Over the past few weeks, the Securities and Exchange Board of India [“SEBI”] has passed multiple orders, adjudicating on the ‘WhatsApp-leak’ saga. The orders pertain to the leak of unpublished price sensitive information [“UPSI”], i.e. financial results of several blue-chip companies ahead of their official announcements on any stock exchange. The orders arise out of the controversy which arose in late 2017. The orders of the SEBI are exemplary on the issues of ‘Heard-on-the-Street’ concept, the irrelevance of establishing the source of the leak and a person being liable for being a link in the chain of communication of UPSI. This article moves the motion that the aforementioned orders have resulted in broadening the ambit of “insider trading”.
In this matter, there were three grounds on which the defendants have been held to be liable, i.e. Sections 12A(d) & 12A(e) of the SEBI Act, 1992 [“SEBI Act”] and Regulation 3(1) of the Prohibition of Insider Trading Regulations, 2015 [“PIT Regulations”].
The dual-criteria for determining the offence of “insider trading”
According to the author, Section 12A(d) as a ground appears to be problematic for conviction in the present matter. The sub-section states that no one shall indulge in ‘insider trading’. There is no definition of ‘insider trading’ which is available in the SEBI Act or the PIT Regulations. However, the terms ‘insider’ and ‘trading’ have been defined individually, both of which need to be satisfied in order to convict a person under this section.
A. The person should be an “insider”.
The defendants who were in possession of the UPSI were termed as ‘insiders’ as per Regulation 2(1)(g) of the PIT Regulations. An ‘insider’, for the purposes of the said cases, means a person in possession of or having access to UPSI. “Possession” of UPSI has been made the test of being adjudged an insider. In the note to the said sub-regulation, it has been stated that anyone in possession of UPSI regardless of how one came in possession, shall be deemed to be an ‘insider’. It can, thus, be safely concluded that the people communicating the information were “insiders” and the information that they were communicating, i.e. the financial results of the companies is clearly UPSI under Regulation 2(n)(I) of the PIT Regulations. However, for justifying prosecuting someone for “insider trading”, the requirements of being an insider shall be fulfilled along with there being ‘trading’ of securities.
B. The person should have “traded” in the securities.
The definition of ‘trading’ is mentioned under Regulation 2(l) of the PIT Regulations.
“. . . means and includes subscribing, buying, selling, dealing, or agreeing to subscribe, buy, sell, deal in any securities”.
In the note to the said clause, it has been stated that the term is to be widely defined to include activities like pledging of securities. However, there must be some monetary transaction involved which involves the securities being dealt in. Merely ‘communicating’ the said information can’t be deemed to be ‘trading’ of securities. In the committee recommendations as well, it has been made clear multiple times that for making someone liable for insider trading there should be an undue benefit extracted out of the possession of the UPSI.[ii] Whether there was trading of/dealing in securities or not, has not been established by the SEBI. It was contented by the defendants that no securities have been traded by the person who had leaked the UPSI, no relative or family members of theirs has dealt in securities of those companies nor any person who received the information on the WhatsApp groups have dealt in the securities.[iii]
Generally, the onus is on the person levelling the charge as per the note under Regulation 2(g) for proving that the offence had taken place. It has been stated in the adjudication orders that the recipients couldn’t be tracked back.[iv] So it naturally flows from here that the fact that they can’t be tracked back works in their favour with the presumption that the ‘trade; never took place. However, it was assumed the other way round in the orders. Now, this creates a problematic scenario as it shifts the onus of proof to the person accused. If the orders are followed as precedent in the future, it can lead to the establishment of a reverse burden of proof, i.e. the defendants would have to prove that all the people they are connected with or related to had not traded in the securities of the said companies.
Interpreting the PIT Regulations.
The literal rule of interpretation states that in a case where the statutory provision is plain and unambiguous, the court shall not interpret the same in a different manner. The court cannot add, subtract or read something into it which is not there.[v] SEBI has “subtracted” the requirement of a “trade/dealing in securities” and has convicted the defendants of the offence of ‘insider trading’ based on the defendants being mere “insiders”. This needs to be rectified. An aid to construction which can be used to resolve an uncertainty is the legislative history.[vi] The N.K. Sodhi Committee report also recommended that trading would mean getting something in return for something else, i.e. there being a consideration changing hands.[vii] In merely “communicating”, the person who is communicating doesn’t get anything in return for the said communication. Even the rule of ejusdem generis can be applied for interpreting the term “trading”. The rule states that when general words follow particular and specific words of the same nature, the general words must be confined to the things of the same kind as those specified.[viii] It can safely be concluded from the different terms like subscribing, buying, selling, dealing and even pledging that a genus of a monetary consideration runs through the regulation. The term “communication” would definitely not fall under this genus.
The Regulatory Framework surrounding insider trading complaints.
From a regulatory perspective, the SEBI has already planned a data lake project to increase market surveillance. In cases where apps like WhatsApp are used for insider trading, the guidelines prepared by the Office of Compliance Inspections and Examinations [“OCIE”] in the US can be adopted. Moreover, whistle-blowers are extremely effective checks on all such illicit activities. Whistle-blowers have been stated by SEBI to be the best sources of information for information pertaining to insider trading. Recently, there has been a surge in the number of complaints by whistle-blowers after SEBI has incentivized the process for people filing complaints of leakage of UPSI in companies. SEBI has made it mandatory for listed companies to have an informant mechanism pertaining to insider trading under regulation 9A of the PIT Regulations.
