Not All Moratoriums Operate The Same Way: A Cautionary Tale

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SEBI has recently on May 14, 2024 reprimanded the erstwhile Managing Director and Designated Person (Noticee) of Kwality Ltd. inter alia for executing contra-trades in the scrip of Kwality Limited (Kwality/the Company) while the trading window for designated persons was closed.
India International Law
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The Securities and Exchange Board of India (SEBI) has recently on May 14, 2024 (SEBI Order)1 reprimanded the erstwhile Managing Director and Designated Person (Noticee) of Kwality Ltd. inter alia for executing contra-trades in the scrip of Kwality Limited (Kwality/the Company) while the trading window for designated persons was closed.

We analyze the facts of the case and SEBI's findings in this piece.


  • Based on complaints received by SEBI alleging price manipulation in the scrip of Kwality, SEBI conducted an investigation and discovered that the Noticee traded during the closure of the trading window and that some of these trades were contra-trades.
  • Designated persons are prohibited from trading in the scrip of the listed company while the trading window is closed as per Clause 4 of Schedule B read with Regulation 9(1) of the SEBI (Prohibition of Insider Trading) Regulations, 2015 (PIT Regulations).
  • A contra-trade is a transaction by which a designated person (as per the Code of Conduct of the listed entity) takes the opposite position in the market from a position he has taken within the preceding 6 months (or more, as per the listed entity's Code of Conduct) of the transaction. Contra-trades violate Clause 10 of Schedule B read with Regulation 9(1) of the PIT Regulations.

Allegations in the show cause notice

  • SEBI in its show cause notice (SCN) inter alia alleged that, during the Investigation Period (March 01, 2018 to July 31, 2018), the Noticee had purchased 44,60,225 shares and sold 2,03,30,184 shares of Kwality, which purported to be contra-trades.
  • Additionally, it was noted that the Noticee earned a profit of INR 2,12,16,943.52/- from these alleged contra-trades, which was not disgorged and remitted to the Investor Protection and Education Fund (IPEF).
  • Furthermore, it was alleged that the Noticee had conducted trades on certain dates when the trading window was closed, selling 90,68,710 shares amounting to a gross trade value of Rs.22,14,47,831.55 during that period.

Key Findings of SEBI

  • Pursuant to the SCN and the written submissions/replies of the Noticee, SEBI passed an order inter alia dismissing the defences raised by the Noticee mainly on the maintainability of the proceedings on the basis of an interim-moratorium under Section 96 of the Insolvency and Bankruptcy Code, 2016 (the Code). The SEBI Order noted that the interim moratorium is applicable only on the legal action or proceedings in relation to "debt" and not the SEBI relied on the judgment of Hon'ble Supreme Court in the matter of Dilip B. Jiwrajka vs. Union of India & Ors., dated November 9, 20232, wherein the Court noted that:
    • the interim moratorium under Section 96 of the Code is intended to be protective in nature, in contrast to the moratorium provided under Section 14, which restrains the transfer, encumbrance, alienation, or disposal by the corporate debtor of any of its assets or any legal right or beneficial interest therein.
    • the interim moratorium primarily applies to a debt rather than a debtor.

Relying on the aforesaid finding, SEBI rejected the contention of the Noticee that during the interim moratorium under Section 96 of the Code, no legal action or proceedings can be initiated or continued against the Noticee by any creditor, including any statutory body.

  • The SEBI Order rejected the Noticee's argument that all documents of Kwality and those of the Noticee were now in the power and possession of the Interim Resolution Professional (IRP) appointed by the Hon'ble National Company Law Tribunal (NCLT). This is because the Noticee, neither in his response nor during the hearing, identified the list of pertinent documents confiscated by the NCLT or specified any particular document or information that he was unable to access due to the aforementioned NCLT proceedings, thereby impeding his ability to mount a defence.
  • Given the Noticee's failure to address the allegation of contra-trade in his reply to the SCN, SEBI formulated its findings on this issue relying on the submissions provided by the Noticee during the investigation. The Noticee during the investigation had submitted that only those transactions executed from April 12, 2018 to June 6, 2018 of the Investigation Period can be considered contra-trades and the transactions for remaining Investigation Period cannot, as the same were invoked/sold by lenders. SEBI considered this submission as an admission by the Noticee that he executed contra trades during April 12, 2018, to June 06, 2018.
  • Further, SEBI rejected the submission of the Noticee that transactions for remaining period were not contra trade by invocation of shares by lenders.

However, SEBI found that the sell transactions were normal market transactions as the said trades were executed on exchange platform of BSE and NSE.

Directions issued by SEBI

SEBI, besides prohibiting the Noticee from accessing the securities market, directly or indirectly, for a duration of 6 months from the date of this order, also directed the Noticee to disgorge the profits earned to the IPEF, totalling ₹2,12,16,943.52, coupled with simple interest calculated at a rate of 10% per annum from July 24, 2018 until the date of actual payment. Additionally, SEBI also imposed a monetary penalty of penalty of ₹5,00,000/- (Rupees Five Lakhs Only) under Section 15HB of the SEBI Act.


It is well settled that admissions, if true and clear, are by far the best proof of the facts admitted and admissions in pleadings made by a party, stand on a higher footing than evidentiary admissions. In this matter, the Noticee made no effort to refute the allegation of contra trade and trading during the closure of the trading window. Instead, he admitted that the transactions executed during a specific period, constituted contra trades. Also, SEBI has relied on the findings of the Hon'ble Supreme Court in Dilip B. Jiwrajka vs. Union of India & Ors. for the first time to emphasise the difference in the impact of a moratorium under Section 14 of the Code vis-a-vis an interim moratorium under Section 96 of the Code.


1. Order dated 14 May 2024 of the Quasi-Judicial Authority, SEBI bearing reference no. QJA/GR/IVD/ID10/30334/2024-25 in the matter of suspected insider trading in the scrip of Kwality Limited.

2. 2023 INSC 1018

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