claims of estranged relationships, a family settlement from years earlier, and a complete lack of communication during the UPSI period. Thus, at the heart of the case was a question of inference: Whether an insider trading liability could be anchored in kinship alone, when no direct proof of information flow existed?

In decisively overturning SEBI's findings, the Supreme Court drew a sharp boundary between association and culpability, reminding regulators that presumptive guilt cannot substitute evidentiary rigor, even in civil proceedings. The Court acknowledged that while insider trading can, by nature, be difficult to prove through direct evidence, circumstantial evidence must form a complete chain, one that unerringly points to the communication of UPSI and excludes any reasonable hypothesis of innocence.

In this case, the Court held that familial ties alone, particularly in the absence of recent contact or demonstrable coordination, could not justify an inference of information flow. The Appellants had shown long-standing estrangement, independent residences, and separate financial conduct, which SEBI had largely disregarded. Critically, the Court reaffirmed the principle that the more serious the allegation, the higher must be the preponderance of probabilities required to sustain it. Without telephone records, emails, meetings, or other corroborative markers of communication, SEBI's case rested on inference piled upon assumption. That, the Court held, was insufficient.

Upholding the presumption of innocence within civil enforcement, it concluded that the regulatory dragnet must not extend so far as to criminalize mere relationships, absent clear and convincing evidence of wrongful use of insider information.

“58. We are of the firm opinion that there is no correlation between the UPSI and the sale of shares undertaken by the appellants…

…Moreover, in the absence of any material available on record to show frequent communication between the parties, there could not have been a presumption of communication of UPSI by the Appellant Balram Garg. The trading pattern of the appellants in CA No. 7590 of 2021 cannot be the circumstantial evidence to prove the communication of UPSI by the Appellant Balram Garg to the other appellants in CA No. 7590 of 2021.”

In the case of Amaresh Pathak v. SEBI^[11] (“Amaresh Pathak”), Justice Tarun Agarwala, (the then Presiding Officer) speaking for the majority, was clear in his emphasis: suspicion, no matter how strong, could not substitute a demonstrable nexus. The Tribunal observed that:

“13. There is no direct evidence of collusion between the appellant and the buyer. The only indirect evidence is that the appellants have sold minuscule quantities leading to an increase in the price of the scrip. One can infer manipulation but such trading cannot happen unilaterally. There must be evidence to show collusion between the buyer and the seller. The principle of preponderance of probability cannot be exercised in the absence of any connection between the seller and the buyer.”

The abovementioned conclusion was reinforced when the majority found:

“9. In the instant case, we find that there is no connection between the buyer and the seller. It is settled law that the charge of raising the price artificially has to be established without which the charge of collusion between the buyer and the seller cannot be proved.”

Relying on the precedent in Nishith M. Shah HUF v. SEBI^[12], the majority reasoned that in the absence of any link whether transactional, communicative, or relational between the appellant and either the buyer or the promoters/directors of the company, no adverse inference could be drawn. The trades, though seemingly skewed and placed at higher prices, lacked the evidentiary backbone of coordination. Even the trading sequence failed to support a synchronous arrangement: buy orders were placed at 9:15 a.m., but the Appellant's sell orders were scattered throughout the day. As such, the Tribunal held that: One has to establish a connection between a buyer and with the seller in order to infer a manipulation in the price of the scrip… Therefore, the principle of preponderance of probability could not be exercised in the absence of any connection between the buyer and the seller.

Per contra, Mr. M.T. Joshi, the Technical Member, offered a compelling dissent. He refused to reduce the case to a binary of connection or no connection. In his view:

“18. ..in my view the present appeal cannot be decided one way or the other merely on the sole axis of presence or absence of connection/nexus between the buyer and seller or promoters/ the Company, or non-prosecution of the buyer, though no doubt, these facts would be of considerable importance in weighing the probabilities.”

Drawing from the SAT's reasoning in Mrs. Bharati Goyal v. SEBI^[13], he opined that when trades are irrational i.e., executed in negligible quantities at significantly higher prices, in a scrip lacking any credible fundamentals, the veil of manipulation need not always be pierced through direct association alone. Especially when the scrip in question, Dhanleela, had lain dormant for over six years, with zero activity for ten months post-revocation, only to resurface with a dramatic price surge from ₹17.50 to ₹427.85 within a few months, such conduct warranted deeper scrutiny.

