Introduction
The economic structure of Indian market has seen a tremendous change in the past few decades wherein India has witnessed a shift from an agricultural based economy to a manufacturing and service based economy. Much of this development has taken place after the advent of Liberalisation, Privatisation and Globalisation. A major role in this development was played by stock market. The growth of stock market resulted in mobilisation of surplus funds that was resting with people and provided a mechanism for transforming household savings into investments for corporate sector[1]. With availability of funds new business entities blossomed along with the development of stock market in India. However, if the same stock market suffers then the economy of a county suffers. The stock market crash of 1929 and 2008 in U.S is a glaring example of effect of stock market on the economy of a country. People lost their jobs, banks were bankrupt and many corporate houses collapsed[2]. Similarly, in 1992 the crash of Indian stock market due to Harshad Mehta scam left a devastating effect on the gullible investors in India[3]. Therefore, it becomes necessary to properly regulate the stock market of a nation. SEBI as a regulator has come up with several legislation to deal with the nuances of securities market[4]. One of these regulations is the SEBI’s (Prohibition of Insider Trading) Regulation (2015)[5] which aims to prevent trading of securities on the basis of unpublished prize sensitive information. However, the fast paced development of technology has caused trouble for the regulator. The technological development has resulted in fast dissemination of information and it is very difficult to keep record of all the information[6]. In 2017, a report by Reuters brought attention to the issue of tipping of information regarding certain companies through a Whatsapp group[7]. The report indicates that price sensitive information regarding 12 Indian Companies was leaked through a Whatsapp group on the basis of which trading took place[8]. The main focus of this article is to look into this issue of dissemination of price sensitive information through digital media or internet and how SEBI has dealt with this issue.
SEBI’s Prohibition of Insider Trading Regulation (2015) and Price Sensitive Information
Prohibition of Insider Trading Regulation by SEBI aims to prevent and prohibit insider trading in the securities market. According to Economic Times Insider Trading is “a malpractice wherein trade of a company’s securities is undertaken by people who by virtue of their work have access to the otherwise non public information which can be crucial for making investment decisions”[9] This non public information refers to ‘price sensitive information’. As defined under SEBI’s Prohibition of Insider Trading Regulation ‘unpublished price sensitive information’ means any information, regarding company or its security, which may materially affect the prices of securities once such information is disclosed to the public[10]. The aim of preventing trading on the basis of unpublished price sensitive information is to prevent people in access of such information to trade at the cost of other investors. Therefore tipping of such price sensitive information through Whatsapp group or internet becomes a contentious issue.
Leak of Price Sensitive Information through Whatsapp
In 2017, a report[11] by Reuters exposed how price sensitive information is circulated through a Whatsapp group. These groups generally work on a give and take basis[12] where, in exchange of information other members are also required to provide price sensitive information from their end. The price sensitive information provided by the Whatsapp group, ‘market chatter’ was correct up to the last decimal[13] in some cases. For example in this report it was provided that posted message on 21 July 2017 regarding HDFC bank predicted a profit of 39 billion rupees and a Gross Non Performing Asset (GNPA) Ratio of 1.25 percent[14]. The actual results were that the company reported profit of 38.94 billion rupees and GNPA ratio of 1.24 percent[15]. This shows the gravity of the issue. SEBI asked the companies named in this report like HDFC Bank Ltd, Axis Bank Ltd, Bata India Limited and Tata Motors Ltd to conduct an internal inquiry and strengthen their system[16]. The 1992 regulation of Prohibition of Insider Trading required the companies to follow the code of internal procedure and conduct as per section 12 of 1992 regulation. The same provision is provided under section 9 of Prohibition of Insider Trading Regulation 2015. SEBI has also made changes to this provision regarding model code of conduct of companies so as to prevent leakage of unpublished price sensitive information[17].
