By Jayant M. Thakur
Chartered Accountant
BACKGROUND
On 29th April,
2020, SEBI passed two orders (‘the orders’) levying stiff penalties on two
persons who allegedly shared price-sensitive information. The information they
shared was the financial results of listed companies before these were
officially published.
About two years back, there
were reports in the media that the financial results of leading companies had
been leaked and shared on WhatsApp before they were formally released. It was
also alleged that heavy trading took place based on such leaked information.
These orders are, thus, the culmination of the investigation that SEBI
conducted in the matter. It is not clear whether these are the only cases or
whether more orders will be passed, considering that leakage was alleged in
respect of several companies. (The two orders dated 29th April, 2020
relate to the circulation of information concerning Ambuja Cements Limited and
Bajaj Auto Limited.)
Insider trading is an issue
of serious concern globally. Leakage of price-sensitive information to select
people results in loss of credibility of the securities markets. However, the
nature of insider trading is such that it is often difficult to prove that it
did happen. This is particularly so because such acts are often committed by
people with a level of financial and other sophistication. Hence, the
regulations relating to insider trading provide for several deeming provisions
whereby certain relations, acts, etc. are presumed to be true. As we will see,
in the present cases the order essentially was passed on the basis of some of
these deeming provisions. However, as we will also see, the application of such
deeming provisions in the context of social media apps like WhatsApp can
actually create difficulties for many persons who may be using them for
constant informal communication.
WHAT
ALLEGEDLY HAPPENED?
There were media reports that
the financial results of certain leading companies were leaked in some WhatsApp
groups well before they were formally approved and published by the companies.
Financial results are by definition deemed to be price-sensitive information,
meaning that their release can be expected to have a material impact on the
price of the shares of such companies in the stock market. In the two companies
considered in the present cases, it was alleged that there was a sharp rise in
the volumes of trade after the leakage.
It was found that two persons
– NA and SV – had shared the results through WhatsApp in respect of the two
companies. NA shared the information with SV and SV passed it on to two other
persons. SEBI carried out extensive raids and collected mobile phones and
documents. But it could not trace back how the information got leaked from the
companies to these persons in the first place and whether it was passed on to
even more people. In both the cases it was found that the information that was
leaked and shared matched with the actual results later released formally by
the companies.
Thus, it was alleged that NA
and SV shared UPSI in contravention with the applicable law. NA and SV were
stated to be working with entities associated with the capital markets.
WHAT
IS THE LAW RELATING TO INSIDER TRADING?
While the SEBI Act, 1992
contains certain broad provisions prohibiting insider trading, the detailed
provisions are contained in the SEBI (Prohibition of Insider Trading)
Regulations, 2015 (‘the Regulations’). These elaborately define several terms
including what constitutes insider trading, who is an insider, what is
unpublished price-sensitive information (‘UPSI’), etc. For the present
purposes, it is seen that financial results are deemed to be UPSI. Further, and
even more importantly in the present context, the term insider includes a
person in possession of UPSI. The offence of insider trading includes sharing
of UPSI with any other person. Thus, if a person is in possession of UPSI and
shares it with another person, he would be deemed guilty of insider trading.
It is not necessary that such
person may be connected with the company to which the UPSI relates. Mere
possession of UPSI, by whatever means, makes him an insider and the law
prohibits him from sharing it with any other person. This thus casts the net
very wide. In principle, even a person who finds a piece of paper containing
financial results on the road would be deemed to be an insider and cannot share
such information with anyone!
WHAT
DID THE PARTIES ARGUE IN THEIR DEFENCE AND HOW DID SEBI DEAL WITH THEM?
The parties placed several
arguments to contend that they could not be held to have violated the
regulations.
They claimed that they were
not aware that these were confirmed financial results and pointed out that
globally there was a common practice to discuss and even share gossip, rumours,
estimates by analysts, etc. relating to companies. There were even columns like
‘Heard on the Street’ which shared such rumours. They received such information
regularly and forwarded it to people. They pointed out that there were many
other bits of information that they shared which were later found to be not
accurate / true. But SEBI had cherry-picked this particular item. As far as
they were concerned, these WhatsApp forwards were rumours / analysts’
estimates, etc. like any other and were thus expected to be given that level of
credibility.
