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Sebi order kicks off storm; social media links can’t prove insider trading

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Unless independent evidence authenticates it, virtual connection alone is not evidence of fact.

A ruling by markets regulator Securities and Exchange Board of India (Sebi) indicting Rupesh Kantilal Savla and Sujay Ajitkumar for insider trading has laid unusual emphasis on social media contacts, sparking a debate on the ubiquitous digital platforms.

Last week, Sebi’s whole-time member Madhabi Puri Buch passed an order against Savla and Ajitkumar, indicting them for insider trading. Sebi examined their Facebook pro les and found they were ‘friends’ on the social networking site and had ‘liked’ pictures posted on their timelines and on those of their wives.

On the basis of this social association, Sebi said that they were connected to each other and had access to unpublished, price-sensitive information. “…an insider can be by way of their association in any capacity or it can be by way of frequent communication with its o icers, which can also be in their social capacity as evident in this case by frequent interactions, including on social media,” Sebi’s whole-time member Madhabi Puri Buch said.

Jayant Thakur of Jayant M Thakur & Co, a Mumbai-based rm specialising in securities law, sought to highlight how ‘friends’ are made on social media.

“The Sebi order makes an unrealistic assessment of social media where people get connected by a mere click of button with strangers. Often, unknown people are followed to keep track of information about professional, personal, social or even vocational interests. They disconnect too, with a single click and usually the other person does not even come to know that he/she has been disconnected,” said Thakur.

“Hence, one should be very wary to place reliance on social media connections, particularly while making serious allegations about violations of law,” he added.

The case pertains to insider trading in the shares of an oil & gas company, Deep Industries Limited (DIL). The company was awarded three contracts for hiring of drilling rigs between August and October 2015.

There was a time gap between the date the company was declared a top bidder and the announcement of the award.

Since the value of the contracts constituted a signi cant percentage of the total revenues of the company, this information was considered price- sensitive. Until the stock exchanges were informed, company o icials were restricted from dealing in the company’s shares.

Sebi’s investigation found that Savla, managing director of DIL, acquired shares of the company during this period before the information was made public. Similarly, Sujay Hamlai and his rm V Techweb India (where he held 50% stake), also bought shares before the information was made public.

They, however, sold shares after the information was publicly announced, raking in profits.

Insider trading rules say the person should be connected in any capacity, including by reason of frequent communication. Besides, the connection should be such that it allows the person, directly or indirectly, access to unpublished, price sensitive information or is reasonably expected to allow such access.

“While the Sebi order seems to base its prima facie ndings on Facebook likes, it is only one of the many factors considered to come to its preliminary findings,” said Sandeep Parekh, former ED, Sebi, and founder of Finsec Law Advisors. “Other factors like trading pattern, admission of being acquaintances etc. have also been considered. Whether this matrix of information is sufficient in the nal ruling will need to be seen.”

Former Sebi official and regulatory lawyer Sumit Agrawal said that relying on Facebook ‘connections’ to make serious charges such as insider trading would be misdirected policy and also raised privacy questions.

Unless independent evidence authenticates it, virtual connection alone is not evidence of the fact and its admissibility is questionable, all the more in an ex-parte civil sanction, he added.

“It also raises a larger debate on fundamental right to privacy of a citizen and Sebi’s need to conduct surveillance on social media under securities laws. From the angle of jurisprudence, this would be a serious concern in regulatory laws,” Agrawal said.