1. Factual Matrix 

Unpublished Price Sensitive Information (“UPSI”) refers to any information which is not accessible to the general public and is known and possessed by only a few who are known as ‘insiders’ of the company. On April 29, 2020 the Adjudicating Officer (“AO”) of the Securities and Exchange Board of India (“SEBI”) delivered an order in the matter of circulation of such UPSI through the online messaging platform of WhatsApp. The case was concerned with the communication of UPSI related to Ambuja Cements Pvt. Ltd. by Naveen Agarwal and Stuti Arora (“Noticees”) through WhatsApp messages, before the official communication by Ambuja to the Bombay Stock Exchange and National Stock Exchange on February 20, 2017.

Pursuant to an investigation and seizure of WhatsApp chats from around 190 devices, records, etc., the noticees were found to be possessing and circulating certain information about the financial results of the 3rd quarter of Financial Year 2016-17 which closely resembled the actual financial results declared on February 20, 2020. The estimated figures circulated through messages were compared with the actual results by the AO and can be summarised in the following table: 

The order took into consideration the respective deviations i.e. 0.09% and 0.07% and categorized the information as UPSI by reasoning it to be a close match of the actual information.

  1. The Judgement and the Rationale 

This case required the application of the SEBI Act, 1992 as well as the SEBI (Prohibition of Insider Trading) Regulations, 2015 (“PIT Regulations”). The first matter of contention was whether the messages circulated on WhatsApp were in the nature of UPSI or were they covered by the concept of Heard on Street (“HoS”). The concept of HoS refers to speculations, gossips and rumours regarding the estimate of a company’s quarterly estimates based on market research and analysis. The noticees availed the defence that the messages circulated were based on street expectation of a company’s performance and any research on the basis of such information which is publicly available would also be classified as generally available information, accessible to the public on a non-discriminatory basis. The noticees took the support of the Justice Sodhi Committee Report, which highlighted the fact that though a research work is based entirely upon generally available information but made available on a discriminatory basis, the same would not change the character of the research work from being a generally available information to being UPSI.

  1. A Definitional Anomaly: Nature and Scope of the term ‘Insider’

A few definitions need considerable attention. The definition of an ‘insider’ under the PIT Regulations includes- i) a connected person, or ii) any person who is in possession of or having access to UPSI. The note to this definition, which explains the term further, states that a connected person is one who has a connection with the company that is expected to put him in the possession of unpublished price sensitive information. The second point in this definition is included on an assumption that if someone is in the possession or having access to such UPSI, he should be considered an ‘insider’. 

The AO while analysing and interpreting the definition, had failed to appreciate the holistic purpose of the PIT Regulations. The order states that it is evident that the information related to financial statements were sensitive in nature and therefore it constituted UPSI. This common thread on conclusion has been arrived at after disregarding the basic rule of interpretation. The Securities Appellate Tribunal in Samir C. Arora v. Securities and Exchange Board of India observed that it becomes evident on reading the definition of ‘insider’ that for one to qualify as an insider it needs to satisfy both the conditions due to usage of the term ‘and’ between them. The interpretation that the order has put forth is wide and can lead to unintended consequences of making almost every market player vulnerable to the charge of insider trading. Therefore, it can be unequivocally stated that all those individuals who are not reasonably expected to have access to such non-public information but who are in possession of the same, can only be treated as insiders if they can be shown as connected or deemed to be connected by evidence satisfying reasonable standard of proof.  

The AO has made a diversion by neglecting the jurisprudence of the term ‘connected persons’. For one to have committed the offence of insider trading, one should be proved as an insider first. This effect based doctrinal approach has circumvented the basic essentials to constitute the offence of insider trading to arrive at a conclusion of convenience. 

