BACKGROUNDOne would think that trading in shares based on one’s own research based on publicly available information is the commonest and the most logical thing to do and cannot imaginably be held to be illegal. Of course, many also trade on the advice of others such as professionals or even friends; equally obvious now is that trading on the basis of inside information is self-evidently illegal. And so is front-running illegal. But it would seem absurd to say that if one does meticulous research from publicly available information and then trades on it, it could be held to be illegal – and invite serious consequences! But, curiously, that is precisely one of the legal conclusions that the Securities and Exchange Board of India (SEBI) has drawn in at least two recent orders. To be clear, the facts as found by SEBI are peculiar. But, as a ruling in law, it does sound to be flawed. There are a couple of other similar issues in these orders which are also of concern.
The cases relate to recommendations for trading in scrips by persons (‘Hosts’) on a financial news channel and dealings by persons alleged to be closely associated with such hosts. The primary questions are three: Whether dealing by such persons (the host / persons closely associated with such host) themselves with advance knowledge of such recommendations is illegal under securities laws and hence punishable? Whether creation of momentum in the market by dealing in advance of such recommendations is illegal? The third question, which partly overlaps with the earlier two, is whether such dealings and practices are so unethical and unfair that they amount to violation of securities laws?
THE SEBI ORDERS
There are primarily two orders that SEBI has issued in this matter. The first order, an interim one, is in the case of Hemant Ghai (the host) and his relatives (order dated 13th January, 2021). This interim order and directions issued thereunder were confirmed by an order dated 2nd September, 2021.
The second order (dated 4th October, 2021), also an interim one, is in the case of Pradeep Pandya and certain members / HUFs of the Furiya family.
It may be added that these orders are / may be further contested and in any case be under further investigation / response from parties, being interim orders. Hence, the alleged findings of SEBI as discussed here are as per the SEBI orders. The focus here is to highlight the important and interesting legal issues involved and the possible ramifications of such cases.
SUMMARY OF ISSUES AND ORDER PASSED
Television channels (and even social media / streaming services) commonly have programmes where a host discusses and often makes recommendations to buy / sell a particular security. The recommendation is usually accompanied by a detailed presentation / graphics, etc., giving the justification for such recommendations. This recommendation may be made in an exclusive show by such a host who is associated with such channel or in general news where an ‘external expert’ is interviewed and who gives his recommendation.
As stated, there were two orders. In the first case, Hemant Ghai hosted / co-hosted various shows on news channel CNBC Awaaz. Recommendations about buying or selling a particular scrip were made on one such show. It was observed that as soon as the recommendation was made, the price of the scrip moved sharply in the direction recommended. That is to say, for example, if the recommendation was to buy a particular scrip, the price of that scrip immediately rose sharply in the market, obviously, as SEBI pointed out, because of such recommendation. Even the volumes rose very significantly on that day. The rise in price was far higher than the comparative movement in the stock index and there was no specific news from the company whose shares were recommended justifying such a rise. SEBI compared the price before and after the recommendation and noted that the rise in price (and volumes, too) was highest on the day of such recommendation. Similar findings were made by SEBI in the second order in the case of Pradeep Pandya’s show.
What was, however, found was that certain persons alleged to be associated with such hosts (‘associates’) repeatedly carried out trading to profit from such recommendation. Such persons bought (in the case of a buy recommendation) on the day before (or earlier on the same day) of the recommendation. When the price of the shares rose sharply after the recommendations, the associates sold the shares and made handsome profits.
Furthermore, such trades were carried out under the Buy-Today-Sell-Tomorrow (BTST) mechanism. This ensured that there was no need to even make payment for the purchase and take delivery.
SEBI made detailed inquiries on how the hosts and the respective associates were linked by taking into account family relations, call data records, addresses, etc. Accordingly, it held that the associates were aware in advance what recommendation was going to be made and hence traded in advance of such recommendation. When the price moved in the desired direction after the recommendations were released, the trades were reversed and profits made.
In the order in the matter of Hemant Ghai, calculations were made alleging that aggregate profits of about Rs. 2.95 crores were generated. In the case of Pradeep Pandya, similar calculations were made alleging profits of Rs. 8.39 crores.
The parties concerned were directed to impound these profits and deposit them in an escrow account. The hosts were also debarred from continuing to make any such recommendations till further orders. The parties were also debarred from dealing in securities till further orders. As stated earlier, the interim order in the matter of Hemant Ghai was confirmed after giving the parties a hearing.
