With modern-day technological advancements, insider trading has raised new contours. Its regime has had certain ramifications due to encrypted applications and social media networks. The question that arises is whether the scope of the Securities and Exchange Board of India (Prohibition of Insider Trading Regulations) 2015 (“SEBI PIT Regulations”) should be widened to counter as well as to regulate these insider trading violations.
In November 2017, certain articles distributed in the print media brought to SEBI’s attention that unpublished price sensitive information (“UPSI”) regarding predicted earning patterns of 12 Indian companies were being circulated on WhatsApp groups, well before they were officially announced. The figure findings that were circulated were too accurate to be considered as mere estimates. SEBI started an investigation into the said issue and roughly 190 gadgets were seized through which the WhatsApp conversations were being coursed. This lead to the inception of a preliminary examination in the issue, wherein it was discovered that UPSI concerning Bata Ltd. alongside 11 different organizations was circulated through WhatsApp. SEBI, while adjudicating the case, held the impugned perpetrators guilty of violating insider trading regulations by unlawful communication of UPSI.
Heard on the Street (HOS) v. UPSI
The accused in these orders had asserted that the data in the WhatsApp messages was not UPSI but ‘heard on the street’ (“HOS”), also known as a “whisper number”. HOS is a practice in the brokerage circle wherein unverified market gossip and common parlances are shared in the media, including WhatsApp and other channels. These speculations are majorly based on financial modelling, management guidance, meetings with the management, and the other global factors.
There is a very thin line that demarcates UPSI from HOS. UPSI implies any data relating to an organization or its securities that is not commonly accessible and is probably going to influence the cost of the securities after becoming generally accessible. Such data should be only disclosed through stock exchanges as per Regulation 83 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. It has also been defined under Regulation 2(1)(n) of the same.
In the present scenario, SEBI concluded that the information disseminated was in the nature of UPSI because not only did it relate to the internal matters of the companies, but also because it had not been disclosed by the companies in the regular course of their business. Communication of UPSI by an insider without any “legitimate purposes, performance of duties or discharge of legal obligation” is prohibited under Regulation 3 of the SEBI PIT Regulations. Also, the ignorance pleaded by the accused in regard to the nature and materiality of data was termed ignorance of the law and not fact, making the legal principle of ignorantia juris non excusat applicable in the present case. The doubt ought to have stimulated when the data circulated by the accused matched with the declared outcome and final figures.
The constitutional directive of right to privacy
There has never been any winnable argument favoring the notion that private interest, private property, and private rights must prevail over the public interest. But there have been many instances where the judiciary has favored public interest over private rights, and this SEBI order shall be added to that list. However, this creates a conundrum as to what should be acknowledged by the court. Under this head, we shall moot upon the act of seizure of mobile phones by SEBI.
The chats in WhatsApp are end-to-end encrypted and bar any other person/party access to the messages due to which the procedure of tracking down the source of the leak became very difficult for SEBI. Furthermore, WhatsApp itself cannot provide any information regarding the forwarded messages due to the nature of encryption.
However, in an attempt to curb the practice of insider trading, SEBI went ahead and requested WhatsApp to furnish information about the quarterly results of the companies, a request that was refused by WhatsApp in consonance with its privacy guidelines. WhatsApp cited the judgment of the Delhi High Court of Karmanya Singh Sareen & Anr. v. Union of India, wherein WhatsApp was not allowed to share private information of its users with other companies including Facebook. The Apex Court in the case of K.S. Puttuswamy v. Union of India, affirmed that Right to Privacy is an intricate part of Right to Life as under Article 21 of the Constitution of India, but did not interpret the technological advancements and white-collar crimes in detail. Seizure of almost 190 mobile phones by SEBI raised a sense of speculation in a common man with regards to data extraction by government agencies, especially when the particular data is end-to-end encrypted.
Consequently, SEBI went ahead and ordered the seizure of mobile phones to look into the WhatsApp chats. Through this they were able to conclude that Asian Paints was one of the firms whose quarterly financial records matched with the messages which were forwarded on WhatsApp, thus terming it as UPSI.
Where did the SEBI go wrong?
The issue of miscarriage of justice is far from over even though SEBI has held the persons accused to be guilty and liable to pay fines. SEBI, as a government organization is not authorized with such powers to carry out a comprehensive inquiry over end-to-end encrypted based software/applications such as WhatsApp, where the source of the information cannot be traced probably because a chain of communication was followed. Furthermore, the challenge is not only limited to the technological advancements per se. Technology is directly proportional to the discovery of knowledge and thus, is inevitable. Before WhatsApp or any form of social media, text messages with high-quality encryption and devices such as burner phones were used by the miscreants to carry out acts such as insider trading.
Subsequently, SEBI was forced to solely rely upon the figures of earnings that were forwarded on WhatsApp to decide whether the information circulated qualified as UPSI. It then compared those figures with actual figures as disclosed by the companies. Later, SEBI concluded that the figures of Asian Paints matched almost exactly with those in the WhatsApp messages which qualified as UPSI, taking away from the claims that the figures were only “estimates”.
This SEBI order has set a rather testing precedent, allowing for seizure of mobile phones to overcome the difficulties posed by end-to-end encryption during investigations. The road ahead is challenging because the government must act robustly and either fill the gap or demarcate specifically between the right to privacy of a particular individual and the rights of the public at large. In this blog, the authors have briefly discussed the technological challenges faced by government agencies such as SEBI during investigations. Further, technology evolves with time, and the fact that SEBI might face many cases dealing with end-to-end encrypted technologies in the near future seems acceptable. It is hoped that SEBI will act rather swiftly to settle the matter once and for all, ensuring the right to privacy of an individual while also managing to satisfy the public interest at large.
This article has been authored by Anurag Mohan Bhatnagar and Amiya Krishna Upadhyay, students at National Law University, Odisha.