Case Comment Shruti Vora v. SEBI

Introduction

For the wholesome management and functioning of a corporate organisation, transparency, openness and disclosure are its fundamentals. And to achieve these qualities, it is essential to keep a fiduciary relationship among the members, managers, and stakeholders of the organisation. Good governance attracts the investors and increases their reliance on the companies. The directors of a company are its care taker and the future of the company is dependent upon the decisions of the directors. Therefore, the meetings and decisions of the company amount to extra sensitive information. Confidential information is only shared, when; either is benefits the company or is essential to do so. Hence, the internal information is to be kept in isolation, until disclosed in public. It has been observed since years that for gaining undue advantage over others, the ‘insiders’ manages to slip the private information and thus, engages in unfair trade.

In 1978, the Sachar Committee recommended to make stringent laws to acknowledge and tackle the details of those involved in trade of unpublished price sensitive information.

What is Insider Trading?

In 1986, the term ‘Insider Trading’ was defined by the G.S. Patel Committee as “trading by the persons who are in the management of the company or are close to the management of company, on the basis of price sensitive information of the company, which they possesses but is not available to others”¹.

In 1989, the Abid Hussain Committee weighted to include the practice of insider trading as civil and criminal offence and to further lay stricter regulations by Security Exchange Board of India (herein after referred as SEBI).

The SEBI (Prohibition of Insider Trading) Regulation, 1992, defines it as a, “breach of duty of trust, by the, officers of the company towards the shareholders. It is a practice of using companies unpublished price sensitive information to deal with the companies’ securities. The Unpublished Price Sensitive Information (herein after referred as UPSI) is not known to public as it is connected with the decision making of the directors of the company. And the manipulation of such information for causing loss or gain is termed as insider trading.

What is Un-published Price Sensitive Information?

Unpublished price sensitive information is defined in Section 2(1) (n) of SEBI (Prohibition of Insider Trading) Regulations, 2015.

Information is referred to as price sensitive when it is not made public, is related to the internal decision of the company and if fired can affects the market value of the shares of the company and hence called as ‘price sensitive information’.

Who is an Insider?

Section 2(1) (g) of SEBI (Prohibition of Insider Trading) Regulations, 2015 defines an insider, as a person who is:

I. Connected person, or

II. In capacity of or having access to unpublished price sensitive information.

Facts of the Case

1. In November 2017, certain articles were in circulation in print media, wherein, it was alleged that the quarterly Unpublished Price Sensitive Information of various companies were in circulation in various private WhatsApp groups, before their official announcement. Against this, the SEBI conducted a preliminary examination in respect of circulation through WhatsApp groups and during these investigations 26 entities of Market Chatter Groups were searched and consequently, 190 electronic devices, records etc., were confiscated. The seized devices and records were further kept under observation and it was found that information in respect to 12 companies were allegedly leaked on WhatsApp, the alleged information relates to the earnings and other financial statements of the companies. Apart from the names of firms published in the aforesaid news articles, while investigation, SEBI further found out 11 firms whose UPSI was in circulation. Wipro Limited was one of them, about whom chat was retrieved from the WhatsApp of Shruti Vora, a participant of the alleged group. Based on further search and evidences one Govind Aggrawal was listed out, who communicated the information to Shruti Vora and then she to some Aditya Gaggar through WhatsApp.

2. Correspondingly, SEBI carried out a separate investigation in respect to Wipro Ltd., to specify any possible breach of the provisions of SEBI Act, 1992, and SEBI (Prohibition of Insider Trading) regulation, 2015 (Herein after referred as SEBI ‘PIT’ Regulations). On 25^th January 2017, Wipro made announcement in respect to its quarter end financial statements. Therefore January 25^th 2017 was the date when the company made its aforesaid price sensitive information public.

The SEBI asked the company to provide detailed chronology of the events with respect to the announcement of quarterly result published on January 2017.

And the following were observed, from the information provided by Wipro Ltd.:

• The data, figures of Wipro Ltd., which were being circulated through WhatsApp prior to the official announcement on stock exchange.
• The deviation in the alleged information being communicated and the one released by the company was miniscule that is, it was closely matching with the figures officially announced and was within the range of 0.03% to 0.47%.
• Similar pattern was also seen in respect to other companies for different quarterly period.

