SAT sets aside SEBI order on insider trading and WhatsApp forwards

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In a landmark case, the Securities Appellate Tribunal has set aside SEBI’s insider trading charges against a few individuals who forwarded WhatsApp messages allegedly containing unpublished price sensitive information (UPSI).  

SEBI, or the Securities & Exchange Board of India, had earlier penalised Shruti Vora from Antique Stock Broking Ltd. with Rs 15 lakh for each violation for “leaking” UPSI of half a dozen companies. In November 2017, several publications reported that the unpublished quarterly financial results of some companies were doing the rounds on WhatsApp. SEBI had then initiated a probe, seizing nearly 200 devices and records, finding from(from WhatsApp chats) that unpublished results of Bajaj Auto, Bata India, Ambuja Cements, Asian Paints, Wipro, and Mindtree were being circulated. 

Under SEBI’s insider trading regulations, sharing of UPSI before companies release their financial results amounts to insider trading. Apart from Vora, the markets regulator had also penalised five other people. They later approached the Securities Appellate Tribunal opposing the charges. 

In their defense, the individuals argued that were not the originator of the message, but had simply forwarded them as received and were unable to show who they received it from. SAT noted that SEBI was unable to find the source due to WhatsApp’s end-to-end encryption policy. SAT agreed with the appellants, reasoning that SEBI could not find the original source of the messages — admittedly due to “severe technological constraints” given WhatsApp’s end-to-end-encryption and instead went after the people that forwarded them. It also concluded that generally available information cannot be construed as UPSI and the person forwarding it is not an insider. Consider this from SAT’s ruling:  

The information can be branded as an unpublished price sensitive information only when the person getting the information had a knowledge that it was unpublished price sensitive information. Though knowledge is a state of mind of a person, the same can be proved on preponderance of probabilities on attendant circumstances.

In this case, there are no attendant circumstances, but only possibilities, SAT said. SEBI had considered only the timing of the messages (they were circulated right after the companies internally finalised results) and similarity (some of the messages had results accurate down to the decimal point). 

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The tribunal relied on an earlier judgment involving fund manager Samir Arora, wherein it had rejected SEBI’s arguments that there is no need for linkage between the potential source of UPSI and the person in possession of it. The tribunal noted that SEBI had failed to consider other factors such as 

  1. The brokers’ phones had hundreds of similar messages but SEBI cherry-picked these results. In fact, the financial information in all the other messages did not match with the actual published financials. 
  2. SEBI had reasoned that it is not the individuals’ claim that the messages had arisen from market research firms. According to the tribunal, SEBI failed to appreciate that the brokers were pleading that WhatsApp messages may have originated from brokerage houses or from domains like Bloomberg. 
  3. The brokers had argued that merely passing information without actually trading any securities did not amount to insider trading. SEBI had noted that results of the companies were leaked within a day of the companies’ finalising the results and more than a fortnight before the results were published on SEBI. 
  4. The brokers also argued that making estimates ahead of financial results is an industry practice, practiced by traders, analysts and institutional investors. 

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