DATE OF THE CASE: 12 February, 2020
APPELLANT: Shruti Vora
RESPONDENTS: Securities and Exchange Board of India (SEBI)
BENCH/JUDGES: Justice M.T. Joshi, Dr. C.K.G Nair, Justice Tarun Agarwala
LEGAL PROVISIONS: SEBI Act, 1992, SEBI (PIT) Regulation, 2015.
APPEAL NO: 28 of 2020.
FACTS OF THE CASE:
- A series of newspaper articles were published in 2017 which stated that quarterly financial results of around 12 companies were out and were circulated on a messaging platform ‘WhatsApp’, before they were officially declared by the companies.
- Six of Twelve namely, Bajaj Auto Ltd., Bata India Ltd., Ambuja Cements Ltd., Asian Paints Ltd., Wipro Ltd., and Mindtree Ltd appealed to the Securities Exchange Board of India (SEBI) as a consequence.
- Hereafter, SEBI started an investigation on such WhatsApp groups where, in the course of inquiry it was found that financial results of these firms were completed 15 days before the disclosure of the information officially.
- The information circulated was found closely related to the exact figures that were officially published.
- The suspected group member Shruti Vora’s WhatsApp was used to retrieve communication. On the basis of further investigation and evidence, Govind Aggrawal was identified as the source of the information, which he sent on via WhatsApp to Shruti Vora before she passed it on to some Aditya Gaggar.
- WhatsApp conversations pertaining to Wipro Ltd. were deemed to be unpublished price sensitive information (UPSI), and the dissemination of information via WhatsApp pertaining to the company’s financial data was considered to be the transmission of UPSI.
- As a result, UPSI possession was charged against the Noticees in the current case, Prathiv Dalal and Shruti Vora. Prathiv Dalal and Shruti Vora were subsequently declared to be “Insiders” engaging in insider trading, and the adjudicating officer imposed a fine of INR15,000,000 in each case in accordance with SEBI (PIT), 2015 Regulation[2].
- As a result, the appellants challenged the adjudicating officer’s decision and eventually moved to the Honourable Securities Appellate Tribunal (hereafter referred to as SAT).
ISSUES RAISED
- Whether a WhatsApp message flagged as “forwarded as received” which then circulated inside in a group about quarterly financial results of a firm Company closely matching with vital data would qualify as unpublished price sensitive information (UPSI) under the Securities and Exchange Board of India (Prohibition of Insider Trading) Act, immediately after the company’s internal finalization of the financial results and before the publication/disclosure of the same by the concerned company?
CONTENTIONS
ASSERTION OF THE ADJUDICATING OFFICER
- The Adjudicating Officer stated that many of the appellants were either employees or involved in the securities market, and therefore, they were required by law to refrain from communicating any such information or messages to clients, although companies to which they were provided information were not even clients.
- But since the message’s intended recipients were not even the clients, the market value of the shares of the various firms may be influenced by the recipients.
- Additionally, the learned Adjudicating Officer reasoned that the messages were nothing more than transmission of unpublished price-sensitive information in violation of the SEBI (PIT) Regulations of 2015 due to the proximity of the messages sent through WhatsApp and the official announcement of the financial results and the remarkable similarity between the numbers transmitted through message and real performance reported by the firms.
- No evidence of information leaking could be found during the SEBI’s examination from the relevant teams within the individual firms.
- It was further argued that the numbers provided in the mails were not even within a general range but rather had a particular value. As a result, the argument used to reject the appellants’ defence using Bloomberg as an example was that the estimations listed there differed significantly from the company’s actual representations.
ASSERTION BY APPELENTS
- All of the appellants claimed that the messages that the respondent, SEBI, had obtained from their devices would exemplify that none of the appellants had created the messages, just that they had received and sent them to others.
- Furthermore, it was argued that numerous additional communications were in circulation that inaccurately predicted the numbers, despite the fact that no notice of them was given throughout the investigation.
- Due to the passage of the reasonable period, the appellants were unable to identify the source to demonstrate where they obtained the purported messages. Furthermore, it was claimed that because to the chat app’s end-to-end encryption and privacy policies, even the responder SEBI was unable to identify the source.
- The appellant said that it is currently in vogue to speculate in the market before the official disclosure or release of the final findings. This is often referred to as “Heard on Street,” a technique that is common in trade marketplaces where such unfounded information is routinely disseminated.
- The information gleaned by the respondent SEBI from the devices also revealed that, in addition to the statements put out as in question, a large number of additional messages referring to financial performance were in circulation and materially diverged from the firms’ actual results. Only those communications, nevertheless, that closely matched the outcomes were acted upon in order to begin the current actions.