SEBI’s Reaction to the issue of Dissemination of Information through Whatsapp
Recently SEBI has brought some amendments in the Prohibition of Insider Trading Regulation 2015. These recent amendments were suggested by T.K. Viswanathan Committee keeping in mind the issue of leak of information through Whatsapp groups[18]. The Viswanathan committee pointed out that such instances effect the market price of share of company and it also adversely affect the investors of a company. It is not only a concern for the regulator but also for the company and therefore the companies should take responsibility to find such sources of leak of information within the company[19]. Major changes have been brought to the code of conduct provisions wherein a new section regarding Institutional Mechanism for Prevention of Insider trading, i.e. section 9A[20], has been introduced. Under this section CEO or other analogous persons can put in place effective internal control system to prevent insider trading. This section has brought under its ambit all employees who have access to unpublished price sensitive information. Under section 9A (2) sub-clause (c), it provides that adequate restriction should be placed on communication and procurement of UPSI (Unpublished Price Sensitive Information)[21]. Under sub clause (d) of this section, a list of all employees and other persons with whom such information is shared is to maintained and a confidentially agreement is required to be signed or notice should be sent in this regard to the concerned persons[22]. Another laudable provision is introduced under Section 9A (6), under the recent amendment, which mandates that there should be a whistle-blower policy in listed companies so as to enable the employees of a company to report any such leak of price sensitive information. The recent amendment requires the employees or designated person to disclose information regarding their immediate relatives and people with whom these designated persons have material financial relationship[23]. The designated persons are required to give phone numbers and cell numbers the abovementioned people[24]. Similar separate code of conduct for disclosure regarding designated persons and their immediate relatives or people with whom such designated person have material financial relationship has been introduced in regard to Intermediaries or fiduciaries under Schedule C[25] of this regulation.
Conclusion
The situation in
India is different from that of foreign countries where there is strong
surveillance system to check instances of insider trading, like in Rajat Gupta
case the allegations of insider trading were made out on the basis of phone
tapping[26]
whereas such power is not present with SEBI in India. Hence, it is difficult to
track down the instances of insider trading that are done through digital media
platforms in India. In regard to the instance of circulation of unpublished
price sensitive information through ‘market
chatter‘ group on Whatsapp SEBI has
zeroed in on two individuals[27].
SEBI has not completed its inquiry yet and no formal order has been passed by
SEBI so far. SEBI as a regulator has tried to bring laudable amendments to the
Prohibition of Insider Trading regulation 2015 to curb such instances. As
pointed out by T.K. Vishwanathan committee source of such unpublished price
sensitive information lies in the company itself and therefore the recent
amendments aim at building a robust internal system for companies to prevent
leakage of such information. The whistle blower policy introduced by SEBI would
immensely help the cause of prevention leakage of price sensitive information. However,
even after all the recent attempts by SEBI the question remains that will SEBI be
able to prevent such acts in the future. The main problem in case of
dissemination of information through Whatsapp is the end to end encryption
system of transfer of information because of which the data cannot be accessed
by third party except receiver and sender[28]. Therefore, it becomes even more challenging
to regulate insider trading through Whatsapp groups especially if such
information is circulated on Whatsapp group that does not have a contact
registered under the disclosure requirement for code of conduct of designated
member of companies or other such persons like designated members of
fiduciaries. A suggestion here would be that SEBI can control such instances of
leak of unpublished price sensitive information by introducing a reward based
policy for people who would expose circulation of unpublished price sensitive
information through Whatsapp groups. Under this reward based policy, if the
charge of insider trading is established on people using Whatsapp groups or on
people disseminating information through such Whatsapp group, a part of penalty
imposed on them can be given as a reward to the person who would expose these
instances. This would incentivize people to come out and disclose circulation
of information through such Whatsapp groups.
