Over the last two months, the Securities and Exchange Board of India (SEBI) has passed a series of orders as part of its investigation into the circulation of company results prior to their public announcement through Whatsapp. The accused in each of these cases are some employees of a stock broking firm, in their institutional sales team. They were found to have passed on near-accurate predictions of quarterly results about to be published by about 12 listed companies — Unpublished Price Sensitive Information (UPSI) — to clients of the firm.
The regulator fined them Rs 15 lakh each, in each of the orders passed, finding that their act of merely sharing the UPSI was a violation of insider trading rules. That was as much evidence as the regulator could gather in the investigation. For this reason, it is highly likely that the orders, if appealed, will be overturned.
The investigators were unable to even get a hint so as to who was behind the actual leak of information. Neither was it shown that the accused benefitted out of sharing the information in any way, or for that matter whether any trades were executed by anybody (including the clients of the firm) on the basis of the shared information.
The adjudication order pleads helplessness, saying that since the message trail was deleted, there was no way to trace the messages to their origin. (The investigation started pursuant to a news report in a newspaper about the circulated messages).
The accused claimed that the information was merely a market rumour — Heard on the Street, as it is known in broking parlance. That seems far-fetched. The accused claim they were sharing one of many estimates found in various research reports, without any explanation as to why they chose one report over the others. They also claim that SEBI has cherry-picked messages pertaining to these 12 companies to build the case against them, when they had sent similar messages with regard to hundreds of other companies. Indeed, to sustain a charge as serious as insider trading, there simply has to be more evidence than mere passing of information.
So then what motivated SEBI to pursue the case to this end?
Perhaps it was merely a warning shot to the broker community at large. That is understandable (though legally unprincipled). The next time a person shares information as if it is a tip or even a rumour, they will be alive to the possibility that they might be in the regulator’s crosshairs.
This then also points to an even graver problem. Cracking down on insider trading is such an uphill task that SEBI almost always comes short. The number of insider trading convictions that have stood up to scrutiny before the Appellate Tribunal is negligible. It might even appear that SEBI is fighting with its hands tied behind its back.
For example, the Securities Appellate Tribunal acquitted Manoj Gaur, the chairman of Jaypee Associates, as well as his wife and brother, of insider trading charges in 2012; finding that SEBI failed to prove that the wife’s trade had been done on the basis of information Gaur had passed on to her. This was in spite of SAT’s finding that Gaur was indeed in possession of the UPSI when the trades were executed by his wife. One could legitimately ask how SEBI could prove a private conversation between a husband and wife, without an unacceptable intrusion into their personal space.
It is only in 2015 that SEBI got the power to summon call data records. Its plea for wiretapping powers has fallen on deaf ears. Incidentally, one of the most high-profile insider trading convictions in recent times — that of Sri Lankan-origin hedge fund owner Raj Rajaratnam, along with former McKinsey boss, Rajat Gupta, in the United States, was based on wiretaps. However, these wiretaps were collected as part of money laundering investigations, not on insider trading charges. Even the American capital markets regulator does not have wiretapping powers.
The fact is insider information abounds unchecked in Indian market circles in the form of rumours. Those who manage to get the information before the market gets wind stands to make a huge windfall. The ordinary trader is justifiably aggrieved that she has to content with the leftovers.Abraham C Mathews is an advocate practicing in Delhi, and a chartered accountant. Twitter: @ebbruz. Views are personal.