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Insider Trading: Recognizing SEBI’s Power to Access Coded Electronic Messages




INTRODUCTION


In mid-2019, SEBI (Prohibition of Insider Trading) (Amendment) Regulations, 2018 was on effect that was passed on the eve of 2018. Securities and Exchange Board of India (SEBI) amended the certain provisions of the SEBI (Prohibition of Insider Trading) Regulations, 2015 (PIT) curbing the irregularities in the flow of Unpublished Price Sensitive Information (UPSI). The amendment clarified the communication of UPSI as prohibited except for legitimate purposes and seeking clearance before trading in the company’s shares extending to senior employees and promoters.


However, in the context of dynamic technology, SEBI has failed in implementing any exclusive amendments for monitoring the social platforms where UPSI are commonly circulated. For the purpose of same, this Article will talk exclusively in relation to the social platform – WhatsApp, considering the current popularity of the platform adopted for circulation of UPSI.


CIRCULATION OF UNPUBLISHED PRICE SENSITIVE INFORMATION THROUGH SOCIAL PLATFORM IS ILLEGAL


Regulation 3 of PIT read with Sub-Section 12A (e) of The Securities and Exchange Board of India Act, 1992 (SEBI Act) prohibits the communication and procurement of UPSI except for legitimate purposes. The term ‘legitimate purposes’ is not defined in the statutes but under the new Sub-Regulation 3 (2A) of PIT, the power to define ‘legitimate purposes’ is given to the board of the listed companies that could determine by implementing policies under their Codes of Fair Disclosure and Conduct.


Furthermore, in the recent cases of Axis Bank Limited[i], HDFC Bank Limited [ii] and Tata Motors Limited[iii], wherein both the entities were held liable for leakage of UPSI, circulating through private WhatsApp groups, as all being listed companies, such leakage of information prima facie attributed to the inadequacy of process, controls and systems. It is necessary for them to keep the processes and systems in their place so to ensure the prohibition of communication of such sensitive information and therefore, were liable for violation of Regulation 3 of PIT and Sub-Section 12A (e) of SEBI Act.


THE POWER OF SEBI TO ACCESS CODED WHATSAPP MESSAGES


SEBI has not exclusively defined any process wherein they have the direct authority to access the WhatsApp messages until there is presence of UPSI in concerned messages and an act of fraudulent trading in consequences of such UPSI. It is a combination of several statutes from where this power has been derived and provided SEBI with the required stature to access such WhatsApp messages.


Firstly, SEBI is a state in accordance with Article 12 of the Constitution of India. SEBI got its statutory power in 1992 through an amendment in the SEBI Act. The Act was passed by the Government of India, making SEBI the regulator of capital market. SEBI is being controlled by the Government of India both financially and managerially as mentioned under Section 4 and Section 13 of SEBI Act respectively and hence, is fulfilling the essentials of Article 12. The Act also gave the three prominent functions including quasi-legislative, quasi-judicial and quasi-executive.[iv] Conclusively, SEBI, being a statutory body, falls under the purview of State.


Secondly, Sub-Section 11 (2A) of the SEBI Act provides the power to inspect any document of a listed company where there is reasonable ground that the company is involved in insider trading or fraudulent practices. Furthermore, it provides SEBI to adopt measures as it deems fit with a view of protecting the interests of investors in securities. Herein, the power to access WhatsApp Messages may come under the ambit of Sub-Section 11 (2A) of the SEBI Act. However, the Section alone would not be able to use for access of such messages as it is to be first considered under the ambit of “document” stated in Sub-Section 11 (2A) of SEBI Act and the presence of reasonable ground, herein the act of trading on such messages, as prescribed under Sub-Section 11 (2A) of SEBI Act.