3. The definition of ‘Unpublished Price Sensitive Information’ is provided under Regulation 2(1) (n) of SEBI(PIT) Regulation, 2015 as :

‘UPSI’ means any information, in respect to the company or its securities, directly or indirectly, that is usually not available to the public and which upon becoming public has the capacity to affect the price of securities etc.

4. In view of the above stated provision, the aforesaid WhatsApp messages related to the Wipro Ltd. was held to be the unpublished price sensitive information and such circulation of information through WhatsApp relating to financial figures of the company was observed as the transmission of the UPSI. The Noticees in the instant case viz. Prathiv Dalal and Shruti Vora were therefore accused of having possession of UPSI. And thereafter it was opined that Prathiv Dalal and Shruti Vora were ‘Insiders’ as according to the Regulation 2(1) (g) of SEBI (PIT), 2015 which is stated below:

‘INSIDER’ means any person who is:

• A connected person or
• In possession of or having access to unpublished price sensitive information.

5. In light of the above provision, it was contended that Prathiv Dalal and Shruti Vora have contravened the Section 12A(d) and (e) of SEBI Act, 1992 and Regulation 3(1) of SEBI (PIT) Regulations,2015, which states that “ no insider shall transmit, provide, allow access to any unpublished price sensitive information, relating to a company or securities listed..²”

6. The companies in issue under the instant case were Bajaj Auto Ltd., Bata India Ltd., Ambuja Cements Ltd., Asian Paints Ltd., Mindtree Ltd., Wipro Ltd., wherein apart from Shruti Vora, Neeeraj Aggrawal, Aditya Gagar, Prathiv Dalal, (referred as ‘Appellants’ collectively) were charged for the offence of Insider Trading and a penalty of INR15, 00,000 was levied, under Section 15G of PIT regulation, 2015, in each matter by the Adjudicating Officer.

Consequently, the appellants approached the Honourable Securities Appellate Tribunal (herein after referred as SAT), against the order of Adjudicating Officer.

Assertion of The Adjudicating Officer

I. All the appellants either were employees or engaged in the securities market, and they were duty bound to abstain from sending any such information or message to any client or some entities to whom the information were forwarded were not even client.

II. The intended receivers of the messages were not the clients even; hence the recipients were capable to affect the market value of shares of the various companies.

III. Further, the proximity between the messages communicated through WhatsApp and the official announcement of the financial results, striking close resemblance of figures transmitted via message and actual output declared by the companies, also lead to the reasoning by the learned Adjudicating Officer to come to the conclusion that the messages were nothing but communication of unpublished price sensitive information in contravention of the SEBI (PIT) Regulations, 2015.

IV. During the course of investigation by the SEBI no proof of leakage of information could be traced from the concerned teams related to the respective companies.

V. It was further contended that the figures stated in the messages were not even in any approximate range but were in definite value. Therefore the reason put forth for denying the defence of appellants citing example of Bloomberg was that in case of estimates enumerated in Bloomberg were widely differing from the actual statements of the company.

Claims of the Appellants

All of the appellants raised the more or less same pleas, as follows:

• They all asserted that the messages taken cognizance of by the respondent, SEBI, from their devices would show that none of the appellants were the generator of the messages but they had merely received and forwarded them to others. Further contended that, several other messages predicting inadequately the figures were in circulation, even though, no cognizance of them were taken during investigation.
• The appellants were unable to trace the originator, owing to the lapse of the reasonable time, to show as to from whom they got the alleged messages. Also, asserted that even the respondent SEBI could not find the originator due to the limitation of end to end encryption and privacy policy of the messenger app.
• The appellant further contented that making speculation ahead of the official disclosure or announcement of the final results in the market is in vogue these days. And this is known as ‘Heard on Street’, a popular practice within trade markets and such unsubstantiated information is widely circulated.

The appellants cited the example of the twitter handle managed by the Wall Street Journal in USA, particularly for the circulation of the Heard on Street.

Also of the forecast done by the Research Analysts, Bloomberg is a reputed organisation working in this regards, regularly publishing the estimates of various reputed entities as expected result.

• The data mined by the respondent SEBI from the devices also showed that beside the messages taken forth as question numerous other messages relating to financial results were in circulation which substantially varied from the final results of the companies. However, only those messages were taken up closely matching with the results with the intention to launch the ongoing proceedings.
• The appellants for further making their contention strong submitted that in the case of Wipro Ltd., the guidance issued by the company precisely matched with the evaluation given in the WhatsApp message which later on almost matched with the final disclosed statement with some minor deviation
  
  And on these assertions the appellants submitted that the proceedings against them shall be called off.