- Based on these claims, the appellants requested that the legal action against them be dropped.
RATIONALE
The learned Adjudicating Officer dismissed the appellants’ argument. And came to the conclusion that each appellant had violated Section 12 of the SEBI Act, 1992, as well as Regulation 3(1) of the SEBI (PIT) Regulation, 2015.
Justice Tarun Agarwala, Dr. C. K. G. Nair, and Justice M. T. Joshi, who served as the Hon’ble Tribunal’s judges, found that the AO’s contested decisions lacked merit and hence permitted the appeals. The AO, it was said, did not give enough consideration to the likelihood that the information leak’s source may have come from a third-party domain (such as brokerage firms or reports), as SEBI was unable to identify the source of the information breach. It was also noted that there is no necessity for any nexus between the putative source of the price-sensitive information and the alleged person in possession in the Hon’ble Tribunal’s ruling in Samir Arora v. SEBI[3].
In actual fact, other messages of similar kind but wrong data were received/forwarded by the Appellants, however, a select handful were hand-picked for the investigation. This demonstrated that the appellant was ignorant of the price sensitivity of the information being sent.
In addition to this, the learned AO neglected to take note of numerous more messages of a similar sort that the appellant had received and forwarded, messages that had nothing to do with the reported financial results. Shruti Vora, the appellant, also argues in her brief that she forwarded a similar communication about the Axis Bank to another person. The published finding, however, in this instance was significantly different, and the AO did not assign a weight age to the same.
The content in the WhatsApp message was thus determined not to constitute unpublished price-sensitive information based on a combined reading of Sections 2(1)(g) and (n) of the PTI Regulations.
Bench argued that information can only be classified as unpublished price sensitive information if the person receiving it was aware that it was price-sensitive information beforehand. On the basis of the preponderance of the evidence in the presence of the circumstances, intention or knowledge as a mental element can be proven. And aside from the possibilities suggested by the AO, there were no such circumstances in the present case. The learned AO only considered the proximity of the moment and of the information when determining if it was the UPSI. Therefore, for an insider trader, there must be some degree of previous information.
In the current case, the honourable bench cited a previous ruling in Samir Arora v. SEBI, in which the tribunal rejected SEBI’s argument that there was no need to prove a relationship between the putative source of the UPSI and the individual who was believed to be in possession of such price-sensitive information.
For the aforementioned reasons, the honourable bench disregarded the learned AO’s rationale and ruling, imposing an INR15,000,000 fine for each offense.
The SEBI appealed the SAT’s decision to the Supreme Court, but the petition was prima facie denied by the Supreme Court.
DEFECTS OF LAW
A person who has access to or is in possession of unpublished price sensitive information is referred to as an insider under the PTI Regulations. However, the Act places a heavy burden of proof on the individual making the accusation. As a result, the current order correctly asserts that an insider trader must possess the element of previous knowledge. It makes it possible to distinguish between hearsay in the market and the true, private information of the companies.
Through the use of “Clean Data Rooms” or “Clean Rooms,” where buyers and sellers can access commercially sensitive information to make informed decisions after signing confidentiality agreements, we can notice a new spin on the voluntary exchange of such information. Recently, bidders attempting to purchase the government’s share in Bharat Petroleum Corporation Ltd. were held to be engaged in this practice.
However, the aforementioned law has prompted a discussion about free expression and customer privacy.
Even a cursory study of the UPSI definition demonstrates that “knowledge of the possessor” is not a necessary component of the UPSI. Giving it a wider perspective with the intention of preserving investors’ interests would have been the goal. Investors will be harmed directly or indirectly by a UPSI share, whether it is done so on purpose or accidentally. Therefore, the tribunal that was supposed to handle the situation veered from its judicial role and into that of a legislative body.
This tribunal judgment has created a space where offenders can get an unfair advantage over investors and simply elude the law. Therefore, it is necessary to once more review the bench’s arguments to see whether or not they were consistent with the statute’s requirements.
CONCLUSION
In India, insider trading is still seen as a type of white-collar crime. The overall situation is, however, rather different. Many nations throughout the world have succeeded in reducing insider trading by enacting and upholding strict rules. Despite India’s numerous rules and laws, the accused always finds a way to elude the legal system.
Regarding the judgment mentioned above, it can be said that the tribunal simply deviated from the legislative intent; the bench applied a more restrictive interpretation that fell short of capturing the spirit of the PIT regulation. The tribunal began to adopt a legislative role rather than abiding by the rules established by the statutes.
Author:
Firdous Barshikar
ILS Law College, Pune.
[1] Shruti Vohra vs. SEBI , AIR 2020 SSC 28
[2] Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015
[3]Samir Arora v. SEBI , AIR 2004 SCC 90