Furthermore, the SEBI also amended the PIT Regulations to introduce a reward mechanism for providing incentives to report a violation of insider trading laws to SEBI.[ix] It is offering rewards up to 10% of the penalty collected or ₹1 crore if the information leads to disgorgement in accordance with the PIT Regulations. SEBI has tried to ensure that the informant confidentiality[x] is maintained and that there is no retaliation or victimization of the informant[xi]. The entire responsibility of conducting the investigation and protecting the confidentiality shall vest with the Office of Informant Protection.[xii] It shall be an independent division established for dealing with the informants.
The US had enacted the Dodd-Frank Act post the 2008 crisis. A whistle-blower, acting under section 922 of the said Act, can get up to 10-30% of the penalty the government collects from the company. The Act doesn’t cap the amount which whistle-blower receives and the percentage (15-30%) offered to a whistle-blower is much higher than the 10% in India, as mentioned above. Since the inception of the Whistle-blower Programme, the SEC Office has issued multiple awards which exceed 1 million dollars and many of these awards are more than $10 million.[xiii] A similar approach can be adopted by SEBI of offering higher rewards and not placing a cap on the amounts which a complainant can receive. This would encourage more complainants to come forward and resultantly, better corporate governance would be achieved.
Last but not the least, the SEBI Complaints Redress System (SCORES) mechanism which was developed by SEBI to help the investors to file complaints[xiv] has been inefficient in handling the complaints. As can be seen from the SAT order of Ashok Dayabhai Shah v. SEBI[xv], the investigations filed under SCORES were not conducted for 6 years[xvi] and the investors filing complaints were not made aware of the investigation status[xvii]. The SAT noted that SEBI had not performed its duties as a regulator in the said case and had treated the minority shareholders in a shabby manner. Although the said criticisms were diluted in the Supreme Court order, the case still proves that the mechanism has not been able to achieve its objectives as efficiently as it was supposed to.
For charging someone with the offence of insider trading, the dual requirement of being an insider and trading in securities needs to be fulfilled. The widening of the ambit of insider trading would be extremely problematic for the adjudication of future cases. The reason for the same is that insider trading is not only a tort, i.e. a civil offence but a crime as well[xviii]. If someone were to suffer the consequences of criminal conviction by referring to these adjudication orders as precedents, it would be a travesty of justice. These adjudication orders, thus, need to be re-examined on this ground. From a regulatory perspective, there can be some modifications made in the existing framework surrounding the PIT Regulations like increasing the rewards for whistle-blowers, improving the complaint mechanism under SCORES, use of the data lake project for targeting insider trading on virtual encrypted platforms and adopting the guidelines of the OCIE for preventing leakage of UPSI in firms dealing in the securities markets.
[i] Anirudh Sood is a 4th Year law student at National Law University Jodhpur. His interests lie in financial policy issues and Securities laws. Any query on the article can be directed to email@example.com. [ii] N.K. Sodhi Committee Report, supra note iii, Preface & note from the Chairman ¶ 15 & Part II key Recommendations: Deliberations & Rationale, ¶¶ 2, 40 & 41. [iii] N.K. Agarwal & S.V. Vora, Ambuja Cements Ltd., supra note 1, ¶¶ 25.j & 28.f. [iv] Id. at ¶¶ 38 & 43. [v] Nasiruddin v. Sita Ram Agarwal (2003) 2 SCC 577. [vi] D.R. Venkatachalam v. Transport Commr., (1977) 2 SCC 273, at ¶28. [vii] N.K. Sodhi Committee Report, supra note iii, Part II key Recommendations: Deliberations & Rationale, at ¶35. [viii] K.K. Kochuni v. State of Madras and Kerala, AIR 1960 SC 1080, ¶50. [ix] Regulation 7D, SEBI (Prohibition Of Insider Trading) Regulations, 2015, inserted by Securities and Exchange Board of India (Prohibition of Insider Trading) (Third Amendment) Regulations, 2019. [x] Regulation 7H of the PIT Regulations. [xi] Regulation 7I of the PIT Regulations. [xii] Regulation 7C of the PIT Regulations. [xiii] See 2019 Annual Report to Congress on the Dodd-Frank Whistleblower Program (referred to hereinafter as “2019 Annual Report”) (Nov. 15, 2019), available online at https://www.sec.gov/files/sec-2019-annualreport-whistleblower-program.pdf, at 9–11 for the SEC’s summary of awards issued during the 2019 fiscal year; SEC Press Release No. 2020-15, “SEC Awards Whistleblowers Whose Information Helped Stop Fraud,” (Jan. 22, 2020), available online at https://www.sec.gov/news/ press-release/2020-15. [xiv] Frequently Asked Questions (FAQ), SEBI Complaints Redress System (SCORES), https://scores.gov.in/scores/Docs/FAQ-SCORES.pdf [xv] Before the Securities Appellate Tribunal, Mumbai, Appeal No. 428 of 2019, Date of decision: Nov. 14, 2019, http://sat.gov.in/english/pdf/E2019_JO2019428.PDF. [xvi] Id. at ¶ 21. [xvii] Id. at ¶ 17. [xviii] N.K. Sodhi Committee Report, supra note iii, Preface & note from the Chairman, ¶ 3.
Preferred Citation: Anirudh Sood, The WhatsApp leak adjudication orders: The correct precedent?, Arbitration & Corporate Law Review, Published on 17th July 2020.