The regulations governing insider trading in India have been interpreted in a manner which inadvertently blurs the line of distinction between an insider trading and an informed trading. The advent of technological platforms has made detection of material and non-public information seemingly impossible. In India, we continue to observe misuse of digital platforms for circulating material information without any affirmative attempt to curb the menace. In the last few years, SEBI has attempted to trace ‘likes’ and ‘friend list’ on Facebook to trace ‘connected persons’. These instance indicate the system’s inability to crack through the digital walls of end-to-end encryption, two-factor authentication etc. It is for the same reason that the jurisprudence around ‘connected persons’ and ‘possession’ have become an assumption of convenience, made only due to the impending inability to trace the digital footprints across such platforms. 

  1. Decoding the doctrine of convenience: Juxtaposing the Mannapuram order

The theory that drives this order rests on the idea that the perpetrators of the problems should be punished even if the primary tipper had not been traced. This order becomes even more complex when read along with SEBI’s order on April 13, 2020 in relation to Mannapuram Finance Ltd. The order devises the concept of an ‘unaware tippee’ while holding that any decision made on the basis of a report, which though confidential to company’s management but made public few hours before publication on exchange, by a person unaware of the origin of the source would not be an offence. The irregularity here is not in the conclusion or the reasoning, rather in the treatment and assumption accorded to such ‘unaware users’ of the information in both the cases. While the tribunal holds true the concept of ‘unaware tippee’ in the Mannapuram case, it succinctly avoids this protection in the WhatsApp case merely due to difference in the source of receiving such information in the latter case. 

The tribunal in both the orders, which involve similar facts, have mechanised the ambit of ‘generally available information’. It has avoided a practical fact, that accessibility to WhatsApp forwards is more conceivable and easy than access to media reports and other such domain specific information. All said, this boils down to the complexities and intricacies that the digital encryptions pose to the jurisprudence of ‘possession’ in India. Therefore, there is a need for a harmonious and concept driven approach between these technological complexities and the laws on insider trading. 

  1. CONCLUSION AND SUGGESTIONS

It can be asserted without doubt that internet and technology has revolutionized the way securities markets regulates its players and its transactions. The digital wall created by these developments has obscured the distinction between non-public and public information. At times when institutions like the Wall Street are having their own twitter handles publishing regular updates of the stock markets, and disclosure power of newsletters and social media has increased, insider trading has become more or less an offence that could be committed by any layman. 

To solve this impending problem, firstly, SEBI needs to create clear and concise rules accommodating the boundless transmission potential in the age of internet. As regards WhatsApp, the Indian regulators need to take inspiration from Law Enforcement Authorities in the United States. Though WhatsApp strictly asserts that it does not have access to the channels of messages exchanged on its application, the US Law mandates WhatsApp to respond to legal inquiries made by their authorities in connection to any regulatory concern. The only step we need to take is to get rid of the convenience doctrine that we have evolved in the recent times. A ‘probable cause’ theory could be the very basis of developing and shaping this new approach. This way, there would be no damage to the existing definition of an insider and a connected person, rather it would only strengthen the reach on insider trading laws. Although a lot of privacy laws and data protection laws would play a major role in this mammoth task, it would only make the tracing of the offence more efficient and mitigation of the liability exposure of innocent market player. 

The order in the WhatsApp case needs to be seen as a global phenomenon which effects the international marketplace and such phenomenon requires aggressive and accurate assertion of legal definitions, investigation and penalties by the regulatory authorities in the digital era. 

About the author

Harsh Dhiraj Singh is a Third Year student at National Law University, Jodhpur. He is currently pursuing B.B.A; L.L.B (Hons.). He has always been inclined towards corporate matters and research and frequently writes on such matters too. 
This Paper titled ‘SEBIs Order in WhatsApp UPSI Leak Case: A Black Letter Approach or a Technological Barrier’ focuses on the broadening expanse of Insider Trading across the globe due to the advent of digital/social media platforms, in this case, it being WhatsApp. He has attempted to elucidate the legal anomalies as well the ignorance that the law on Insider Trading has been receiving in light of these technological developments. The concept of ‘Possession’ has been converted into principles of convenience to escape rising complications. The paper brings forth such complications and suggests policy as well as regulatory changes to counter this issue.

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