THINK BEFORE YOU SPEAK, MR. CHAIRMAN!

The Securities and Exchange Board of India
(SEBI) recently charged the Chairman of a major listed FMCG company with making
a fraudulent/misleading statement. The reason? He had allegedly said to a
leading newspaper that he was interested in buying out a large competitor
listed company. According to SEBI, this resulted in a substantial rise in the
price of the shares of the competitor. Such rise in price is an expected result
when there is news that an acquisition is likely.

But soon, both the Chairman and his company,
as well as the competitor, clarified that no such buyout plans were afoot and
the price of the shares fell. SEBI alleged that this was a fraudulent/reckless
statement. Public shareholders who may have bought the shares on the basis of
the statement would have suffered a loss on account of this. Therefore, SEBI
levied a monetary penalty on the said Chairman.

While the Securities Appellate Tribunal
(SAT) exonerated the Chairman pointing out several errors of fact and law in
the SEBI order, this case raises critical issues, reminders and lessons on how
such price-sensitive matters should be handled. There are several provisions of
law that prescribe for care in dealing with price-sensitive information. It has
been found that companies/promoters deliberately and fraudulently “create”
price-sensitive information so that the market price rises owing to public
interest and then they can offload their shares (often held in proxy names) and
profit. Even in cases where there is no fraudulent intent, the concern may be
whether there was an element of negligence or irresponsibility.

Securities laws have several provisions for
handling price-sensitive information. These include prohibitions against abuse,
illegal leaking, timely disclosures, etc.

Let us consider this case first in a summary
manner and then consider the provisions of the law and also some related,
relevant issues.

SEBI’S ORDER LEVYING PENALTY AND THE SAT ORDER REVERSING IT

It appears that the Chairman of a leading
listed FMCG company gave an interview to a large daily newspaper. The reporter
asked whether his company was in the process of acquiring a leading competitor.
This was in the context of significant interest in the shares of the competitor
with there being higher volumes of trading and rapid rise in price; there also
appeared to be rumours of a significant acquisition of shares by a specified
but unnamed entity. The Chairman reportedly said that he would be interested to
buy out the competitor, though he added that he did not know who had acquired
that significant lot of shares in that company. SEBI alleged that the
publishing of this news resulted in a sharp increase in price and volumes.
Later, indeed on the afternoon of the very next trading day, the Chairman, his
company as well as the competitor company clarified that no such buyout was
envisaged. SEBI alleged that the price and volumes immediately fell the day
after that. The Chairman was alleged to have violated the provisions relating
to fraudulent/unfair trade practices and a penalty of Rs. 8 lakh was levied on
him (vide order dated 27.12.2017).

On appeal, SAT reversed the penalty [R.
S. Agarwal vs. SEBI (Appeal No. 63 of 2018, order dated 13.03.2019)]. It
was noted that the rise in both price and volumes was much prior to the said
statement. Thus, there was already a market interest. It was pointed out that
analysts had projected higher profits/EPS for the company and that was also a
contributing factor. The Chairman or his company had not acquired/sold any
shares. The SAT even raised doubts about the authenticity of the press report.
Even otherwise, it does not make sense that a potential acquirer would make a
statement that may result in further increase in the price. As an important
point of law, SAT highlighted that the onus of proving such a serious
allegation of fraud in such a background rested on SEBI, which onus it did not
fulfil. In conclusion, SAT reversed the order of penalty.

IMPORTANT PROVISIONS OF SECURITIES LAWS DEALING WITH PRICE-SENSITIVE INFORMATION

Proper handling of price-sensitive
information is a very important tenet of safeguarding the integrity of capital
markets as provided in securities laws. Price-sensitive information is required
to be carefully guarded. It should be disclosed in a timely manner – neither
too early so as to be premature and thus misleading, nor too late that there
are chances of leakage and abuse and that the public may be deprived of
knowledge of such significant price-sensitive information. It should be clear,
complete and precise, neither understating nor exaggerating anything.

Several provisions in the SEBI Insider
Trading Regulations, in the SEBI Regulations relating to Fraudulent and Unfair
Trade Practices (FUTP) and in the SEBI Listing Obligations and Disclosure
Requirements Regulations (“the LODR Regulations”), make elaborate provisions
relating to price-sensitive information.