SEBI, however, rejected this
claim for two major reasons. Firstly, it was shown that the information shared
was near accurate and matched with the actual results later released by the
companies. Secondly, the law was clear that being in possession of UPSI and
sharing it made it a violation. It was also pointed out that the claim that
these were analysts’ estimates was not substantiated.
The parties also pointed out
that they were not connected with the companies. Further, no link was
established with anyone in the companies and the information received by them.
But SEBI held that because mere possession of UPSI made a person an insider, no
link was required to be shown between the parties or the source of information
and the companies.
It was also pointed out that
they had not traded on the basis of such information. Here, too, SEBI said that
mere sharing of UPSI itself was an offence. Further, SEBI said that it was also
not possible to determine due to technical reasons who were the other persons
with whom the information may have been shared and whether anyone had traded on
the basis of such information.
There were other contentions,
too, but SEBI rejected all of them and held that the core ingredients of the
offence were established.
ORDER
OF SEBI
SEBI levied in each of the
orders on each of the parties a penalty of Rs. 15 lakhs. Thus, in all, a total
penalty of Rs. 60 lakhs was levied on the two. SEBI pointed out that it was not
possible to determine what were the benefits gained and other implications of
the sharing of information. However, it said that an appropriate penalty was
required to be levied to discourage such actions in the markets.
CRITIQUE
OF THE ORDERS
Insider trading, as mentioned
earlier, is looked at very harshly by laws globally and strong deterrent
punishment is expected on the perpetrators. However, there are certain aspects
of these orders that are of concern and there are also some general lessons.
The core point made in the
orders is that mere possession of UPSI is enough to make a person an insider.
There is certainly a rationale behind such a deeming provision. It is often
very difficult to prove links between a company and its officials with a person
in possession of inside information. A company is expected to take due steps to
prevent leakage of information by laying down proper systems and safeguards.
If, despite this, information is leaked, then the person in possession is
likely to have got it through some links. Further, where a person is in
possession of such information, even if accidentally, it would be expected of
him to act responsibly and not to trade on it or share it with others. In the
present case, SEBI held that the parties were having the UPSI and they should
not have shared it with others.
However, there are certain
points worth considering here, in the opinion of the author. The parties have
claimed that they have been sharing many other items which were not confirmed
or authentic information but merely what was ‘heard on the street’. The persons
who received it would also treat such information with the same level of
scepticism. If, say, 24 items were shared which were mere rumours and then one
such item was shared without any further tag to it, the fair question then
would be whether it should really be treated as UPSI, or even ‘information’? SEBI
has not alleged or recorded a finding that there was any special mention that
these bits of information were unique and authentic.
SEBI has stated that the
parties should have noted later, when the results were formally declared, that
the information was confirmed to be authentic. The question again is whether it
can be expected of a person, if, assuming this was so, he or she is sharing
hundreds of such forwards, to check whether any such item was found later to be
true?
SEBI has insisted that (i) it
was shown that the information was authentic, (ii) it was deemed to be
price-sensitive, (iii) it was not published, (iv) the parties were in
possession of it, and (v) they shared it. Hence, the technical requirements for
the offence were complete and thus it levied the penalty. It is also relevant
to note that the same two parties were found to have shared UPSI in two
different companies and to the same persons.
Be that
as it may, this is an important lesson for people associated with the capital
markets. Social media messages are proliferating. People chat endlessly on such
apps and forward / share information. We have earlier seen cases where
connections on social media were considered as a factor for establishing
connections between people. The lesson then is that, at least in the interim,
people connected with the capital market and even others would need to err on
the side of caution and not share any such items. Just as people are
increasingly advised to be careful about sharing information received on WhatsApp
and the like which could be fake news, such caution may be advised for such
items, too. The difference is that in the former case it is to safeguard
against fake news and in the latter it is to safeguard against authentic news!
At the same time, it is
submitted that a relook is needed at the deeming provisions and their
interpretation and exceptions may need to be made. Sharing of guesses, gossip,
estimates, etc. ought not to be wholly banned as they too have their productive
uses. Considering the proliferating nature of such apps and their productive
uses, it may not be possible or fair to expect that people will not discuss or
share gossip and things that are ‘heard on the street’. Something more should
be required to be established to hold a person as guilty than the mere ticking
off of the technical requirements of an offence.
