In this article, Ambika Jhawar discusses Sebi PIT Regulation on Leakage of UPSI through WhatsApp.
Introduction
Insider trading means trading of securities of a public listed company, by an individual or an entity, who has access to unpublished sensitive information (“UPSI”) of the company. There are two kinds of offences related to Insider trading, that is communication offence and trading offence. In India, only trading offence[1] is recognized as an offence and therefore attracts the provision of SEBI (Prohibition of Insider Trading) Regulations, 2015 (“PIT Regulations”). The law on prohibition of Insider Trading in India has been replaced by new set of regulations, to provide a better legal framework for investigating and curbing the practice of Insider Trading[2].
In this article, I will analyze whether the present PIT Regulations are capable enough to deal with the problem of leakage of UPSI through social networking application WhatsApp. This article is divided into two parts. Part I will talk about the recent cases on insider trading, which involved communication of UPSI through WhatsApp and the approach taken by Securities and Exchange Board of India (“SEBI”). Part II will talk about the recommendations given by Shri T.K. Viswanathan committee on Fair Market conduct, which can solve the problem of leakage of UPSI through WhatsApp. Lastly, I conclude this paper by stating my opinion on the recommendations and its utility in solving the issue at hand.
PART I
Leakage of UPSI through WhatsApp
In 2017, Reuters documented 12 cases of prescient messages about Indian companies being posted on WhatsApp groups[3]. After this report, SEBI has made efforts to deal with this issue, which has become relevant due to the rise of new technology. Recently, SEBI initiated preliminary examination in the matter of circulation of UPSI through WhatsApp groups. It was observed with respect to companies like Tata Motors Limited[4], Bata India Limited,[5] and HDFC Bank limited[6] that the messages, which were circulated on WhatsApp group matched the quarterly financial results of the companies. The messages about the financial results were circulated prior to the official announcement made by the companies. In my opinion, the disclosure of this information violates the rule of parity of information and perpetuates information asymmetry. The same could not have been possible without communication of UPSI by any person, who was privy to the information prior to the official announcement. The problem faced by SEBI in these cases was that the source of the leakage of UPSI could not be identified.
In this context, SEBI stated that leakage of unpublished quarterly financial result is prohibited and is in contravention of regulation 3(1) and (2) of PIT Regulations read with section 12A(e) of the SEBI Act, which prohibits procurement or communication of UPSI[7]. SEBI gave the following directions to the companies: Companies shall strengthen its processes/systems/controls to ensure that in future UPSI is not leaked; companies shall submit a report on how are they planning to strengthen the present control systems; companies shall conduct an internal inquiry into the leakage of UPSI and take actions against those responsible for the same; and the inquiry shall be completed within period of 3 months from the date of this order and within 7 days from the completion of the report, the company shall submit the report to SEBI[8]. It can be inferred from these cases that communication of UPSI, even though not an offence in India, is taken seriously by SEBI. The report given by Shri T.K. Viswanathan committee (“Report”) proposed some amendments to the PIT Regulations to deal with the issue at hand.
