India: WHATS-UPSI? Key Themes From SEBI'S Recent Orders On Insider Trading

1. INTRODUCTION

Sixty five billion messages are sent over WhatsApp every day (over 750,000 every second). WhatsApp's users exceed two billion, reside in 180 countries and speak over 60 languages. Perhaps these numbers exemplify best the Korean proverb: words have no wings but can fly a thousand miles. Digital, electronic and social media lend, not wings, but veritable rocket-fuel to a staggering quantum of information. Corporate and securities laws must stay apace, given the mind-boggling potential that unregulated (and often, end-to-end encrypted) information flow has toward market disruption.

The Securities and Exchange Board of India ("SEBI") has recently had the opportunity to examine some of these knotty issues. In two related sets of orders, it has opined on the dissemination of unpublished price sensitive information ("UPSI") through digital and social media. Read together, the orders lend valuable regulatory perspective on some keenly-debated questions, including on (i) what makes UPSI "public"; (ii) the contents and source of information in research reports; (iii) the legality of "Heard-on-Street" estimates; and (iv) the liability of innocent tippees who receive UPSI.

In this article, we analyse these orders, examine key themes that emerge and attempt to discern bright-lines.

2. THE ORDERS

2.1 WhatsApp Orders¹: In 2017, media houses reported rampant circulation of UPSI through private WhatsApp groups. An extensive investigation by SEBI ensued. Apart from a maze of dubious "market chatter" groups, the investigation revealed that financial information of 11 listed entities had been received and subsequently forwarded by certain individuals ("UPSI Transferors") on a one-on-one basis. Circulation was through one-liners summarizing select line-items of the 11 entities (such as profits, EBITDA and turnover) prior to a formal announcement of their quarterly results. Adjudication proceedings were initiated against the UPSI Transferors. After extensive hearings, SEBI held (in 8 orders till date) the UPSI Transferors liable for communication of UPSI under Regulation 3(1) of the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015, as amended ("PIT 2015"). The orders were premised on the following:

• The underlying financial information circulated was UPSI².
• Since the information had been circulated in a closed private environment, it did not amount to speculative "Heard on Street" estimates.
• Irrespective of the source of the leak/ identity of the original tipper, since the UPSI Transferors had received UPSI, they were deemed to be "insiders" under PIT 2015. Onward circulation through WhatsApp, therefore, amounted to communication of UPSI in violation of Regulation 3(1) of PIT 2015.

We refer to these orders collectively as the "WhatsApp Orders".

2.2 Manappuram Orders³: At 8:30 am on March 19, 2013, numerous market participants received a research report from a renowned brokerage house on the Q4 2013 results of Manappuram Finance Limited ("MFL"). The report was also hosted on Bloomberg. By 9:22 am, it was being widely discussed on CNBC TV-18. Some of the recipients (including prominent mutual funds) offloaded MFL's shares later that day on-market. An investigation by SEBI revealed that the report contained UPSI - that MFL was likely to report losses in Q4. This information had allegedly been shared by officials of MFL with the brokerage house in a private meeting prior to the release of the report. MFL formally notified the stock exchanges a whole day later, i.e., on the afternoon of March 20, 2013. Proceedings were initiated by SEBI against the brokerage house (for communication of UPSI), which were subsequently settled in December 2019. Further, adjudication proceedings were also initiated against the recipients who had sold MFL's shares - on the charge that they had traded while in possession of UPSI. After hearings, SEBI held (in 5 orders till date) that the sales did not amount to insider trading under the Securities and Exchange Board of India (Prevention of Insider Trading) Regulations, 1992 ("PIT 1992"). The orders were premised on the following:

• Even though the research reports contained UPSI, by widespread distribution to over 2,000 recipients, hosting on Bloomberg and dissemination on television prior to the trades, the UPSI had been rendered "public".
• The recipients were "innocent tippees". Since the report had been penned by a prominent research house and contained disclaimers stating it was based on information in the public domain, the recipients had no reason to believe that it contained UPSI.

While the orders were passed under the provisions of PIT 1992, the analyses therein (and in particular, as regards what constitutes "public domain") are equally relevant in the contest of PIT 2015. We refer to these orders collectively as the "Manappuram Orders".

