“More Likely Than Not”: Understanding the Preponderance of Probabilities Standard in Indian Securities Law

Introduction

In India’s securities regulatory landscape, enforcement by the Securities and Exchange Board of India (SEBI) is governed not by criminal prosecution, but by civil and quasi-judicial mechanisms. These proceedings rely not on the criminal standard of “beyond reasonable doubt”, but on a civil standard of proof—the preponderance of probabilities. In essence, SEBI must establish that the alleged misconduct was more likely than not to have occurred.

While seemingly straightforward, this evidentiary threshold carries significant implications for both enforcement agencies and regulated entities. This article explores how Indian courts interpret this standard, how SEBI applies it in practice, and how emerging regulatory frameworks may impact its scope.

The Legal Basis for the Preponderance Standard

The preponderance of probabilities test arises from the Indian Evidence Act, 1872, specifically Section 3, which defines a “proved” fact as one where the court believes it to exist or considers its existence so probable that a prudent person would act upon its assumption. In SEBI's civil proceedings, this standard is applied in contrast to criminal trials, where the burden is “beyond a reasonable doubt”.

Under the SEBI Act, 1992, particularly Sections 11, 11B, and 15-I, SEBI and its Adjudicating Officers are empowered to pass orders based on their satisfaction regarding violations. These provisions were drafted to allow for prompt market regulation, without the procedural rigidity of criminal proceedings. However, this flexibility also demands adherence to principles of natural justice, including fair hearing and reasoned decisions.

Judicial Interpretation: Supreme Court and SAT Jurisprudence

Shriram Mutual Fund Case (2006)

In Chairman, SEBI v. Shriram Mutual Fund, the Supreme Court ruled that mens rea (criminal intent) was not necessary for imposing penalties under SEBI regulations. This case set a strong precedent that regulatory violations could be penalized even when committed without intent, provided they were established on the balance of probabilities.

Kishore R. Ajmera Case (2016)

The Supreme Court further clarified in SEBI v. Kishore Ajmera that direct evidence is not always required in market-manipulation cases. Inferences drawn from trading patterns, volumes, and the proximity of trades can suffice to establish collusion or manipulation. This landmark decision provided SEBI greater latitude in proving complex financial misconduct.

Balram Garg Case (2022)

However, the apex court struck a more cautious tone in Balram Garg v. SEBI. The case involved allegations of insider trading by the promoter of PC Jeweller. Here, the Court held that trading patterns alone are insufficient. SEBI must demonstrate a clear nexus between the information source and the trader. The judgment emphasized the need for “cogent material”, such as call records, email exchanges, or witness statements, to establish the charge.

This decision has raised the bar, particularly in insider trading cases, where reputational damage is significant, and where courts expect a higher quality of circumstantial evidence, even if the standard of proof remains formally civil.

SAT’s Approach: Balancing Probabilities

The Securities Appellate Tribunal (SAT) functions as the primary forum for appeals against SEBI’s orders and often acts as the final fact-finder. SAT applies the mental balance-sheet approach, assessing all facts and inferences before determining whether the regulator's version is more probable than the defence.

In several cases, including Amaresh Pathak v. SEBI, SAT has emphasized that mere trade proximity or volume cannot alone constitute manipulation unless accompanied by evidence of coordination, relationship, or intention. SAT’s rulings are vital in reinforcing that the civil standard does not mean speculative or presumptive findings.

Evidentiary Tools in Securities Investigations

SEBI’s investigations rely on a combination of traditional and tech-enabled tools to establish probabilities:

Trade Analytics: Identifying unusual trading patterns, price/volume spikes, and UID-linked connections.
Communication Records: Call Detail Records (CDRs), emails, WhatsApp chats, and metadata form crucial links in establishing insider connections.
Banking and Fund Trails: Used in front-running and circular trading investigations to establish financial flows and connections.
Expert Testimonies: Including handwriting analysis, voice authentication, and algorithmic forensics.

However, courts remain clear: red flags do not equal proof. Suspicious indicators must be corroborated by credible, probative evidence linking the accused to the alleged misconduct.

The PUSTA Debate: A Tilt Toward Presumption?

In 2023, SEBI released a consultation paper proposing the Prohibition of Unexplained Suspicious Trading Activities (PUSTA) Regulations. Under this draft, certain “suspicious trades” would trigger a presumption of guilt, shifting the burden onto the accused to prove innocence.

The move sparked strong opposition from legal practitioners and market participants, who argued that PUSTA violates principles of natural justice and due process, particularly as it dilutes the foundational principle that the regulator must prove wrongdoing. Critics pointed out that this could lead to a presumption-based enforcement regime, undermining the carefully balanced standard of “more likely than not”.

As of mid-2025, the PUSTA regulations remain under review and have not yet been adopted.

A Comparative Perspective

Internationally, SEBI’s civil standard aligns with global regulatory practices:

Country	Regulatory Authority	Standard of Proof
United States	SEC	Preponderance of evidence (civil cases)
United Kingdom	FCA	Balance of probabilities
Australia	ASIC	Civil standard, enhanced for serious misconduct
India	SEBI	Preponderance of probabilities

However, Indian courts remain more protective in cases with serious reputational harm, especially insider trading, by requiring a higher evidentiary threshold within the civil framework.

Practical Implications for Listed Companies and Professionals

For compliance officers, general counsels, and directors, the evolving jurisprudence around the preponderance standard requires:

Documented Defences: Maintain clear documentation of trading policies, insider lists, and Chinese walls.
Controlled Communication: Avoid use of unofficial communication channels for any sensitive information.
Training & Simulations: Conduct regular mock drills and legal trainings on SEBI compliance and investigation procedures.
Early Legal Counsel: Engage experienced counsel as soon as a SEBI notice is received; even a civil penalty can have lasting reputational and regulatory consequences.

Conclusion

The phrase “more likely than not” may sound benign, but in the context of securities regulation, it represents a fine balance between effective enforcement and fair adjudication. Indian courts, especially the Supreme Court and SAT, have gradually evolved a nuanced interpretation of this standard—supporting SEBI’s need to protect the market, while ensuring that enforcement actions are grounded in evidence, not assumption.

As SEBI continues to adapt to increasingly complex market behaviors, maintaining this balance will be critical. Any legislative shift—such as through PUSTA—must be carefully calibrated so that the civil character of enforcement proceedings is preserved without compromising due process.

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