[1] Uma Jayender and Monika Dudani, ‘Role of Stock Market in the Growth of Indian Economy’ (Researchgate, December 2015)
<https://www.researchgate.net/publication/320958534> accessed on 05 April 2019
[2] Kyoung Tae Kim and Sherman D. Hanna, ‘The Impact of the 2008–2009 Stock Market Crash on the Wealth of U.S. Households’ (Fincancial Planning Assocaitaion, 2016)
<https://www.onefpa.org/journal/Pages/FEB16-The-Impact-of-the-2008–2009-Stock-Market-Crash-on-the-Wealth-of-U-S–Households.aspx> accessed on 05 April 2019
[3] Sucheta Dalal, ‘Bull in the media ring’ (Suchetadalal.com, 11 October 1999)
<http://www.suchetadalal.com/?id=c47006e0-08f8-5d82-492e8292ea7b&base=sub_sections_content&f&t=Bull+in+the+media+rig> accessed on 05 April 2019
[4] ‘List of All SEBI Regulations’ (SEBI)
<https://www.sebi.gov.in/sebiweb/home/HomeAction.do?doListing=yes&sid=1&ssid=3&smid=0> accessed on 05 April 2019
[5] ibid
[6] Devangshu Datta, ‘Whatsapp Earnings Leak Shows SEBI Must Monitor Insider Trading on Social Media’ (The Wire, 21 Nov 2017)
<https://thewire.in/economy/Whatsapp-earnings-leak-shows-sebi-must-monitor-insider-trading-social-media> accessed on 05 April 2019
[7] ‘Leaks on Whatsapp: Sebi asks exchanges to check trade data’ (Economic Times, 21 Nov 2017)
<https://economictimes.indiatimes.com/markets/stocks/news/leaks-on-Whatsapp-sebi-asks-exchanges-to-check-trade-data/articleshow/61732902.cms> accessed on 05 April 2019
[8] ‘Factbox: How corporate numbers on Indian Whatsapp groups compared with actual results’ (Reuters, 16 Nov 2017)
<https://in.reuters.com/article/india-Whatsapp/factbox-how-corporate-numbers-on-indian-Whatsapp-groups-compared-with-actual-results-idINKBN1DG0J9> accessed on 05 April 2019
[9] ‘Definition of ‘Insider Trading’, (The Economic Times)
<https://economictimes.indiatimes.com/definition/insider-trading> accessed on 05 April 2019
[10] SEBI’s Prohibition of Insider Trading Regulation 2015, s 2(n)
[11] Supra note 8
[12] Sriram Iyer, ‘India’s market regulator wants to see your Whatsapp chats’ (Quartz India, 08 March 2018)
<https://qz.com/india/1223379/in-india-Whatsapp-is-the-new-frontier-for-insider-trading/> accessed on 05 April 2019
[13] ‘SEBI zeroes in on 2 individuals in Whatsapp leak case’ (Business Line, 24 May 2018)
<https://www.thehindubusinessline.com/markets/sebi-zeroes-in-on-2-individuals-in-Whatsapp-leak-case/article23980737.ece> accessed on 05 April 2019
[14] Supra note 8
The Message: POSTED MESSAGE (July, 21, 2017)
“Hearing Hdfc Bank PAT @ 3900 crs & 1.25 GNPA vs 1.04”
(Profit after tax will be 39 billion rupees and gross non-performing asset ratio will be at 1.25 percent vs 1.04 percent.)
“Consensus estimate is 3950 crs. Our estimate is 3973 crs so 3900 is not a good number. Numbers on Monday.”
(Consensus estimate 39.5 billion rupees, our estimate 39.73 billion rupees.)
[15] ibid
[16] Jayshree P. Upadhyay, ‘Insider info: Sebi moves to plug Whatsapp leaks’ (Live Mint, 19 March 2018)
<https://www.livemint.com/Money/eDXuwPL6sV2zmsN006kAdI/Insider-info-Sebi-moves-to-plug-Whatsapp-leaks.html> accessed on 05 April 2019
[17] ibid
[18] ‘SEBI seeks public comments on Report submitted by the Committee on Fair Market Conduct’ (SEBI, 09 August 2018) p 54
<https://www.sebi.gov.in/media/press-releases/aug-2018/sebi-seeks-public-comments-on-report-submitted-by-the-committee-on-fair-market-conduct_39885.html> accessed on 05 April 2019
[19] ibid
[20] SEBI’s Prohibition of Insider Trading Regulation 2015, s 9A
[21] ibid
[22] ibid
[23] Prohibition of Insider Trading Regulation 2015, Schedule B, s 14
See: Prohibition of Insider Trading Regulation 2015, Schedule B, s 14 explanation: Material Financial Relationship has been defined as a relationship in which one person is a recipient of any kind of payment such as by way of a loan or gift during the immediately preceding twelve months, equivalent to at least 25% of such payer’s annual income.
[24] ibid
[25] Prohibition of Insider Trading Regulation 2015, Schedule C
[26] Supra note 12
[27] Supra note 13
[28] Jitendra Singh, ‘SEBI may move to court against Whatsapp as it denies to share user-specific data’ (ENTRACKR, 01 March 2018)
<https://entrackr.com/2018/03/sebi-move-court-Whatsapp-user-data/> accessed on 05 April 2019]
This article is written by Yash Pandey.
Disclaimer: This article is an original submission of the Author. Lex Insight does not hold any liability arising out of this article. Kindly refer to our Terms of use or write to us in case of any concerns. This article is a part of the 1st National Essay Competition, 2019.
