Facebook friends may be treated as connected persons for the purposes of Insider Trading: SEBI

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Customer Care No. 91-11-45562222
Facebook friends may be treated as connected
persons for the purposes of Insider Trading SEBI
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• This article gives an analysis of the latest
  SEBI's order on Insider Trading especially it is
  a case concerning Promoters of a listed company
  and persons connected with them who have
  allegedly engaged in insider trading. SEBI has
  chosen the social media 'Facebook' to determine
  and to establish connection between the parties
  who have committed Insider Trading.
• 1. Introduction
• Securities Exchange Board of India (SEBI) had
  originally framed SEBI (Prohibition of Insider
  Trading) Regulations, 1992 in order to deter the
  practice of insider trading in the securities of
  listed companies. Afterwards several amendments
  to the said Regulations and also judicial
  paradigm through various case laws had also
  evolved to prohibit insider trading. But major
  overhaul of the Regulations have not been done.
  But SEBI on 15th January, 2015 had notified SEBI
  (Prohibition of Insider Trading) Regulations,
  2015 Regulations 2015 and has been done in
  order to strengthen the legal and enforcement
  framework, toughen the insider trading rules,
  align Indian regime with International practices
  and to provide clarity to certain definitions and
  concepts.

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• 2. Background
• This article gives an analysis of the latest
  SEBI's order on insider trading especially it is
  a case concerning Promoters of a listed company
  and persons connected with them who have
  allegedly engaged in insider trading. This case
  delves into how SEBI investigates into and
  determines the connections between the parties.
  The interesting point of contention or the
  analysis include that one of the person in fact
  was connected with another through Facebook, i.e.
  even if established indirectly, was considered a
  relevant factor to establish connection between
  the parties. Further, the investigation also
  includes the manner in which the pattern of
  investments and their funding were scrutinized
  etc.
• 3. Facts of the case- Paired Technologies Ltd
• 3.1 SEBI's order no WTM/PS/152/IVD/Feb/2016
  dated 4th February, 2016 in the matter of trading
  in the shares of Paired Technologies Ltd under
  Section 11(1), 11(4) and 11B of the SEBI Act,
  1992
• In the aforesaid order SEBI has held guilty
  Chairman and Managing Director (CMD) and Chief
  Executive Officer (CEO) of Paired Technologies
  Ltd (PTL), a micro-cap which runs LatestOne.com,
  an online mobile accessories store. The PTL had
  run into financial difficulties from which it
  recovered and achieved some stability and
  thereafter it decided to sell its business on a
  slump sale basis to another entity. It is to be
  noted that the price of the shares of the company
  was low following the period of recovery. But the
  proposed restructuring would enable the company
  to raise substantial cash and value. The company
  which has adopted and following such deal,
  decided to declare special dividend and also
  carry out a buyback of shares. Because of this,
  the shareholders received an amount far higher
  than the then ruling market price of the shares.
  Subsequently, the price of the shares also
  started rising substantially. It was later
  revealed through investigation that the CMD, CEO
  were part of a cartel of 15 people termed as
  'insiders' and were in possession of unpublished
  price sensitive information (UPSI) on the basis
  of which they traded in the scrip of PTL. These
  persons allegedly connected with them had
  purchased the shares of PTL at the earlier low
  ruling price. While they held on to most of the
  shares so purchased, the fact is that they
  benefitted from the significant appreciation in
  the market price.

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• 3.2 Unpublished Price Sensitive Information-Date
  from which it can be said to have arisen
• UPSI is that information which is not yet made
  public by the company but which, if published,
  would materially affect the ruling market price
  of the shares of the company. It is to be noted
  that in any insider trading, the main component
  for making profiting is that the UPSI should be
  known well in advance. Obviously, in this case,
  the slump sale of the business of the company,
  the proposal to distribute substantial special
  dividend and of course the buy back through which
  return of money can be done were known well in
  advance and that has persuaded the parties to do
  Insider Trading.
• On analysis, it was found that the first board
  meeting of PTL held to formally approve the slump
  sale of business and consider declaration of
  special dividend was on 10.12.2013. The said
  announcement was made to public through Stock
  Exchange two days later. But the discussions
  relating to the slump sale of business with the
  proposed buyer was initiated almost a year
  earlier on 5th September, 2012. The
  Non-disclosure Agreement with the buyers was
  signed on 18thSeptember, 2012. Thus, SEBI
  concluded that the date 18th September, 2012 as
  the date on which the UPSI had come into being.
  The transactions of the parties on and from this
  date till the date when the UPSI was made public
  were held to be Insider trading of shares which
  was in violation of the law.
• Extracts from SEBI's order
• "The PSI regarding the slump sale of software
  solutions business to Kewill group came into
  existence on September 18, 2012, i.e. when the
  non-disclosure agreement was executed between
  Kewill group and PTL. The non-disclosure
  agreement (having a confidentiality clause) was a
  binding contract on both the sides. Disclosure of
  the agreement would certainly have an impact on
  the deal. Therefore, the same can be considered
  to be an 'unpublished price sensitive
  information' (hereinafter referred to as 'UPSI')
  which had definitely originated on September 18,
  2012 and the same had remained unpublished till
  August 10, 2013 at 13.01 hrs. in terms of the
  Regulation 2(ha) (vi) of the PTI Regulations. The
  period of such UPSI was from September 18, 2012
  to August 10, 2013."

