Recently, on April 29, SEBI penalized two individuals for circulating unpublished price sensitive information (UPSI) related to financial results of two listed companies, Ambuja Cements Limited and Bajaj Auto Limited, on WhatsApp, a popular instant-messaging application.
Financial results of a company, which are “generally not available” with the public, constitute UPSI and communication or procurement of the same is strictly prohibited under Regulation 3 of the SEBI (Prohibition of Insider Trading), 2015 (PIT Regulations), except for legitimate reasons. In FY 2017-18, SEBI had initiated an examination relating to the circulation of UPSI in various WhatsApp groups, based on certain media reports which stated that the financial results of several companies were posted on WhatsApp groups prior to their official announcement to the stock exchanges. Pursuant to such examination, SEBI had issued directions to certain entities such as, Axis Bank, Bata India, HDFC Bank and Tata Motors, to strengthen their internal processes and systems in order to prevent such instances of leakage of UPSI. While SEBI had noted back then that the source / origin of such leakage could not be ascertained, the above entities were directed to conduct internal inquiries into the matter and take appropriate actions against persons responsible for such leakage.
Now, on April 29, through two separate orders, SEBI has imposed a penalty of Rs. 15 lakh each on the two noticees, in each case, for circulating certain WhatsApp messages in 2017 containing information related to financial results of Ambuja Cements Limited and Bajaj Auto Limited, ahead of their official announcements to the stock exchanges.
The noticees had pleaded that such information was in the nature of “heard on street” or “market gossip”, which was akin to mere speculation or rumour, and therefore, did not constitute UPSI. However, SEBI was of the view that the information circulated by them constituted UPSI since it was available to only a few people on a closed group, as opposed to information that is published in the newspaper or by brokerage houses, which is in public domain.
Further, WhatsApp messages are usually protected through end-to-end encryption, which makes it difficult to trace the source or origin of the information contained in such messages. However, according to SEBI, even if the origin / source of the information could not be traced, the fact that the persons were in possession of such information which closely matched with the financial figures of the companies and the same was forwarded by them further, was sufficient to hold them liable for violation of the PIT Regulations.
By the mere fact that the financial results substantially mirrored the estimates shares over Whatsapp, SEBI conclusively determined that the noticees had access to UPSI. SEBI found this to be sufficient circumstantial evidence to categorise the noticees, who are otherwise not connected to any of the companies, as insiders.
Further, SEBI observed that for information based on research to not be considered as UPSI, two criteria are required to be satisfied - such research should itself be based on “generally available” information and the research work should have been accessible on a “non-discriminatory” basis. Since none of the criteria were fulfilled, SEBI held the aforesaid persons liable for violation of Regulation 3 of the PIT Regulations. It is common for stock brokers and other market intermediaries to provide estimates of financial results of different companies prior to the actual announcements and such estimates are usually based on various sources of information. These estimates are sometimes shared by stock brokers and research analysts with a select group of paid clients. This order would restrict this activity. By observing that both the criteria are required to be fulfilled, SEBI has overlooked a key point made in the report of the High-Level Committee to Review the SEBI (Prohibition of Insider Trading) Regulations, 1992 constituted under the Chairmanship of Mr. Justice N K Sodhi, which states that research available on “discriminatory basis” but which is based on generally available information will not change the character of the research from generally available to UPSI.
The order effectively restricts market participants from communicating any “heard on street”, without first verifying that such rumour is backed by research conducted using generally available information and which is non-discriminatorily available. This order severely limits free speech among the market participants. In their endeavour to clamp down on leak of financial data of listed companies prior to their release, SEBI has fined recipients of secondary information without identifying the source of information. This also highlights the inability of SEBI to curb and identify the insiders of listed companies from leaking UPSI on encrypted platforms like WhatsApp.