3. KEY THEMES

Beyond the individual facts and rulings, the orders lend perspective on regulatory policy around some key insider trading issues. Interestingly, both sets of orders deep-dive into the Report of the High Level Committee to review PIT 1992 ("Sodhi Committee Report"), on the basis of whose recommendations PIT 2015 was framed. Some themes that emerge from the orders are discussed here.

3.1 Research reports: kosher content and "proprietary information" defense

3.1.1 In the WhatsApp Orders, one of the many defenses taken by the UPSI Transferors was that the information circulated by them was speculative market chatter based on broker analyses on Bloomberg. Accordingly, they argued that it was generally available information ("GAI") and not UPSI. Debunking these arguments, SEBI expounded at length on what was permissible content (and therefore, not UPSI) in communiques shared by market participants to their clients - eventually extending the scope of this analysis to research reports.

3.1.2 As a result, SEBI appears to have prescribed some bright-lines on research reports:

1. Content: Research reports on listed companies must be based on (a) GAI, or (b) analyses or estimates of GAI, conducted either by the analyst itself, or by third parties.
2. Scope of GAI and non-discriminatory access: In the Mannapuram Orders, while not specifically referring to "GAI" (since PIT 1992 did not use this term), SEBI examined questions around how and through what media UPSI may be made public. It held that UPSI loses its character of being "unpublished" as soon as it is disseminated to the public through non-discriminatory information channels, citing newspapers, television and electronic media platforms such as Bloomberg as examples of such channels. Accordingly, if UPSI is (a) discussed and debated on television channels like CNBC TV-18, (b) published in newspapers, or (c) hosted on platforms like Bloomberg that were accessible to all its subscribers, it would be reasonable to assume that the UPSI had been made public. While recognizing that MFL had, on its own, posted the underlying information to the stock exchanges more than 24 hours after the trades, SEBI opined that stock-exchange dissemination is but one of the many ways through which UPSI may be made public.
   Interestingly, while not directly called upon to do so, SEBI also considered the scope of GAI in the WhatsApp Orders. Here, it extensively quoted the Sodhi Committee Report, which had provided a number of illustrations of GAI in the context of research reports. In particular, the report stated that research reports priced for purchase (and in line with market practice) to all clients of a broker should be considered non-discriminatory, and therefore, GAI. While stopping short of an express endorsement, in the WhatsApp Orders, SEBI appears to espouse this interpretation.
3. Sourcing: If a report includes estimates and analyses by third parties on GAI (such as reports hosted on Bloomberg), it must appropriately source this content. Further, reliance by the author on third-party analyses should be evident through a "demonstrable, verifiable trail of well documented and laid down processes". In effect, the regulator appears keen to achieve two objectives here. First, readers of a report should be informed of all relevant sources. Second, through an obligation to proactively maintain and disclose sources, authors of a research report would be compelled to rely only on analyses in the public domain, and not scuttlebutt of questionable origin circulated through closed WhatsApp groups that could well turn out to be UPSI.
4. Usage of own estimates not UPSI: An analyst's proprietary estimates on GAI can be used without restriction. SEBI recognizes, in this regard, that it is extremely common for brokerages to formulate "estimate(s) on results based on several factors including financial modelling, management guidance, global factors, meetings with management of listed companies". It categorically opines that such estimates are not to be considered UPSI, even if they eventually match formal announcements made later by the listed companies.

3.1.3 To sum up:

1. Research content should be limited to GAI, or analyses or estimates on GAI;
2. GAI includes information (or estimates and analyses thereon) available in a non-discriminatory manner in the public domain, including on print and electronic media and on portals like Bloomberg;
3. If third-party estimates are used in a report, they should be extracted from material in the public domain (as above) and clearly sourced; and
4. Research reports should be uniformly distributed among all clients of the analyst, and should not be priced in a manner that enables discriminatory access.