PART II
Recommendations in the Report
Some of the recommendations given can be useful in dealing with the problem of leakage of UPSI through WhatsApp. Firstly, the Committee has recommended that the PIT Regulations can be amended to include two separate Codes of Conduct, which prescribes minimum standards for (1) Listed companies and (2) Market Intermediaries and other Persons who are required to handle UPSI[9]. In my opinion, this recommendation can be helpful as it will put an obligation on market intermediaries like auditors, accountancy firms, law firms and consultancy firms to follow certain standards and a proper control system, while handling UPSI during the course of their ordinary business as well as while discharging its legal obligations. Secondly, it is recommended that a new regulation should be added to the PIT Regulations that Listed companies/ market intermediary may sign confidential or non-disclosure agreements with a third party, who is in possession of UPSI. The agreements should clearly state their responsibilities, while handling UPSI. If it is not practical to sign confidentiality agreements, then a notice may be given to the person receiving UPSI, stating the necessary safeguards while dealing with the information.[10]
Thirdly, the Committee recommends that SEBI should seek power to intercept telephone calls and electronic communication, to collect strong evidence against repetitive offenders in cases of insider trading[11]. In my opinion, this power will violate the right to privacy which is being recognized as a fundamental right by the supreme court. Also, sharing the data of users is against the privacy policy of WhatsApp. Another key issue with this kind of power is, that if WhatsApp shares data with SEBI, it will set a precedent and other government agencies would also file for similar cases. Therefore, SEBI should not have the power to intercept telephone calls and electronic communications. Fourthly, the committee suggests that Whistleblower Mechanism is an important tool to obtain information on market abuse such as insider trading. This kind of mechanism can increase the incidents of voluntary disclosure by persons, who are involved in unlawful dealings[12]. I would like to compare this mechanism with the Voluntary Disclosure of Income Scheme. It would give an opportunity to the defaulters to disclose their undisclosed income at the prevailing tax rates. This scheme has been successful for collecting revenues and it also ensures that the laws relating to economic offences would not be applicable for those defaulters. As per the present law, “the Central Government may, on recommendation by the Board, grant immunity to any person from prosecution for any offence under this Act, or the rules or the regulations made thereunder or also from the imposition of any penalty under this Act with respect to the alleged violation” [13].
The committee also suggested that the section may be amended to give power to SEBI to grant complete immunity or impose lesser penalty along the lines of a similar provision in Section 46 of the Competition Act, 2002 and the associated leniency regulations. In my opinion, the central government should lay down some guidelines and standards, which needs to be followed before using this mechanism.
The benefit of giving SEBI the power to grant immunity can be that political influence and pressure will not be a determining factor in the decision. Lastly, the committee recommended Inter-regulatory cooperation. SEBI may sign a Memorandum of Understanding amongst the various regulatory bodies and enforcement agencies like Income Tax Authorities, Reserve Bank of India, Ministry of Corporate affairs etc. for information-sharing and joint investigation in certain cases, to enable speedy and effective investigation of economic offences[14]. In my opinion, this is a good recommendation as it will also create a deterrent effect and compliance rate will be higher.
Conclusion
In my opinion, some amendments to the PIT Regulations are necessary to deal with the new concerns, which have arisen in the field of economic offences like Insider trading. Inferring from the language of Regulation 3 of the PIT Regulations, recent orders by SEBI and the recommendations, I believe that communication and procurement of UPSI shall also be recognized as an offence to deal with the issue at hand. Even though SEBI in recent cases has not imposed any penalty on the companies due to leakage of UPSI, but it has given directions to the companies to deal with the problem and the language of the directions use the word “shall”. Therefore, the jurisprudence on this point suggests that for better enforcement and compliance, communication and procurement of UPSI shall be declared as an offence under Indian law.
References
[1] Trading while being in possession of UPSI.
[2] SEBI (Prohibition of Insider Trading) Regulations, 2015 replaced the 1992 regulations.
[3] Reuters, “Exclusive: Prescient messages about Indian companies circulate in WhatsApp group” by Rafael Nam, dated 16th November 2017. https://in.reuters.com/article/india-whatsapp/exclusive-prescient-messages-about-indian-companies-circulate-in-whatsapp-groups-idINKBN1DG0IQ
[4] 2018 SCC OnLine SEBI 87.
[5] 2018 SCC OnLine SEBI 89.
[6] 2018 SCC OnLine SEBI 119.
[7] Ibid.
[8] Supra note 4,5,6.
[9] Pg. 51, REPORT OF COMMITTEE ON FAIR MARKET CONDUCT UNDER THE CHAIRMANSHIP OF Dr. T. K. VISWANATHAN (Ex-Secretary General, Lok Sabha and Ex -Law Secretary)
[10] Pg.56, ibid.
[11] Pg.62, ibid.
[12] Pg.63, ibid.
[13] Section 24 B, Securities and Exchange Board of India Act, 1992
[14] Supra note 11.
