According to SEBI, Facebook friends can be ‘connected persons’ for insider trading

The Securities and Exchange Board of India (SEBI) has recently passed an interim order finding two persons to be ‘connected’, for the purpose of insider trading, based on their status as Facebook friends..The interim order was passed by Whole Time Member Madhabi Puri Buch on April 16..The case pertains to insider trading in the shares of an oil & gas company, Deep Industries Limited (DIL). DIL was awarded three contracts for hiring of drilling rigs in the months of August, September and October 2015. However, in two of these contracts, there was a gap of more than two months between the time DIL was declared as a winning bidder and the date of award, which is when the information becomes public..In deciding whether the said information constituted ‘unpublished price sensitive information’ (UPSI), SEBI relied on the value of these contracts in relation to DIL’s revenue for the relevant period..SEBI found that the value of the contracts in question amounted to a substantial percentage of DIL’s turnover for the two immediately preceding financial years. On this basis, SEBI was of the view that the publishing of such information was likely to materially affect the share price of DIL..Further, allegations of insider trading were made against Rupeshbhai Kantilal Savla, V-Techweb India Private Limited (VTIPL) and Sujay Ajitkumar Hamlai. Of these three persons, Rupeshbhai Kantilal Savla was held to be an insider by virtue of him being the managing director of DIL during the relevant period, which was calculated as July 17, 2015 to October 14, 2015..Both Sujay and Rupeshbhai were summoned asking whether they were connected. They both responded to SEBI saying that they were socially acquainted, but had no business connection..While arriving at whether Sujay was a connected person or not, funnily, the SEBI viewed their Facebook profiles to find that Sujay was in fact friends with Rupeshbhai..In an attempt to fortify their findings on their relation, Facebook observed the ‘likes’ history between both accused and their respective wives. While noting the definition of ‘connected person’ under the SEBI (Prohibition of Insider Trading) Regulations, the SEBI in its interim order recorded that,.“The perusal of the provision shows that the association of the person can be direct or indirect and the association can be in any capacity which can include frequent communication with its officers by virtue of which such associated person can be reasonably expected to have access to unpublished price sensitive information. .The provision, inter alia, provides for the yardstick for insiders by stipulating that insider can be by way of their association in any capacity or it can be by way of frequent communication with its officers which can also be in their social capacity as evident in this case by frequent interactions including likes on the social media.”.And on the basis of their ‘likes’ history and friendship on Facebook, SEBI believes that they are ‘reasonably expected’ to have access to the UPSI of DIL during the relevant period. Having ‘proved’ the relation between Rupeshbhai and Sujay, incriminating VTIPL was relatively easy given that it is essentially controlled by Sujay and Kantilal, both of whom are Facebook friends with Rupeshbhai..In arriving at the quantum of gains made by these connected persons, SEBI calculated the difference between number of shares bought valued at closing price on which UPSI became public and the value at which shares were bought. Accordingly, Rupeshbhai Kantilal Savla, Sujay Ajitkumar Hamlai and VTIPL had made Rs. 1.34 crores, Rs. 13.99 Lakhs and Rs. 36.79 lakhs each. A further interest of 12% p.a. was charged by SEBI.The interim order is also in the nature of a show cause notice, since it has asked the three connected persons to deposit the said amounts in an escrow account and has asked them to reply to these allegations explaining why such amounts should not be formally disgorged..It has also questioned them as to why they should not be debarred from accessing capital markets/prohibited from dealing in securities for a specified period..HT to @IndiaCorpLaw.(Read the interim order)