The trades during both Patch 1 and Patch 2 revealed a striking pattern: a handful of notices, including the Appellant, engaged in minute, high-priced sell orders that created an illusion of vibrant market activity. These shares had been received off-market some directly, some through a trail from Appellant Narayan Das Rathi at prices substantially below the prevailing market rate. With no substantive explanation furnished, the dissent found the circumstantial fabric compelling:

“32. It is true that a connection between buyer and seller or between promoter/company and the buyer or seller would be strong indicator to conclude that there were manipulative trades. In the absence of the same however, this Tribunal is not handicapped in arriving at the above conclusion as preponderance of probabilities definitely lies in favour of the charge as detailed above.”

In toto, the split verdict in Amaresh Pathak distilled a critical lesson: the test of preponderance of probabilities is not monolithic as it flexes with context but never breaks from logic. The majority reaffirmed that without a demonstrable link or causal chain, mere price spikes and trade patterns cannot cross the threshold of inference.

The Test: More Likely Than Not

The judiciary's test for the preponderance of probabilities is the “reasonable man” standard, a prism through which the Supreme Court as well as the SAT assess whether a prudent person, confronted with the totality of circumstances, would deem a securities violation more probable than not. This is not a rigid algorithm but a disciplined exercise in logical reasoning, requiring inferences to flow from a coherent chain of objective facts i.e. trading logs, communication records, or market data. The test demands a narrative that aligns with human conduct and ordinary experience, rejecting suspicion as a substitute for proof. Every inference must be moored to tangible evidence, ensuring that the mosaic does not crumble into conjecture.

Given the gravity of securities violations, such as insider trading or market manipulation, the judiciary calibrates the degree of probability upward within the civil standard. Circumstantial elements trade proximity to undisclosed price-sensitive information, unusual trading volumes, or documented relationships are scrutinized against the allegation's severity. The threshold is crossed when these elements coalesce into a mosaic that marginalizes alternative, innocent explanations. Yet, courts remain guardians of due process, ensuring that the mosaic does not ensnare the blameless through vague correlations or untested assumptions, preserving the integrity of the “reasonable man” test.

The Indian Judiciary unequivocally prioritizes prudent accuracy over mathematical precision. Securities violations, rooted in human intent and market complexity, defy reduction to numerical certainties or statistical formulas. Courts acknowledge a “subjective element” in forensic probability, relying on robust common sense and judicial intuition to evaluate the cogency of circumstantial evidence. This approach does not sacrifice rigor; it demands a holistic appraisal of facts, assessing their coherence within the context of the alleged violation.

For example, trade timings are not judged by split-second alignment with price-sensitive events but by whether their proximity suggests intent beyond mere chance. Abnormal profits are weighed not against a fixed benchmark but in light of market trends or the trader's past behavior. Relationships are evaluated not for their existence but for evidence of coordination, such as call records or shared financial interests. This prudent accuracy affords SEBI flexibility to pursue sophisticated violations while ensuring that inferences remain grounded, preventing the mosaic from becoming a speculative patchwork.

When SEBI's Mosaic Sustains the Test

SEBI's mosaic endures judicial scrutiny when it weaves circumstantial elements into a compelling, logical narrative that unerringly points to a violation. When Trades are executed in close temporal alignment with undisclosed price-sensitive information, such as corporate decisions or financial disclosures, raise an irresistible inference of misuse. Courts find this persuasive when the timing defies coincidence, particularly if the trader had access through their position or connections. However, the said irresistible inference ought to be anchored in foundational facts of the matter and not rested on a mere hypothesis. When marked deviations from market norms or the trader's history such as surges in trade volume, outsized profits, or synchronized buy-sell orders often signal potential wrongdoing. Patterns like artificial liquidity or price spikes in illiquid stocks are compelling when supported by forensic market analysis.

When documented ties, whether professional or personal, paired with evidence of communication (e.g., call logs, shared brokers, or fund flows, common addresses, social media connections, CDR logs, mobile tower location, etc.), strengthen the mosaic. Courts find this particularly incriminating when the relationship facilitates access to sensitive information or orchestrated market activity. When contradictions in the trader's account, such as denying contact with insiders despite communication records or claiming routine trading despite anomalous patterns, erode credibility and bolster the inference of guilt. When a clear sequence linking access to information, trading activity, and market impact such as trades preceding a price-sensitive announcement followed by profit realization, creates a near-irrefutable inference. This is most effective when aligned with objective records, like board resolutions or trade logs.

When these elements converge, SEBI's mosaic forms a chain so complete that alternative explanations in the form of coincidence, independent decisions, etc., become improbable. Courts uphold such findings, recognizing that insisting on direct evidence, like a recorded confession, would cripple enforcement in an era of digital subterfuge.