3.2 Heard-on-Street: not UPSI if shared uniformly

3.2.1 In the WhatsApp Orders, SEBI evaluated the nature and character of Heard-on-Street ("HOS") estimates. The UPSI Transferors maintained that the information they had circulated was not UPSI, but in the nature of HOS. They averred that HOS is a longstanding and well-recognized practice in the brokerage community whereby analysts publish speculative (sometimes unsubstantiated) forecasts on their coverage companies, often through preview reports released prior to results announcements. Newspapers and other media channels actively include HOS in their financial pages - notable examples being the Wall Street Journal's @WSJHeard Twitter handle and market chatter columns on The Economic Times.

3.2.2 SEBI agreed that HOS by itself would not constitute UPSI if released uniformly and without disparity in access. In other words, for HOS to be kosher, the "voice of the streets" must reverberate loud and clear in the public domain (including through the channels discussed in paragraph 3.1.2(ii) above), and not skulk in end-to-end encrypted anonymity. Information received on limited WhatsApp groups would not constitute legitimate HOS activity.

3.3 UPSI remains UPSI even if its source/ "leak" is unidentified or unknown

3.3.1 In the WhatsApp Orders, the UPSI Transferors argued that they were merely conduits of information. The original tipper/ source of the "leak" had remained unidentified. Absent the identity of the originator and any details as to its connection with the companies in question, the UPSI Transferors claimed that the impugned information could not be classified as UPSI.

3.3.2 SEBI disagreed squarely. It held that UPSI derives its character from what it is (content) and not who spilled the beans. Accordingly, any information that falls within the PIT 2015 definition, i.e., information capable of materially affecting the price of securities when made generally available, is UPSI. Notably, UPSI is tipper-agnostic - as evident from the definition of "insider" being revamped in PIT 2015 to include both connected persons and any persons who have access to UPSI. While SEBI rued the inability to unearth tipper-zero, it maintained that its identity would, at best, have bolstered (and not negated) the fact that the financial information circulated was UPSI.

3.4 Innocent tippees are not liable if they traded in possession of UPSI

3.4.1 The concept of the "innocent tippee" is recognized globally under securities laws. An innocent tippee unknowingly receives (without soliciting) UPSI and, without discernible reasons to suspect taint, trades on its basis. The Sodhi Committee Report had vocally advocated including an innocent tippee defense in PIT 2015, since "where a person trades on the basis of contents of a research report which later turns out to have contained UPSI illegally procured by the research analyst, the fact that a bona fide recipient of that report trade when in possession of that report should not be visited with the charge of insider trading". However, given underlying complexities in detecting and proving insider trading, this defense was not included in PIT 2015.

3.4.2 SEBI appeared to agree with the spirit of this Sodhi Committee recommendation in the Manappuram Orders. While not importing them wholesale into PIT 2015, SEBI noted that whilst adopting PIT 2015, the SEBI board had observed that "an insider may prove his innocence by demonstrating the inclusive list of circumstances provided in the regulations, in a case and it is up to the authority adjudicating to consider it". The determination of innocence of the tippee would, therefore, be on a case-by-case basis, to be gleaned from the underlying facts and circumstances. In Manappuram, SEBI held that the recipients of the MFL research report had adequately demonstrated their innocence, since the report (a) was authored by a reputed broking entity, and (b) contained a disclaimer stating that it was based on publicly available information (therefore, GAI).

3.4.3 The innocent tippee defense was also evoked in the WhatsApp Orders by the UPSI Transferors, who claimed that they were unaware that the messages received by them contained UPSI. Unlike in the Manappuram Orders, SEBI could not be convinced here. It held that since the UPSI Transferors had been long associated with the securities and brokerage markets, they could not feign ignorance of the sensitive nature of the information they had received. Having repudiated the defense, SEBI went a step further. It opined that persons who are well aware of the sensitive nature of UPSI have an ethical obligation to inform regulators when they receive UPSI from suspicious sources. In effect, SEBI appears to envisage an even higher bar for market participants who receive UPSI (accidentally or otherwise) beyond that contemplated in PIT 2015.

