India: Unreined 280 Characters – A Recipe For Disaster!

BACKGROUND

Not even 280 characters, but less than 15 characters tweeted by Elon Musk ("Musk"), the erstwhile chairman and present day chief executive officer of Tesla, Inc. ("Tesla") on the popular social media platform Twitter, attracted a flurry of repercussions for him personally as well as for Tesla.

The aforementioned tweet was made by Musk on 7 August 2018 in which he had stated, "Am considering taking Tesla private at $420. Funding secured"1 and he also made certain related tweets in the ensuing days (collectively referred to as "Tweets"). An offshoot of such Tweets was that the United States Securities and Exchange Commission ("US SEC") charged, (i) Musk with securities fraud for a series of false and misleading tweets about a potential transaction to take Tesla private2; and (ii) Tesla with failure to have the required disclosure controls and procedures relating to Musk's Tweets.3 The aforementioned charges were settled by both Musk and Tesla without admitting or denying the US SEC's allegations ("Settlement Agreement"). One of the glaring monetary terms of the Settlement Agreement was payment of USD 20 million each by Musk and Tesla to US SEC which is to be distributed to harmed investors under a court approved process.4

The key takeaway of the Tweets Saga was how stakeholders of a listed company (such as its shareholders) became helpless onlookers as the value of the Tesla scrip depleted. The most unfortunate bit is that such depletion was not in the ordinary course, it was triggered by an allegedly false and misleading statement made on an informal platform (which has a wide outreach) by an individual who for the world is the "be all and end all" of Tesla.

RESTRICTIONS IMPOSED BY SETTLEMENT AGREEMENT VIS-A-VIS COMMUNICATIONS

In addition to the monetary terms, the Settlement Agreement imposed certain fetters on Tesla's and its management's (including Musk's) making of public statements about Tesla ("Communication Restrictions"). The key highlights of the Communication Restrictions include:

  • Creation of a permanent board committee of independent directors, who amongst others, will oversee controls that will govern Tesla and its management's public statements regarding Tesla.
  • To further enhance controls with respect to Musk's public communications regarding Tesla.
  • To pre-approve any such written communications that contain, or reasonably could contain, information material to Tesla or its stockholders.
  • To employ or designate from among its existing personnel, an experienced securities lawyer to advise on securities issues relating to Tesla and to ensure compliance with Tesla's disclosure policy and controls, including by reviewing the management's public communications in a manner that is consistent with such policy and control.

STATUTORY MEASURES ADOPTED BY UNITED STATES OF AMERICA ("US")

The US has taken note of the proliferation in the use of non-conventional channels of communication (such as social media platforms) by listed companies to communicate with its stakeholders. Accordingly, the US has time and again brought in measures to facilitate regulation of usage of such non-conventional modes of communication (such as social media platforms) to ensure compliance with the principles of securities laws that frown upon, amongst others, "selective disclosure of material information" and "inaccurate disclosures".

The US regulatory regime which seeks to regulate communications through company websites, social media platforms and the like, predominantly stand on the "tripod stand" of, (i) Section 13(a) of the Securities Exchange Act, 1934 ("SEC Act") read along with Regulation Fair Disclosure ("Regulation FD"); (ii) Commission Guidance on the Use of Company Websites5 ("2008 Guidance"); and (iii) Report of Investigation.6

A brief overview of each of the aforementioned pillars is as set out below:

  • Section 13(a) of the SEC Act read along with Regulation FD:
    To prohibit public companies, or persons acting on their behalf, from selectively disclosing material, non-public information to certain securities professionals, or shareholders where it is reasonably foreseeable that they will trade on that information, before it is made available to the general public.7
  • 2008 Guidance:
    It provides guidance regarding the use of company web sites in accordance with the SEC Act and the antifraud provisions of the federal securities laws.
  • Report of Investigation:
    It provides guidance to issuers regarding how Regulation FD and the 2008 Guidance apply to disclosures made even through social media channels.

WHISPERS OF STATUTORY CHANGES IN INDIA

Way back in 2013, the Indian regulatory climate was replete with the possibility that the Indian capital markets regulator i.e., Securities and Exchange Board of India ("SEBI") may come out with guidelines addressed to the listed companies ("Company"/ "Companies") on usage of various social media platforms such as Facebook and Twitter8.