The learned Adjudicating Officer however, rejected the submission of appellants. And concluded that each of the appellant is guilty of violating the Section 12 of the SEBI Act, 1992 and of regulation 3(1) of the SEBI (PIT) Regulation, 2015, which run under as:

I. Section 12A(d) of SEBI Act, 1992

‘No person shall directly or indirectly engage in insider trading’.

II. Section 12A(e) of SEBI Act, 1992

‘No insider shall communicate, provide, or allow access to any unpublished price sensitive information, relating to a company or securities listed or proposed to be listed, to any person including other insider except where such communication is in furtherance of legitimate purpose, performance of duties or discharge of legal obligations’.³

Issue Involved In The Case

I. Whether a message ‘received and forwarded’ on WhatsApp regarding quarterly monetary results of a company closely resembling to the vital statistics, released after the in house finalisation by the company, before any public disclosure of the same by the concerned company, would amount to an unpublished price sensitive information under the provisions of the SEBI(PIT) Regulation, 2015?

Observations of the Securities Appellate Tribunal

The honourable tribunal was chaired by Justice, Tarun Aggrawal, Dr.C.K.G. Nair as a member and Justice M.T.Joshi as a judicial member, the bench held that the orders of the Adjudicating Officer were meritless and hence the appeals were allowed. And following observations were made by the bench:

• It is worth to be noted that the respondent SEBI despite all efforts could not locate the source of the information or find out leakage, if any, from the side of companies internal management teams. And the same contention has been expressed by the Adjudicating Officer time and again.
• In respect of the estimates of the broker which subsequently matched the with the final statement of the company, the Adjudicating Officer (herein after referred as AO) justified that, appellants never claimed that impugned messages had arisen from the market research similar to that of brokerage houses.
  
  The honourable bench of SAT, thus, observed that the AO failed to entertain the appellant’s plea that the WhatsApp message in issue would have been originated from such brokerage houses or from the speculations available on the platform of Bloomberg which were floating in public domain. Apart from this, learned AO also failed to took notice of several other messages of same nature received and forwarded by the appellant which were totally aloof from the published financial results. Moreover, the plea of the appellant Shruti Vora pointing out that similar message regarding the Axis Bank has also reached her which she had also forwarded. The published result, however, in this case was widely different and no weight-age was attached to the same by the AO. Therefore, it was observed by the honourable bench that on the conjoint reading of the Section 2(1) (n) and (g) of the PIT Regulation, 2015 the information contained in the WhatsApp message did not amount to the unpublished price sensitive information.
• The definitions as stated above of ‘UPSI’ and ‘Insider’, shows that generally available information can not constitute the subject matter of price sensitive information.
• Bench contended that, information can be labelled as unpublished price sensitive information only when the person getting the information had prior acknowledgement of it being price sensitive information. Intention or knowledge being mental element can be proved on the merit of preponderance of probability on attending circumstances⁴. And in the instant case there were no such circumstances except those possibilities advanced by the AO. Closeness of time and proximity between the information were the only two elements weighed by the learned AO to regard it as the UPSI. Therefore, element of prior knowledge must be there in case of insider trader.
• The honourable bench in the instant case placed reliance on an earlier judgement of the Samir Arora v. SEBI⁵, wherein the tribunal rejected the viewpoint of SEBI that there is no need to establish any connection between the potential source of the UPSI and the person alleged to have possession of such price sensitive information.

For the above mentioned reasons the honourable bench withheld the reasoning and order of the learned AO, imposing a penal liability of INR15, 00,000 for each case.

The SEBI appealed against the order of the SAT in honourable Supreme Court; however, the apex court prima facie rejected the appeal.

Analysis of the Judgement

1. Determining what is UPSI?

‘UPSI’ means any information, in respect to the company or its securities, directly or indirectly, that is usually not available to the public and which upon becoming public has the capacity to affect the price of securities, means and includes the following⁶:

• Financial results
• Dividends
• Change in capital structure etc.

It must be kept in mind that the messages being circulated through WhatsApp in the instant case, meet the requirements of as laid down in the definition mentioned above. However, for two reasons the tribunal has held that information not to be a UPSI, which are as follows:

a. The information could have originated in public domain prior to appellant sharing it and therefore it falls under the ambit of ‘generally available information⁷’, which means accessible to the public at large. This implies that only that information, which is on such front to be accessed by the public, would qualify for this definition.

