On May 29, 2020, the Securities and Exchange Board of India (“SEBI”) imposed penalties on noticees vide 3 (three) separate orders (“Orders”) for insider trading violations. 

During November 2017, there were certain articles published in newspapers / print media referring to the circulation of unpublished price sensitive information (“UPSI”) in various private WhatsApp groups about certain companies ahead of their official announcements to the respective stock exchanges. Against this backdrop, SEBI initiated a preliminary examination in the matter of circulation of UPSI through WhatsApp groups during which search and seizure operation for 26 (twenty six) entities of Market Chatter WhatsApp Group were conducted and approximately 190 (one hundred ninety) devices, records etc., were seized. The WhatsApp chats extracted from the seized devices were examined further and while examining the chats, it was found that earnings data and other financial information got leaked in WhatsApp in respect of around 12 (twelve) companies. 

In this regard, SEBI carried out an investigation in the matter of circulation of UPSI through WhatsApp messages with respect to Mindtree Limited, Wipro Limited and Asian Paints Limited, to ascertain any possible violation of the provisions of the SEBI Act, 1992 (“SEBI Act”) and the SEBI (Prohibition of Insider Trading) Regulations, 2015 (“PIT Regulations”). 

In all 3 (three) cases, the adjudicating officer was required to determine whether the noticees had violated the provisions of sections 12A(d) an 12A(e) of the SEBI Act and regulation 3(1) of the PIT Regulations. 

The noticees, inter-alia, made the following arguments:

1. no connection was established between company and the noticee or the sender of the message;
2. no leak was established from the insiders;
3. without establishing a connection and without leak there cannot be UPSI;
4. without the guarantee about the source that the information is from the company there cannot be UPSI;
5. the information forwarded by the notice was in the nature of ‘heard on street’/estimate/speculation and not UPSI and the same matching with the actual numbers does not make it a UPSI and that the Show cause notice failed to consider numerous instances where estimates did not match (‘Heard on Street’ or ‘HOS’ is a common practice within traders, market analysts, institutional investors etc. whereby unsubstantiated gossip is widely shared and the said gossip is clearly understood as speculation / rumours in the market);
6. there was no nexus/no definite pattern of access to UPSI;
7. there is no mens rea established.

SEBI dismissed these arguments and, inter alia, made the following observations based on the facts in each of the cases:

1. the circulated WhatsApp messages included information on revenue, profit before interest and profit after tax which were not approximations but definite amounts and exactly matched with the actual financial results;
2. determining whether information is unpublished or not is a mixed question of law and fact. The statement that the information was an outcome of the research does not by itself make it generally available. The test to ascertain an information to be UPSI or not is its non-discriminatory nature of availability;
3. the shared information could not be claimed to based on any market research or based on the estimations made by the noticee. Sharing of sensitive information to a select few to the exclusion of others is against the investor’s interest; and
4. in view of the gravity of consequences arising out of such sharing of information among the closed groups through WhatsApp or social media platform, the adjudicating officer was not inclined to give any benefit of doubt in favour of the noticee by treating the information as HOS as claimed by the notice.

Whilst SEBI could not trace the origin of the WhatsApp texts due to inherent technological limitations, SEBI found that the information circulated by the noticee through Whatsapp was similar to official announcements later made by the listed companies. SEBI relied on the Supreme Court decision in the case of Jagir Singh v. Ranbir Singh (1979 AIR 381) to state that what cannot be done directly, cannot be allowed to be done indirectly as that would be an evasion of the statute and held that the noticees were liable for violation of the provisions of sections 12A(d) an 12A(e) of the SEBI Act and regulation 3(1) of the PIT Regulations.

Please find attached the copies of the orders.

This update has been contributed by Adity Chaudhury (Partner) and Deeya Ray (Associate).