Why Sebi’s use of Facebook doesn’t deserve any likes
Proving insider trading charges can be a cumbersome process. In the well-known Raj Rajaratnam prosecution, the US government built its case based on secretly recorded phone conversations over a nine-month period. In India, the Securities and Exchange Board of India (Sebi) can’t tap phones or get hold of conversation transcripts, but can access call data records by following a prescribed protocol.
But why go through all this rigmarole when you can establish insider trading charges by simply observing likes, pokes and winks on social media sites? At least that’s what Sebi seems to think. In an interim order passed last month, it arrived at the conclusion that a set of people were “connected persons” under the definition of insider trading rules simply by means of being “friends” with an officer of a company on Facebook. That’s not all. “They even liked each other’s pictures,” Sebi says.
The details of the case show that Sebi is being highly irresponsible by relying on such flimsy connections to establish a serious charge. Did it bother with a serious probe by asking for call data records, or establish contact through any other means? If it did, there isn’t any mention of it in its order. Unless Sebi can quickly unearth more conclusive evidence, the case is going to end up as another major embarrassment for the regulator.
For background, these connected persons bought shares of the said company, Deep Industries Ltd, when they were allegedly in possession of unpublished price-sensitive information. According to Sebi, they got the information by means of being Facebook friends with the managing director of the company, who is also part of the promoter group. Sebi’s insider trading rules say that connected persons are those who are frequently in touch with insiders, such as, say, a senior official in a company. In this case, liking each other’s pictures on Facebook is being used as a proxy for frequent contact with an official.
“It has to be accepted that ‘connections’ on Facebook can often be casual and between persons who are for all practical purposes strangers,” chartered account Jayant Thakur wrote in a column for Firstpost.
But Sebi will have none of this. The Facebook connection is the only ground it is standing on to establish links between Deep Industries’ managing director and the alleged connected persons. It has relied on Facebook connections in the past, Thakur points out, although in an earlier case, the social media connection was one among other connections used to prove its case.
There are other holes in the Deep Industries order. For instance, the order doesn’t state why the connected persons took about two months after unpublished price-sensitive information became available to buy the company’s shares.
In Sebi’s books, the managing director knew the company was going to win large orders when it was selected as a top bidder, a full seven to 10 weeks before the orders were formally received. Any trading during this period is being viewed suspiciously by the regulator. Ironically, the official himself bought shares during this period, and Sebi appears to have a strong case against him.
But it’s not clear why the connected persons bought shares only in September 2015, while the unpublished price-sensitive information related to the largest orders in question became available in July 2015. They are well likely to argue that their decision to purchase shares of Deep Industries was based on the public disclosure that persons within the company’s promoter group were buying shares in quick succession between mid-July and early September 2015. Mimicking promoter purchases and sales is a legitimate trading strategy, and the alleged connected persons may argue they struck gold on this occasion by just following what the promoters were doing.
These factors would have mattered less if Sebi had established a clearer connection between traders and the managing director of the company. But with something as flimsy as Facebook likes, Sebi’s case can be expected to fall apart when challenged. If it doesn’t, traders will have no option but to “unfriend” everyone on social media.