On November 16, Reuters published an article claiming that three days before the publication of the financial results of Dr. Reddy’s Laboratories Limited (and certain other companies) for the year 2016-17, information regarding loss on its balance sheet had already been exchanged on WhatsApp. This issue became critical because the consensus forecast compiled by Thomson Reuters had predicted a profit of 3 billion rupees in the said financial year, whereas the actual results showed a loss of approximately 500 million rupees, as also circulated on WhatsApp. According to the news report, an insider had disclosed this information to a broker who uploaded it on a WhatsApp group. The matter is currently being investigated by SEBI.
This news article and the subsequent discussions has raised important issues related to the interpretation and scope of the SEBI (Prohibition of Insider Trading) Regulations, 2015. We analyze some of them here.
Identifying whether the information is UPSI
Regulation 2(1)(n) defines Unpublished Price Sensitive Information (UPSI) as information which is related to a company or its securities, which when made available to the public at large, will materially affect the price of the securities of the company. The definition also provides a list of certain information which is deemed to be UPSI such as information regarding financial results, mergers, dividends, and information which is considered ‘material’ under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.
In the abovementioned news article, a person who often received and shared such messages on WhatsApp claimed that he was not aware whether the information being shared was UPSI or not; he merely forwards what he receives. It is easy to determine whether the information is UPSI if it falls under one of the categories under Regulation 2(1)(n). However, the list is only illustrative. Certain information which is considered “price sensitive” by one may not be considered so by another, resulting in the UPSI being shared by the latter in good faith. Thus, the intention of a person in possession of the information plays crucial role. Although, in 2006, the Supreme Court held that mens rea is not an essential element while determining whether an act amounts to insider trading; however, one can always argue that this position was taken under the 1992 Insider Trading Regulations and not under the current law which has expanded the restrictions on handling of UPSI. Considering that under Regulation 3, mere communication or procurement of UPSI is punishable, the standard to determine UPSI should be carefully adopted and the plea of ‘no malicious intent’ may be considered by SEBI.
Recognizing who is an “Insider”
The Insider Trading Regulation prohibits communication and procurement of UPSI and also restricts trading in securities by an “insider” while in possession of UPSI. An important enquiry is to identify: who an “insider” is. Regulation 2(1)(g) defines an insider as: (i) a connected person (Regulation 2(1)(d) defines “connected persons and also provides a list of persons who are deemed to be connected); or, (ii) a person who is in possession of or has an access to UPSI.
In the instant matter, the person who was aware of Dr. Reddy’s losses in the said financial year will be an insider since he was in possession of the UPSI. However, the difficultly arises in imposing liability in cases where there is a chain of tippees after the original tipper involved in such exchange of UPSI. Moreover, due to the use of ‘end-to-end encryption’ technology by WhatsApp, third parties are now prevented from decoding messages exchanged between two persons and therefore, it is difficult to identify all tippees.
As per the current law, every tippee who has procured or provided an access to UPSI is in contravention of Insider Trading Regulations and liable for punishment. This draws our attention to another question: should sharing of a relationship (such as that of a promoter, director, employee, etc.) with the company be made prerequisite for determining whether a person is an “insider” in India where the principle of ‘communication simpliciter’ is followed. In some jurisdictions, such as the USA, there is no blatant prohibition on communication of UPSI; barring a few exceptional situations, fiduciary duty between an insider and the company is an essential element before holding a person liable for insider trading.
If such instances become frequent, wherein confidential information which may have a bearing on the price of the securities is exchanged on social media platforms, which has a wider reach, then it may increase the chances of market manipulation. The bad actors could potentially share misleading information and benefit from price fluctuations arising out of investors reacting to such information. Thus, there will be no level playing field for investors and it would act detrimental to the interest of ordinary shareholders of the company and the public, in general.
Besides investigating the current matter, SEBI needs to relook at the current laws. A ‘Committee on Fair Market Conduct’ was formed by SEBI in August 2017. However, the Committee has not come out with its findings / recommendations yet. In light of the recent events, it will now be essential for the Committee to take a note of the new channels of outflow of price sensitive information and suggest ways to monitor / regulate them. Besides this, the Committee should also reconsider the criteria for identifying UPSI and insider to fix liability under the Insider Trading Regulations.