Thirdly, WhatsApp Messages, being in electronic form, is admissible in the Court of Law as the electronic data is admissible as an evidence under Section 65B of Indian Evidence Act, 1872 (Evidence Act) that provides the conditions for admissibility of electronic records read with Sub-Section 2(1)(i) and Sub-Section 2(1)(w) of Information Technology Act, 2000 (IT Act) that defines Computer and Intermediary respectively. Consequently, through literal interpretation, WhatsApp Messages can be considered as a document in electronic form while the electronic device used for communication can be considered under the definition of ‘Computer’. Thus, the transcripts in form of messages are admissible in the Court of Law and could be used for verification of Insider Trading. However, WhatsApp being an intermediary, won’t be personally liable under Section 79 of IT Act due to the involvement of “Safe Harbour Protection” wherein the intermediary is merely a facilitator and does not play any part in creation or modification of third-party data.


Furthermore, Sub-Section 11C (3) of SEBI Act provides SEBI, when acting as the Investigation Authority, to ask for any such information or to produce such books or records from the intermediary that is relevant for the purpose of investigation. The intermediary, herein WhatsApp, are obliged to share the information or data, if it could be verified that any fraudulent trading was done on such messages. The messages sent through the intermediary would be required to be given to SEBI on such situations. However, it is to be noted that due to recent internal policy changes, now WhatsApp does not record any messages or data sent through their platform due to the coded “end-to-end encryption” system, thus, the intermediary would not be able to furnish the required transcripts on the request of the Investigation Authority.


The direct remedy would be seizing of the Source and accessing to get the required messages. The Source could be in form of computer, mobile or any other instrument through which such messages could be accessed. Such action could be taken under Sub-Section 11C (3) of SEBI Act read with aforementioned acts. However, there must be hard-proof that any fraudulent trade practice must be completed.


CONCLUSION


SEBI derives the power to access WhatsApp Messages from multiple statutes that are further admissible in Court of Law. Furthermore, considering SEBI as a state, it has superior powers than other private regulators, conferring them the wider power to initiate any action under their ambit for the fulfilment of their duty.


However, the absence of a stand-alone statute that provides the power to access WhatsApp messages has hampered the duty of SEBI for safeguarding investor interests. There is utmost requirement of the condition stating the occurrence of any fraudulent activity. The concerned authority requires to issue or amend the existing statute similar to Sub-Section 11C (3), that provides the power to SEBI to access the alleged UPSI by accessing the content of the mobile-phones or computers send through third-party intermediaries, without the occurrence of concerned fraudulent activity.


SEBI has been conferred wide powers by SEBI Act because it is entrusted with the nature of duties that are highly specialised and important. SEBI’s role as safeguarding investor interests is of paramount importance and the exhaustive powers are a testimony to the statutory recognition of the regulator’s authority to interfere as and when it deems fit. Consequently, SEBI has been conferred the power to access the UPSI sent through social platforms, specifically WhatsApp, in order to identify the flow of information and identify the accused for securing the interest of investors, after fulfilment of certain stated conditions.


FOOTNOTES

[i] SEBI Order in the Matter of Axis Bank Ltd., WTM/GM/ISD/81/2017-18, https://www.sebi.gov.in/enforcement/orders/dec-2017/directions-in-the-matter-of-axis-bank-limited_37168.html.


[ii] SEBI Order in the Matter of HDFC Bank Ltd., WTM/MPB/ISD/142/2018, https://www.sebi.gov.in/enforcement/orders/feb-2018/directions-in-the-matter-of-hdfc-bank-limited_37996.html.


[iii] SEBI Order in the Matter of Tata Motors Ltd., WTM/MPB/ISD/147/2018, https://www.sebi.gov.in/enforcement/orders/mar-2018/directions-in-the-matter-of-tata-motors-limited_38102.html.


[iv] SEBI Order in the Matter of Deep Industries Ltd., SEBI/WTM/MPB/IVD/ID–6/162/2018, https://www.sebi.gov.in/enforcement/orders/apr-2018/order-in-the-matter-of-insider-trading-in-the-scrip-of-deep-industries-limited_38713.html.

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