The insider trading regulations have
price-sensitive information at the core. Insiders have access to
price-sensitive information and they are required to carefully handle it. The
Regulations have been progressively broadened over the years. There are several
deeming provisions. The Regulations even require a formal code of disclosure of
price-sensitive information to be made along prescribed lines that the company
must scrupulously follow. One requirement of this code, for example, requires
that selective disclosures should not be made to a section of public/analysts,
and if at all it is anticipated that this may happen, there should be parallel
disclosure for all. Dealings in shares by “designated persons”, who are close
insiders, are required to be carefully monitored and they can deal in them only
after prior permission and that, too, during a period when the trading window
is open.

The LODR Regulations require that material
developments be disclosed well in time. An elaborate list has been provided of
what constitute such material developments and an even more elaborate process
by which they should be decided upon and disclosed.

The FUTP Regulations particularly have
several provisions that deal with such price-sensitive information and how they
could constitute fraud. There are generic provisions which prohibit “any
manipulative or deceptive device or contrivance” or engaging in “any act,
practice, course of business which operates or would operate as fraud or deceit
upon any person in connection with any dealing in or issue of securities…”.
There are several specific provisions. One such provision, for example,
prohibits “publishing or causing to publish or reporting or causing to report
by a person dealing in securities any information which is not true or which he
does not believe to be true prior to or in the course of dealing in
securities”. Yet another provision prohibits “planting false or misleading news
which may induce sale or purchase of securities”. These practices are
considered fraudulent practices and can result in stiff penalties, prosecution
and other adverse consequences.

Thus, price-sensitive information has to be
handled delicately, and with full realisation of the impact it may potentially
have if there is under- or over-disclosure, too early or too late disclosure,
or misleading, fraudulent or even negligent disclosure. While there are
provisions that deal with fraudulent practices, even unintentional
acts/omissions would be severely dealt with. It is not surprising that
companies have — and are expected to have —carefully-laid-down procedures and
systems for dealing with such information.

ROLE OF CHAIRMAN / TOP MANAGEMENT IN DEALING WITH THE MEDIA OR OTHERWISE SHARING INFORMATION

The Chairman, the Managing Director, the
Company Secretary, etc., are often approached by the media for their views on
developments or even generally. Such persons may even engage on social media
(as in the recent Tesla case, discussed separately below). Often, even
authorities such as exchanges approach a company for a response to certain
rumours or news. Thus, engaging with outsiders is common and even expected of
the company executives. However, even one loose statement can have disastrous
consequences.

It is also important for promoters and
others to be aware that there are elaborate procedures and governance
requirements which have to be complied with. In the present case, the question
is whether the Chairman’s statement could be seen to be that of the company?
This is relevant because even the law requires approval of the Board and
recommendation/clearance of the Audit Committee in important matters. The
public does not view a statement by a Chairman or Managing Director as subject
to such conditions. Internal requirements are presumed to have been complied
with. A declaration by the Chairman, for example, that his company would be
buying out another company would be taken at face value and will have a market
reaction leading to unwanted consequences. Hence, it is important that
statements by such persons should be carefully worded. Ideally, a well-reviewed
press release should be released.

TESLA’S CASE

The importance for top management to be
careful while interacting with the public becomes even more important in these
days of social media where posts and comments are made several times a day,
often on the spur of the moment and without a second thought. Last year, it was
reported that Elon Musk, the Chairman of Tesla, tweeted that he intended to take
the company private and that funding for this purpose was secured. It was
alleged that this statement did not have sound basis. Eventually, in a reported
settlement, Musk had to resign as Chairman, accept a ban from office for at
least three years and he and Tesla had to pay $ 20 million each.

In addition, the company was required to add two independent directors and the
Board was required to keep a close watch on his public communications.

CONCLUSION

Corporate communications are no more meant
to be merely for public relations but have to be increasingly in compliance
with securities laws that require deft treading as in a minefield. Social media
is particularly vulnerable as proved by the Elon Musk episode. We have seen how
SEBI is monitoring and scrutinising social media reports and has even made
adverse orders relying on “friendships” and other connections. Messaging apps
like WhatsApp have also been reported to be used for sharing inside
information. On the other hand, there is often pressure, both internal and
external, to make statements. Exchanges, for example, want prompt responses to
rumours/news in the media to ensure that the official position of the company
is known to the public. The LODR Regulations provide for fairly short time
limits for sharing of material developments. In short, sharing of information,
plans and developments about the company requires more careful handling than
ever before.

The moral of the episode is: Think before you speak, Mr. Chairman,
though speak you must!