Almost 6 years have elapsed but SEBI did not come forward with any such guidance.

REGULATORY REGIME PROPOSED FOR INDIA

It can be argued (and such an argument might well be a fair one) that the existing Indian regulatory regime that comprises of SEBI (Prohibition of Insider Trading) Regulations, 2015 ("PIT Regulations"), SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 and SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003 ("PFUTP Regulations") already regulate disclosure/ communication of information in relation to a Company and provide a comprehensive list of do's and dont's while doing so.

Upon a closer look at the existing Indian securities law regime (which does not have the benefit of the 2008 Guidance and/ or Report of Investigation as does the US), one can make a fair observation that the present day securities law regime may not be well equipped vis-à-vis innovative technologies such as social media platforms given that such platforms are informal in nature, unimaginably responsive and provide a never before experienced wide outreach.

To prevent Indian stakeholders from being impacted by unregulated social media communications (like the Musk Tweets saga), it is advisable that SEBI should, at the earliest, in exercise of its powers under Section 11(1)9 of the Securities and Exchange Board of India Act, 1992 issue a circular to provide for a framework that regulates communications through social media platforms by Companies and certain key designation holders of such Companies ("Proposed Circular").

The table below provides an indicative list of aspects which the Proposed Circular should deal with ("Recommendations") along with our rationale for each Recommendation.

Principle Recommendation Rationale for recommendation
Scope
  • Persons covered:
    The Proposed Circular should be applicable to "designated persons" who will be determined in accordance with the PIT Regulations, more specifically Regulation 9(4) of the PIT Regulations.
  • Communications covered:
    The Proposed Circular should be applicable to communications that contain or reasonably could contain information material to the Company or its stakeholders ("Covered Communications").
  • Persons covered:
    The designated persons represent a pool of people that ordinarily demonstrate the highest degree of possibility of having access to material non-public information in relation to the Company. Further, to limit the applicability of the Proposed Circular to "designated persons" will go a long way to ensure a robust and practically feasible implementation of the Proposed Circular for the Company as opposed to making it cumbersome for the Company.
  • Communications covered:
    It is important to avoid unwarranted restrictions on such communications of a designated person which merely reflect a personal viewpoint/ personal opinion and such communications that neither contain nor are reasonably expected to contain information material to the Company or its stakeholders ("Exempted Communications").

    In view of the aforementioned, Covered Communications must not include Exempted Communications.

    Further, it must be noted that Covered Communications have been on purpose kept broad enough to include statements/ information other than unpublished price sensitive information ("UPSI") as defined under the PIT Regulations. Therefore, Covered Communications will also include statements that may not be UPSI but qualify as a fraudulent statement as defined under the PFUTP Regulations.
Mandatory undertaking from designated persons ("Mandatory Undertaking") The Proposed Circular should oblige the Company to obtain the Mandatory Undertaking from its designated persons to comply with securities laws in relation to the respective Covered Communications made by them on both official and non-official platforms such as social media platforms.

As regards persons classified as "designated persons" prior to coming into force of the Proposed Circular, the Mandatory Undertaking must be procured by the Company from the designated persons within 7 working days from the Proposed Circular coming into force.

As regards persons classified as "designated persons" post coming into force of the Proposed Circular, the Mandatory Undertaking should be obtained within 2 working days from the person being classified as a designated person.
The primary objective of the Mandatory Undertaking is to procure from the designated persons a positive confirmation of compliance with securities laws.

Further, it expressly lays down that the requirement to ensure compliance with the provisions of the Proposed Circular is that of the designated persons.
Designation of a Chief Communications Officer ("CCO") The person who has been appointed as the chief investor relations officer under the PIT Regulations can be appointed as the CCO for the purposes of the Proposed Circular as well.