When SEBI's Mosaic Crumbles

SEBI's mosaic falters when its circumstantial elements lack cohesion, rely on presumption, or fail to exclude reasonable alternative hypotheses. When temporal proximity between trades and price-sensitive events is insufficient without evidence tying the trader to the information. Trades during a sensitive period are not incriminating if the trader lacked access or the timing aligns with routine financial decisions. When familial or professional ties, without proof of communication or coordination, they cannot sustain an inference of wrongdoing. Courts reject assumptions that relationships imply information sharing, especially when evidence of independence, estrangement, or lack of contact exists. When anomalous trades lack a clear link to a violation such as small-volume transactions consistent with past behavior or market trends, the charges are deemed inadequate. Patterns like synchronized orders must demonstrate intent or impact, not mere correlation. When SEBI dismisses contemporaneous records (contract notes, ledger entries, or broker statements) that support an innocent explanation, Courts find the aforestated reasoning flawed. Failing to address traders' evidence or confront them with revised allegations further undermines the mosaic.

While not codified, the judiciary has outlined key circumstantial elements that SEBI must substantiate to meet the preponderance threshold. To “close the circle” SEBI's mosaic must encompass:

1. Volume and Persistence: Evidence of significant trade volumes or sustained activity in a stock, disproportionate to market norms or the trader's history, indicating intent or impact.
2. Order Particulars: Detailed records of buy and sell orders (size, price, timing) revealing patterns like synchronization or artificial price manipulation.
3. Temporal Proximity: A clear nexus between trades and price-sensitive events, corroborated by records like board minutes or announcement timelines.
4. Relational Nexus: Documented connections through communication, shared financial interests, or coordinated actions that enable access to or misuse of information.
5. Market Context: Analysis of market data showing abnormal liquidity, price surges, or volatility attributable to the violation, ruling out external factors like sector trends.
6. Rebuttal of Alternatives: A narrative that addresses and discredits innocent explanations, such as routine trading or independent decisions, through inconsistencies or objective evidence.

The test of “more likely than not” is a finely calibrated instrument, neither a blunt tool nor an unreachable ideal. It empowers SEBI to pursue violations through a mosaic of circumstantial evidence, yet demands that each shard be grounded in fact, not fancy. When SEBI substantiates timing, patterns, relationships, and context with rigor, its mosaic endures, affirming regulatory authority. When it leans on presumption or leaves evidentiary gaps, the mosaic collapses, protecting the innocent from overreach. Through prudent accuracy, not mathematical precision, the judiciary ensures that the scales of justice tip only when probability is compelling.

In a final confluence, the observation of the Supreme Court in Hanumant vs. State of Madhya Pradesh^[14] serves as a timeless admonition: “In such cases there is always the danger that conjecture or suspicion may take the place of legal proof and therefore it is right to recall the warning addressed by Baron Alderson, to the jury in Reg v. Hodge ((1838) 2 Lew. 227), where he said:

'The mind was apt to take a pleasure in adapting circumstances to one another, and even in straining them a little, if need be, to force them to form parts of one connected whole; and the more ingenious the mind of the individual, the more likely was it, considering such matters to overreach and mislead itself, to supply some little link that is wanting, to take for granted some fact consistent with its previous theories and necessary to render them complete.'”

Authors: Adv. Ravi Prakash (Associate Partner), Adv. Mohit Sirohi (Associate), and Adv. Vishal Jain (Associate) at Corporate Professionals Advisers & Advocates. Views are personal.

1. A.I.R. 1975 Supreme Court 1534 ↑

2. (1947) 2, ALL ER 372 ↑

3. AIR 1988 SC 2154 ↑

4. Appeal No. 39 of 2008 decided on 25^th September, 2008. ↑

5. [1950] 2 All E.R. 458, at p. 459 ↑

6. (1956) 3 All E.R.970 ↑

7. Appeal No. 64 of 2012 decided on 3^rd October, 2012. ↑

8. Appeal No. 55 of 2012 decided on 8^th October, 2012. ↑

9. Supra. ↑

10. No. 11-4416 (2d Cir. 2013) ↑

11. Appeal No. 332 of 2020 decided on 16^th February, 2021. ↑

12. Appeal No. 97 of 2019 decided on 16^th January, 2020. ↑

13. Appeal No. 171 of 2020 decided on 6^th September, 2020. [Pending before the Hon'ble Supreme Court] ↑

14. (1952) 2 SCC 71 ↑