By Lucy Rana and Isha Tiwari
Shruti Vohra vs. Securities and Exchange Board of India
Insider information refers to potential stock-affecting information about a company which does not form a part of a public domain. As per the Prohibition of Insider Trading Regulations, sharing of such unpublished insider information amounts to a legal offence unless conducted in furtherance of legitimate purposes, performance of duties or discharge of legal obligations.
Companies are making conscious efforts to simultaneously secure confidential information while maintaining employee privacy. However, creative means such as end-to-end encrypted software is the latest garb of insiders. Commonly found in messaging platforms these days, such encryption hampers one’s ability to trace the origin of information leak. In an interesting recent development, the Hon’ble Securities Appellate Tribunal perused the line of demarcation between confidential information and circulated market figures and how WhatsApp’s end-to-end encryption exonerated the hefty penalties levied in the case of Shruti Vohra vs. Securities and Exchange Board of India (SEBI)[1].
Brief facts
In November 2017, certain articles were published in newspapers wherein it was alleged that the quarterly financial results of several companies were in circulation in certain WhatsApp groups before its official disclosure by the respective companies. After investigation and seizures conducted by SEBI, it was concluded that the financial results of 12 companies were leaked by a WhatsApp message, which closely resembled the results revealed on the published financial results and the same amounted to unpublished price sensitive information under the provisions of Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 (PIT Regulations).
The companies referred to in the present case were Bajaj Auto Ltd., Bata India Ltd., Ambuja Cements Ltd., Asian Paints Ltd., Wipro Ltd. and Mindtree Ltd., wherein Ms. Shruti Vohra, Mr. Neeraj Agarwal, Mr. Aditya Gagar and Mr. Parthiv Dalal (hereinafter as ‘the Appellants’ collectively) filed appeals before the Hon’ble Securities Appellate Tribunal (hereinafter as ‘the SAT’) against the order of the Adjudicating Officer (hereinafter as ‘the AO’) imposing a penalty of INR 15,00,000 in each matter.
Contentions of the Adjudicating Officer
- All of the Appellants were either employees or involved in the securities market and their duties did not involve sending messages to any of the clients/entities;
- The intended recipients of the messages were not the clients; and
- The proximity of the circulation of the WhatsApp messages with publication of financial results, alongwith the close similarity between the circulated figures as compared to the actual figures declared by the respective companies later.
Contentions of the Appellants
- The Appellants merely forwarded the WhatsApp message as received from the source, and were not the originators. Moreover, several other messages which inaccurately predicted the numbers were also circulated on the group, although were overlooked during the investigation;
- Due to the lapse of time, the Appellants were not able to confirm the source of the message;
- The practice of estimating the financial results ahead of disclosure by companies, a.k.a. ‘Heard on Street’ (HoS) is a popular and common practice within traders, market analyst, institutional investors etc.;
- The guidance towards disclosure of financial results as shared by Wipro, was identical to the estimate mentioned in the WhatsApp message, which later on similarly matched with minor deviation with the disclosed financial statement;
- No leakage of information could be traced back to the Appellants by SEBI during the course of investigation due to end-to-end encryption policy of WhatsApp;
Issue Framed
Whether a “forwarded as received” WhatsApp message circulated on a group regarding quarterly financial results of a company closely matching with the vital statistics, shortly after the in-house finalization of the financial results by the company and some time before the publication/disclosure of the same by the concerned company, would amount to an unpublished price sensitive information under the provisions of Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 (hereinafter as ‘the PTI Regulations).
Observations of the SAT and Order
The Hon’ble Tribunal was presided over by Justice Tarun Agarwala, Dr. C. K. G. Nair as Member and Justice M. T. Joshi as Judicial Member, who held that the impugned orders of the AO were meritless and thus allowed the appeals.
It was opined that since SEBI was unable to trace the source of information leak, the AO did not pay weightage to the possibility that the source thereof might have originated from third-party domain itself (such as brokerage houses/reports). Reliance was also placed on the Hon’ble Tribunal’s judgment in Samir Arora vs. SEBI[2], wherein it was observed that there is no requirement for any linkage between potential source of the price sensitive information and alleged person in its possession.
In fact, several messages of similar nature albeit inaccurate figures were received/forwarded by the Appellants, though select few were hand-picked for the investigation. This substantiated the Appellant’s lack of knowledge on whether the said information as being forwarded was price sensitive or not.
Therefore, on a combined reading of the clauses Section 2(1) (g)[3] and (n)[4] of the PTI Regulations, the information as contained in the WhatsApp message was deemed to not amount to unpublished price sensitive information.
Element of prior knowledge must be present in an insider trader
As per the PTI Regulations an insider is one who is in possession of or having access to unpublished price sensitive information. However, the Act levies a strict onus of holding good to such charge on the person levelling the same. Thus, the current order rightly opines that the element of prior knowledge must be present in an insider trader. It paves the way for distinction between the market hearsay and the actual confidential data of the companies.
A new twist on voluntary sharing of such information can be observed by way of ‘Clean Data Rooms’ or ‘Clean Rooms’ wherein buyers and sellers can access commercially sensitive information for making informed decisions subject to signing confidentiality agreements. This practice was recently undertaken by bidders seeking to acquire the government’s stake in Bharat Petroleum Corporation Ltd[5].
However, the said regulation has sparked the debate of consumer privacy and free speech.
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[1] Shruti Vohra vs. SEBI Appeal No. 308 of 2020; http://sat.gov.in/english/pdf/E2021_JO2020313_25.PDF
[2] (2004) SCC Online SAT 90
[3] Section 2(1)(g) of the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 – “insider” means any person who is: i) a connected person; or ii) in possession of or having access to unpublished price sensitive information.
[4] Section 2(1)(n) of the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 – any information, relating to a company or its securities, directly or indirectly, that is not generally available which upon becoming generally available, is likely to materially affect the price of the securities and shall, ordinarily including but not restricted to, information relating to the following:–
- financial results;
- dividends;
- change in capital structure;
- mergers, de-mergers, acquisitions, delistings, disposals and expansion of business and such other transactions;
- changes in key managerial personnel; and
- material events in accordance with the listing agreement.
[5] ‘Clean Data Room’ with sensitive info on BPCL to open for bidders signing additional pact; https://economictimes.indiatimes.com/industry/energy/oil-gas/clean-data-room-with-sensitive-info-on-bpcl-to-open-for-bidders-signing-additional-pact/articleshow/82875854.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst; accessed on May 31, 2021
[6] In new rules for social media, Centre asks platforms to name ‘originator of mischievous’ posts; https://scroll.in/latest/987905/centre-asks-social-media-platforms-to-give-details-about-originator-of-mischievous-posts; accessed on May 31, 2021