However, in the present case the appellant do not have anything to put on record, specifying the availability of the alleged information to the public prior to their sharing it. Their assertion in this regard was solely based on the presumption of having origin from the brokerage houses or Bloomberg estimates which were circulated widely.

Thus, concluding we can say that tribunal proceeded on mere possibility of existence of such information in public domain.

b. The appellant were unaware of the fact that the impugned information was UPSI. The tribunal observed that only that information would be branded as UPSI, possessor of which had knowledge that it was a UPSI.

Even the rough reading of the definition of UPSI nowhere shows that ‘knowledge of the possessor’ is an essential of the UPSI. The objective behind it would have been to give it a broader perspective with the view of protecting investors’ interest. A UPSI whether share intentionally or unintentional is going to harm either directly or indirectly the investors. So, tribunal was supposed to deal with the matter instead deviated from its judicial function into the legislative one.

2. Relevance of tracing the source of UPSI

In the instant case tribunal has relied heavily on the fact that the source of origin could not be identified by the investigation team. Hence, appellant could not be held liable for committing insider trading.

However, the note provided in the Regulation 2(g) of PIT, 2015, states that, anyone having in possession the UPSI regardless of how he got it or accessed it, is to be considered as an ‘insider’. Therefore, the intent was to bring in ambit any person who is in possession or has access to UPSI. The onus of proving the fact is on the party asserting the fact while the other party would defend it by producing effective evidences.

A combine reading of the two provisions discussed above reflects that appellant were very well within the ambit of insider, since they were in possession of UPSI. And even the end note categorically states that anyone in possession of UPSI is insider regardless of how he/she acquired it.

But, on the contrary, the honourable tribunal relied upon the judgement of Samir Aroracase wherein it was observed that the establishment of connection between the source of information and the person possessing information is sine qua non for fixing liability under insider trading provisions.

Conclusion

Insider trading is still perceived as one of the white collar crimes in India. However, the global scenario is relatively different. Many a countries across the globe managed to curb the insider trading by implementing and executing stringent laws. Although, many regulations and laws in India the accused somehow, manages to free themselves from the clutches of the law.

In respect to the judgement discussed above, one can conclude that the tribunal has just gone the opposite of the legislative intend, a narrower interpretation was done by the bench which failed to meet the essence of the PIT regulation. Instead of sticking to the provisions laid down by the statutes, the tribunal went on to assume legislative function.

Therefore, this order of the tribunal has opened up the scope for the offenders to take up undue advantage over the investors and thus can easily evade from law. Therefore, there is a need to again re-examine the contentions of the bench, whether they were in consonance of the provisions of the statute or not.

Bibliography

BOOKS REFERRED:

• C.G. Bhuwneshwar Mishra, Law Relating to Insider Trading, Taxmann, 11^th edition 2018.
• Eshwar Sabapathy, Case Digest on Insider Trading, Bloomsbury Professional India, 2022 edition.

STATUTORY PROVISIONS REFFERED:

• Security Exchange Board of India Act, 1992 (Act no.15 of 1992)
• Security Exchange Board of India (Prohibition of Insider Trading) Regulation, 2015 (as amended in 2021)

WEBSITES REFFERED:

• Samir Arora vs. SEBI, available here, last visited on 7^th December 2022.
• Shruti Vora vs. SEBI, available here, last visited on 7^th December 2022.
• Blog available at, here, unknown author, last visited on 7^th December 2022.
• Judgement of Shruti Vora case available at, here, last visited on 7^th December 2022.

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About the author

Jatan Singh is a 3 Year Student of the Faculty of Law, Aligarh Muslim University, Aligarh, India.

1. Report of the, high powered committee on Stock Exchange Reform, available here. Accessed on 6^thDecember 2022. [↩]
2. Available here. ( last accessed on 6^th December 2022) [↩]
3. Statute available here (accessed on 6th December 2022). [↩]
4. Para 16, Shruti Vora vs. SEBI Appeal No. 308 of 2020 [↩]
5. (2005) 59 SCL 96 SAT Mumbai [↩]
6. Defined in, regulation 2(1) (n) of SEBI (PIT), 2015 [↩]
7. Defined in, regulation 2(e) of PIT, 2015. [↩]