3.5 Information becomes UPSI much before formal adoption by board/ listed company

3.5.1 In both the WhatsApp Orders and the Manappuram Orders, SEBI examined when the underlying UPSI had come into existence. The noticees in both had argued that the UPSI had been created only on the date when it was adopted by the board of directors of the companies prior to notification to the stock exchanges. However, SEBI held that the underlying UPSI had come into existence much before - at such points of time when initial versions of the underlying information had been prepared for review by company officials. To illustrate below:

3.5.2 The fact that UPSI originates much before adoption/ board approval is of particular relevance for capital raising by listed companies, and in particular, for deals launched soon after the end of a financial quarter (qualified institutions placements ("QIP"), rights offerings, preferential issues, further public offerings or otherwise). Deal-teams should keep this in mind while drawing up timelines. As an example - if a QIP is slated to be launched after draft quarterly financials are submitted for review by the issuer's audit committee, the deal team should be mindful that the information may not be considered speculative anymore and that UPSI has come to life. Diligence checks, issuer representations and warranties, and bring-down calls for such deals should, accordingly, be conducted even more stringently than usual to ensure that offer document disclosures remain true, correct and accurate, notwithstanding the UPSI in the system.

4. CONCLUSION

Through the WhatsApp Orders and the Mannapuram Orders, SEBI has shown itself vigilant and capable of tackling UPSI transfer through modern-day technology. It has manifested a mature outlook towards individuals who trade on the basis of information in the public domain, while deep-diving into the concept of "public domain" to include newspapers, the television and Bloomberg within its ambit. In the process, some bright-lines for research reports have emerged, particularly on the inclusion of third-party estimates therein. HOS has also been recognized as legitimate research activity, although the regulator has cautioned participants against selective circulation.

Operationally, SEBI has exonerated innocent tippees trading on the basis of UPSI received unknowingly, and has reaffirmed that the character of UPSI is not dependent on who leaks it first. Further, it is heartening to note the emphasis SEBI places on the Sodhi Committee Report in its deliberations. The street will hope this signals an era of pragmatic interpretation of PIT 2015 in adjudication proceedings.

We end (fittingly?) with an OTT reference. In an early scene from Amazon Prime's Paatal Lok, the protagonist describes the eponymous netherworld in gritty detail. At the end, he acknowledges that whilst his tale was writ in scriptures, "maine whatsapp pe pada tha" (I learned about it on WhatsApp). Surveillance may be lax in the Hades - but surely the same thing shall no longer be said about the Indian capital markets.

ANNEXURE A

Key definitions under PIT 2015

UPSI

The term "unpublished price sensitive information" means any information, relating to a company or its securities, directly or indirectly, that is not generally available which upon becoming generally available, is likely to materially affect the price of the securities and shall, ordinarily including but not restricted to, information relating to the following:

1. financial results;
2. dividends;
3. changes in capital structure;
4. mergers, de-mergers, acquisitions, delistings, disposals and expansion of business and such other transactions;
5. changes in key managerial personnel.

NOTE:It is intended that information relating to a company or securities, that is not generally available would be unpublished price sensitive information if it is likely to materially affect the price upon coming into the public domain. The types of matters that would ordinarily give rise to unpublished price sensitive information have been listed above to give illustrative guidance of unpublished price sensitive information.

GAI

The term "generally available information" means information that is accessible to the public on a non-discriminatory basis;

NOTE: It is intended to define what constitutes generally available information so that it is easier to crystallize and appreciate what unpublished price sensitive information is. Information published on the website of a stock exchange, would ordinarily be considered generally available.

Footnotes

1. See SEBI adjudication orders in the matters of circulation of UPSI through WhatsApp messages in the scrips of Bajaj Auto Limited, Ambuja Cements Limited, Asian Paints Limited, Wipro Limited, Mindtree Limited and Bata Limited.

2. Under PIT 2015, UPSI means any information relating to a company or its securities, directly or indirectly, that is not generally available which upon becoming generally available, is likely to materially affect the price of the securities. PIT 2015 sets forth certain categories of information deemed to be UPSI, which includes "financial results". Further, PIT 2015 defines "generally available information" as information accessible to the public on a non-discriminatory basis. See Annexure A for the complete definitions of these terms.

3. See SEBI adjudication orders in respect of BNP Paribas Asset Management, IDFC Asset Management Company, SBI Funds Management Private Limited, Aditya Birla Sunlife AMC and Kotak Mahindra Life Insurance in the matter of selective disclosure of UPSI by MFL.

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