As discussed several times earlier in this column, SEBI has been investigating stock market frauds, insider trading, etc., by tracking the use of social media / messaging applications. About a year back, we also discussed certain SEBI orders where it was held that some persons shared unpublished price-sensitive information through the popular chat application WhatsApp. Stiff penalties were levied on such persons under the Insider Trading Regulations. Those who were penalised appealed to the Securities Appellate Tribunal (‘SAT’) which has now reversed those orders. SAT has held that, on the facts, there was no violation of the SEBI Regulations on insider trading.
This decision of SAT has several interesting aspects. Has SAT made any significant interpretation of the law that has far-reaching implications as suggested by some reports? When can a person, who shares unpublished price-sensitive information (‘UPSI’), be held to have violated the Regulations? Is it necessary that a link be established between the person having the UPSI and the source within a company who had leaked such information? There are also lessons generally for persons using social media applications. Let us consider this decision (Shruti Vora vs. SEBI, dated 22nd March, 2021) in greater detail.
BROAD SCHEME OF SEBI (PROHIBITION OF INSIDER TRADING) REGULATIONS, 2015 AS RELEVANT HERE
The Regulations seek to prohibit and punish insider trading. They prohibit what is commonly understood as insider trading – that is, trading by an insider who is in possession of, or has access to, UPSI. However, they also prohibit several other things like communication of UPSI except where permitted under the Regulations. The Regulations also have further requirements of disclosure of holdings and dealings by certain insiders, prohibition of trading during periods when the trading window is required to be closed, etc.
In the present case, the relevant provision is related to the sharing of UPSI. Insiders are prohibited from sharing UPSI. The reason for this prohibition is obvious. Sharing such information may result in the recipient dealing and profiting out of it. However, such recipient may also further pass on such information to others. Such sharing is also covered by the offence of ‘insider trading’.
However, as this case shows, three interesting questions arise: Is it required to show that a person who shared UPSI had received it from a particular person within the company? Is it required that he should know that such information was UPSI? Would the offence of insider trading also cover sharing of UPSI by a person who is not aware that it is UPSI?
The first question has been answered by a deeming provision in the Regulations itself. It is provided that a person would be deemed to be an insider even if he is in mere possession of UPSI. Thus, it is not required that his source of such information be traced within the company (a little more on this later). He is deemed to be an insider. If he then deals in the securities, or shares such UPSI, he would be deemed to have committed the offence of insider trading.
The second question is interesting and indeed became, as we will see, the core issue in this case. Should a person know that the information in his possession is UPSI? The Regulations have not made an express provision on this. SAT has held that a person should be aware that such information is UPSI and it is only in such a case that the person would be deemed to be an insider. However, the equally critical question is how does one establish whether a person knows that the information he possesses is UPSI? This can be tricky as this would be something in the person’s mind. This aspect will be discussed further while analysing the decision.
The third question would be answered by implication from the answer to the second question although, again, the Regulations have no express provision about it. If a person does not know that the information he possesses is UPSI, then sharing of such information would not make him guilty of the offence of insider trading.
With this brief background, let us consider the case and then discuss what SAT has held.
FACTS OF THE CASE AND SEBI’S ORDER
It appears that SEBI was alerted especially by media reports that financial results of reputed companies were being leaked and shared in advance on social media through chat applications like WhatsApp. It conducted investigations and amongst its findings was some data relating to two appellants in the present case. It was found that they worked in the industry and had forwarded financial results through WhatsApp to many persons, including clients. The financial results forwarded were eerily accurate and very closely matched the actual results published soon after. However, SEBI could not trace who had sent this information to such persons. Even the companies concerned could not find any leak that could have happened internally from within the companies themselves.
SEBI, however, held that the law was clear. Possession of UPSI made the person an insider. The law also prohibited insiders from sharing UPSI with others. Since these persons did share the UPSI, they committed the offence of insider trading. It levied stiff penalties on such persons. Since similar orders were passed separately for sharing of results for each company, the penalties cumulatively rose to an even larger amount.
The parties had argued that not only these messages but several others were also forwarded in the same manner. And these messages were forwarded to groups of numerous persons. The messages were sent almost as soon as they were received. The other messages had information which was not UPSI and in any case often did not even match with the actual financial results in those other cases. However, SEBI stuck to its position and held that they had indulged in insider trading and levied penalties.
APPEAL BEFORE SAT
In the appeal before SAT, the appellants made several arguments. It was pointed out that they were not aware that what they had was UPSI. They had received numerous such messages and those were also forwarded along with the ones under question. They had no means to verify the authenticity of any of the information. The messages / information so received could be compared to ‘heard in the street’ columns common in media and while such pieces are read by many, it was accepted that their authenticity was not assured. Indeed, some could be just rumours or informed guesses. The appellants also pointed out that the specific messages that were of concern were not differently coded while being forwarded. So the recipients could not distinguish those messages from the others.
DECISION OF SAT
SAT accepted the arguments of the appellants and set aside the orders of SEBI levying penalties. It also made some important points about the interpretation of the law.
At the outset, SAT confirmed that possession of UPSI did make a person an insider under law and sharing of such UPSI by such person would be an offence under the Regulations. SEBI did show that the person was in possession of the UPSI and hence it may appear that one part was fulfilled. The information was shared, too.
However, and this was the crucial point, did such person know the information received and shared was UPSI? And, if not, would the information still be UPSI qua such person? The law is silent on this point. However, this did matter because it is from the perspective of the person accused of insider trading. If such person did not know it was UPSI, then that person cannot be held to be in possession of UPSI and hence is not an insider. And if this was so, his sharing of the information was not insider trading.
It was apparent from the record itself that the persons had received numerous bits of information and had forwarded the same to many other persons. Neither the persons sending them nor the persons receiving them could have had any way of knowing that the information was authentic and hence UPSI. SAT observed, ‘The above definitions of the “unpublished price sensitive information” and “insider” would show that a generally available information would not be an unpublished price sensitive information… The information can be branded as an unpublished price sensitive information only when the person getting the information had a knowledge that it was unpublished price sensitive information’. Thus, the information was not UPSI. One could take the example of the numerous WhatsApp forwards many of us receive. We have become used to examine them with so much scepticism that we generally have stopped even reading most of them.
While it is true that possession of UPSI was sufficient to make a person an insider, there were sufficient circumstances to doubt that it was UPSI and thus the onus shifted back to SEBI. It was now up to SEBI to prove, even with a reasonably low benchmark of proof or of the preponderance of probability, that the persons knew it was UPSI. SEBI could not and it did not so prove.
SAT also noted that SEBI has not connected the information to any source within the companies and even the companies did not have any such findings of leakage.
The order was thus set aside.
CONCLUSION
The important legal point thus is that UPSI is from the perspective of the person who is in possession of the same. If I have a pile of stones with me and I do not know that a couple of the ‘stones’ are really diamonds, I may give the same to someone else for a low value. And even he may do the same with them.
That said, this does not mean one should be lax with the law. The law provides for serious consequences for insider traders and the benchmark of proof remains relatively low. In this particular case, the facts were peculiar and hence did not allow any wider generalisation. One should remain ever vigilant while forwarding information. The law has sufficient deeming provisions. Chartered Accountants are typically and even otherwise deemed to be insiders as auditors, advisers, CFOs, etc. They are also expected to know the importance of figures and it is even possible that information shared by them may be given more weightage by the recipient, and thereby also by SEBI while deciding guilt. Thus, this case should induce even more caution.
