Does a forwarded WhatsApp message detailing a company’s financial results before publication amount to insider trading? SAT answers

The Securities Appellate Tribunal (SAT) recently held that information can be branded as unpublished price sensitive information only when the person getting the information had knowledge that it was of such nature..While doing so, the SAT set aside an order of an Adjudicating Officer (AO) which held that a WhatsApp message circulated on a group detailing quarterly financial results of a company that closely matches the actual numbers, before the company publishes the same, amounts to insider trading under the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015..The SAT order was passed in a batch of appeals filed by various companies against an AO order which imposed a penalty of Rs. 15,00,000 in each of the proceedings before it..The facts of the case are that in November 2017, certain articles were published in newspapers alleging that the quarterly financial results of several companies were in circulation in certain WhatsApp groups before their official disclosure by the respective companies. On the basis of these articles, the Securities and Exchange Board of India (SEBI) initiated an investigation..SEBI claimed that the earning data and financial information of twelve companies got leaked through these WhatsApp messages. The SAT in this case was dealing with the cases of six companies - Bajaj Auto Ltd., Bata India Ltd., Ambuja Cements Ltd., Asian Paints Ltd., Wipro Ltd. and Mindtree Ltd..The markets regulator contended that quarterly financial results of the above six companies were finalized after about fifteen days of closure of the quarter by the respective finance teams. This information was finalized around fifteen days prior to its disclosure on the stock exchange. Within a day or two of the finalization of the financial results, WhatsApp messages were circulated which closely matched the financial results later published by the companies..The AO stated in his order that though the appellants were involved as employees in the securities market, their duties did not involve sending any such messages to any of the clients and entities to whom the messages were forwarded. Further the information sent through WhatsApp closely resembled the financial figures declared by the respective companies..It was thus concluded that the WhatsApp messages amounted to circulation of unpublished price sensitive information in violation of the PIT Regulations..Before the SAT the appellants made the following arguments, among others:The messages mined by SEBI from the devices of the appellants admittedly show that none of the appellants were the originator of the messages; they had simply forwarded the messages as received from some other sources.SEBI was also unable to find the source due to the constraints of end to end encryption policy of the messenger etc.The practice of making estimates ahead of the disclosure of the financial results of companies is in vogue in the market. In fact, there is a big market for the same. The concept of “Heard on Street‟ (HoS) is a common practice within traders, market analysts, institutional investors etc. Unsubstantiated information is widely shared.Research analysts forecast the financial results upon collation of the publicly available data. Platforms like Bloomberg regularly publish the estimates of various reputed research entities as expected results.Besides the messages in question, numerous other messages regarding financial results were circulated within the group which widely differed from the results later on published by the respective companies. Only the closely matching messages with the results were cherry-picked for launching the present proceedings.It was thus contended that merely passing of the information without any trading in the scrips of the concerned company would not amount to violation of the PIT Regulations..After hearing the parties, the SAT Bench headed by Justice Tarun Agarwala held that the AO’s order cannot be sustained..Noting the inability of SEBI to find the source of the information sent on WhatsApp, the SAT held,“Out of those numerous messages only in the present six cases the messages matched with the exact figure of the financial results. It is not the case of the respondent SEBI that the present impugned messages were coded differently. On the other hand, it would show that within minutes of receipt of the messages by the respective appellant she/he forwarded it to several persons including one of the group members who happens to be a journalist of Reuters.”.The Tribunal also noted that the AO failed to appreciate that the WhatsApp messages might have originated from brokerage houses, or from the estimates found on Bloomberg which were floated and were in the public domain..On perusing the definitions of “unpublished price sensitive information‟ and “insider‟ under the PIT Regulations, the SAT held,“The information can be branded as an unpublished price sensitive information only when the person getting the information had a knowledge that it was unpublished price sensitive information. Though knowledge is a state of mind of a person, the same can be proved on preponderance of probabilities on attendant circumstances. In the present case, there are no attendant circumstances at all except the possibilities as enumerated by the learned AO. Proximity of time, similarity between the information were the only two factors that weighed with the learned AO to brand the information as unpublished price sensitive information…...However, in the facts of the case, in our view the respondents failed to prove any preponderance of probabilities that the impugned messages were unpublished price sensitive information, that the appellants knew that it was unpublished price sensitive information and with the said knowledge they or any of them had passed the said information to other parties.”.Senior Advocate Pesi Mody and Advocate Somasekhar Sundaresan along with Advocates Kunal Katariya, Sahebrao Wamanrao Buktare, Deepak Dhane and Ramakant Kini appeared for the appellantsSenior Advocate Zal Andhyarujina and Advocates Suraj Choudhary, Nidhi Singh, Maithalli Parikh, Kinjal Bhatt and Hersh Choudhary appeared for SEBI..[Read the order]