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• Analysis also revealed that the price of the
  shares of PTL on 5th November, 2012 from which
  date an insider was found to have acquired the
  shares was Rs. 10.71. The price thereafter rose
  to Rs. 39.20 on the day when the UPSI was made
  public.
• 3.3 Determination of the parties found connected
  for purposes of Insider Trading
• In the aforesaid case, connections with the other
  parties were found on various grounds. In fact
  Mr. Palem Srikanth Reddy, the Chairman and MD of
  PTL was a connected person under the Regulations
  and the company accepted that he, along with two
  other persons, were privy to the UPSI relating to
  slump sale. He was also accepted to be privy to
  the UPSI relating to special dividend. On
  scrutiny, it was also known that Mr. Ameen Khwaja
  was found to be common director/promoter with the
  Chairman on another company which incidentally
  had also provided services to PTL. Further
  investigations revealed that this company was
  also proposed to be merged with PTL. It was also
  revealed that several family members of Mr. Ameen
  Khwaja had dealt in the shares of PTL while Mr.
  Ameen Khwaja did not deal in the shares directly.
  SEBI concluded that such dealing of shares by the
  family members of Mr. Ameen Khwaja was held to
  have carried out insider trading. These dealings
  in shares clearly indicated that the shares were
  dealt with under Insider Trading.
• 3.4 Definition of "Insider"
• Insider means any person who is (i) A connected
  person or (ii) in possession of or having access
  to unpublished price sensitive information.
• The definition of insider in Regulation 2015 is
  also widened i.e. any one in possession of or
  having access to unpublished price sensitive
  information should be considered an 'insider'
  regardless of how one came in possession of or
  had access to such information as the 'generally
  available information' has already been defined.

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• 4. Facebook - Basis of determination of
  connection
• Probably, it is for the first time that SEBI has
  treated Facebook as a relevant factor to
  determine connections between persons or to
  establish connection. In this case, SEBI observed
  that having "mutual friends" on Facebook will
  form the basis of determination of connection.
  Further, SEBI observed and noted that Mr. Pirani
  Amyn Abdul Aziz is also found to be connected to
  Mr. Ameen Khwaja through mutual friends on
  Facebook. Mr. Aziz was employed with Deloitte Tax
  Services, a group company of Deloitte Touche
  Tohmatsu India Pvt. Ltd which had conducted the
  due diligence of PTL during the slump sale.
  Facebook is a relatively open social media
  network and friends are often made and removed /
  deleted without knowing in detail the background
  of the parties. In fact, such friends are often
  strangers with whom there are no other
  connections and sometimes there may not be even
  offline contact for quite some time. Since SEBI
  made an observation and did comment on the
  connection in the Order, it is quite clear that
  SEBI would resort to all the social media to
  determine connection or to establish 'connection'
  for investigation purposes of insider trading
  violations. Apart from this other social media
  are twitter and linkedin etc. On investigation,
  SEBI considered connections on social media on
  internet between the parties i.e. through
  Facebook as relevant factor to determine
  connections between parties.
• The definition of connected person under SEBI
  (Prohibition of Insider Trading) Regulations,
  2015 has been widened and thus encompassed to
  include any person who has a connection with the
  company that has given him or in possession of
  unpublished price sensitive information. Thus, a
  banker or immediate relative of a banker or an
  official of a stock exchange or of clearing house
  or corporation who may not seemingly in
  occupation of any position in the company but are
  in regular touch with the company and its
  officers are all included under the definition of
  connected person because, these persons are
  presumed to know of the company's operations.
  Thus, through whatever connection is possible, if
  a person is in a position to access unpublished
  price sensitive information about any company or
  class of companies, then he is a connected person.

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