INTERESTING POINTS ARISING OUT OF THE ORDERS
SEBI held, under the interim order, the parties (the hosts / associates) prima facie guilty of violation of multiple provisions of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Markets) Regulations, 2003 (‘the Regulations’). It was held that they traded on the basis of advance information that was not public. It was further held that trading in such manner, particularly without intimating the public that they have carried out such trades, was an unethical / unfair practice which in the light of several rulings amounted to violation of the Regulations. It was also held, in the Pradeep Pandya case, that by trading in advance, a momentum was created which contributed to price movement which, too, was in violation of the Regulations.
SEBI held, on the basis of the preponderance of probability, that the parties were guilty. For this purpose it relied on the decisions of the Supreme Court in the following cases: SEBI vs. Rakhi Trading (P) Ltd. [(2018) 143 CLA 15 (SC)]; and SEBI vs. Kishore R. Ajmera [134 SCL 481 (SC)].
SEBI also relied on the decision of the Supreme Court in SEBI vs. Kanaiyalal Baldevbhai Patel [(2017) 141 CLA 254 (SC)] for taking a broader and contextual view of what constitute unfair trade practices under the Regulations. Accordingly, it held that the practices alleged to have been carried out by the parties were in violation of the Regulations.
A few interesting points arise. The primary issue is whether trading on material self-generated information / analysis can be a violation of the Regulations? Can it be said that to have such advance information and trading on it amounts to such violation?
It is respectfully submitted that such ruling is absurd. Persons trading in markets, particularly informed and expert persons, often collate information of a wide nature and arrive at their own conclusion. There is no duty in law to publish such self-generated analysis and conclusions in advance to the public before carrying out trading on their own account. Investing and speculation in the market would, it is submitted, come to a standstill if this was held to be a requirement. Let us compare this aspect with two other types of dealings which are now well settled to be violations – insider dealing and front-running. In case of insider dealing, a person has access to unpublished price-sensitive information about a company and he deals on the basis of such information. It does not need elaborate explanation as to why this is illegal and indeed specific regulations make such dealings illegal. In the case of front-running, persons entrusted with price-sensitive information carry out trades on their own account first and then carry out the trades of the persons who have entrusted them with such information. They, too, thus profit and now such dealings are well settled to be violations of the Regulations.
In the case of self-generated information, there can hardly be a case of having advance information illegitimately obtained on the basis of which trades were carried out and that this is violation of the Regulations. It is submitted that this finding of SEBI has no basis in law or logic and the order needs to be reconsidered on this point.
Let us take the next issue which is a bit more contentious. The parties did not disclose to the public that they had already carried out the trades in advance of the time when they made the recommendations. To begin with, SEBI has not pointed out any specific provision in law which requires them to make such declaration. Interestingly, in most of the transactions, it was not even as if the parties made trades opposite to what they recommended. In other words, it was not as if the parties were, for example, selling while recommending to the public to buy. They did sell but after having bought first and after the price rose.
It was not even the case of SEBI that the price fell sharply after the parties sold the shares. Indeed, SEBI gave data in several cases which did not show any fall and the only point which was made was that the price did not rise as much in the days after the day of the recommendations. So it was not even a case of what is commonly known as ‘pump-and-dump’, which is a well-known fraudulent practice where unscrupulous persons by various means make the price rise to artificially high levels and then offload the shares, leaving the buyers in the lurch as the price falls soon thereafter.
Moreover, SEBI has not even claimed that the recommendation was deliberately manipulative and there was no informed basis for the recommendation. Indeed, as the SEBI orders point out, often the scrips recommended were large, well-known companies.
The allegation that in the Pradeep Pandya order the parties carried out heavy trades with an intention to thereby (even without the recommendation) result in an artificial momentum in one direction and this is thus a violation of the Regulations, of course does make sense. It would indeed be a case of pump-and-dump.
CONCLUSION
It would indeed be disturbing for the public to know that hosts of TV shows buy (or sell, as the case may be) first for themselves the scrips they recommend and sell when the price rises when there is a heavy rush to buy following the recommendation. Cynics would, of course, argue that there is no free lunch and indeed their own buying the very scrips they recommend to buy is actually having faith in their own recommendations. But holding that this is illegal and hence punishable is, it is submitted, a flawed view.
The matters are under further investigation. There could be prolonged proceedings resulting in a final order which could then be appealed against at various levels. It would be interesting to see how SEBI and appellate authorities deal with the issues. A wide range of persons, formally and informally, make recommendations about scrips. The final ruling could make such persons change the manner in which they make recommendations, what disclosures they make and perhaps debar certain types of trades.