Having said that, the Company should have the discretion to appoint any other person as the CCO subject to such person meeting the criterion required to be fulfilled by a "compliance officer" under the PIT Regulations.
To have an identified individual in place who assists the Company in ensuring implementation of the Proposed Circular (for further details please refer to the immediately succeeding point which deals with the duties of CCO).
Duties of CCO The primary duties of CCO must include the following:
  • to oversee implementation of the Proposed Circular from the perspective of the Company;
  • to report to the board of directors ("Board") of the Company or any other committee authorised by the Board of the Company in relation to the implementation of the Proposed Circular including any incidents of violation of the Proposed Circular;
  • to report to SEBI incidents of violation of the Proposed Circular and the actions taken by the Company against such a designated person; and
  • to be the person responsible for clarifying queries in relation to the Proposed Circular including providing voluntary "pre-clearance" as and when sought by a concerned designated person in relation to the Covered Communications.
Discharge of such duties by the CCO will act as a means to ensure a structured, holistic implementation of the Proposed Circular along with the possibility of seeking clarity in case of doubt.
Familiarization Programmes The Proposed Circular should oblige the Company to organise a familiarisation programme at such frequency as decided by the Board of the Company but not less than once in a year to educate the designated persons about their duties and responsibilities under the Proposed Circular. By specifically organizing familiarization programmes for designated persons, such persons can be effectively sensitized about what kind of communications made by them on platforms (including social media) may lead to violation of securities laws (including the Proposed Circular).
Mechanism for internal inquiry The CCO post obtaining the approval of the Board of the Company should be empowered to undertake an internal inquiry in the event a potential case of violation is suspected to have taken place by the CCO. Covered Communications have a nexus with the Company. Therefore, the Board of the Company is best suited to be the first one to assess the material on record and come to the conclusion of whether or not any provision of the Proposed Circular has been violated.
Penalties/ Actions In the event, a person has been found to have violated the provisions of the Proposed Circular, the Company must be entitled to impose certain penalties on such a person.

Such penalties may include, (i) to obtain an indemnity from such a designated person to indemnify the Company and hold it harmless against any legal action that arises as a result of violation of the provisions of the Proposed Circular; (ii) requirement on such a designated person to mandatorily obtain pre-clearance from the CCO prior to making any Covered Communications in the future; (iii) disciplinary actions; (iv) wage freeze; and (v) suspension.

For the avoidance of doubt, the aforementioned penalties will be without prejudice to the actions that can be taken by SEBI against a designated person who has violated the Proposed Circular.
To provide the Company with the ability to take actions against a contravener to ensure deterrence.

Further, the deterrence gets multiplied as such measures do not prevent SEBI from initiating any action against such a contravener.
Without prejudice to other securities laws The Proposed Circular is in addition to the other securities laws in place and therefore without prejudice to the other securities laws. Such an express language will ensure that there is no ambiguity in relation to the fact that communications on social media platforms will be required to be in compliance with all applicable securities laws regime including the Proposed Circular.

CONCLUSION

SEBI should steadfastly move towards introduction of the Proposed Circular so that it becomes amply clear in the Indian context that whether a Covered Communication be made on a formal platform or an informal platform (such as social media platforms), designated persons making such Covered Communications need to be in compliance with applicable securities laws. This will ensure that the cardinal attributes of the existing Indian disclosure regime (i.e., disclosure to be non-discriminatory, accurate and legally permissible) are very well preserved even in the wake of ever evolving modes of communication.

Footnotes

1. https://mobile.twitter.com/elonmusk/status/1026872652290379776?lang=en

2. https://www.sec.gov/news/press-release/2018-219

3. https://www.sec.gov/news/press-release/2018-226

4. Ibid.

5. Release No. 34-58288 (Aug. 7, 2008)

6. Report of Investigation pursuant to Section 21(a) of the SEC Act: Netflix, Inc., and Reed Hastings

7. Ibid.

8. https://economictimes.indiatimes.com/sebi-to-issue-social-media-norms-to-avoid-unofficial-disclosures-on-facebook- twitter/articleshow/19435334.cms

9. Section 11(1) of the SEBI Act reads as follows, "Subject to the provisions of this Act, it shall be the duty of the Board to protect the interests of investors in securities and to promote the development of, and to regulate the securities market, by such measures as it thinks fit."

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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