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Sebi summons individuals raided over leak of earnings reports on WhatsApp

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Sebi has started seeking explanations on the data dump recovered from the electronic devices that were seized during the raids

Mumbai: The stock market regulator has started summoning individuals it recently raided in connection with the leaked corporate earnings to record their statements, two people familiar with the matter said.

A Reuters report on 17 November named 12 listed companies whose second quarter earnings it said were shared in WhatsApp groups ahead of their formal release. Nearly half of these companies were bluechips in the National Stock Exchange’s Nifty 50. As part of its investigation, the regulator on 22 December raided over 30 brokers, traders and analysts and seized electronic devices and documents.

“The regulator has started seeking explanations on the data dump recovered from the electronic devices that were seized during the raids,” said a regulatory official, said one of the two people cited above on the condition of anonymity.

An email sent to Sebi on Friday was not answered as of press time.

“Sebi is looking for a company employee or person who was definitely in the know of unpublished price-sensitive information. The statement recording is a process to ascertain it. Sebi wants to wrap up the case by the time next financial year begins, but the technology analysis and pin-pointing the modus operandi is complex,” the second person said, also on the condition of anonymity. Sebi has now expanded its probe to around 40 companies where it suspects key financial information was leaked and insider trading regulations violated.

Legal experts said finding the source of the leaks will be difficult. “The massive search and seizure operations across brokers and analysts, coupled with a probe on the listed companies under leak, were the best immediate steps the regulator could have taken. Keeping in view the nature of the medium through which information has travelled, Sebi will have a real task in hand to investigate and find out the origin of the leak,” said Tejesh Chitlangi, partner at law firm IC Universal Legal.

“Even once the origin of leak is established, the tough task would also be to determine the chain of insiders who all came in possession of such information, communicated/traded thereafter,” he added.

According to Sumit Agrawal of Suvan Law Advisors, pinpointing financial benefits will be even tougher. “The insider trading law has been interpreted in a topsy-turvy way over the years. Sebi’s burden may be particularly difficult in the case of a communication, to find out the financial benefit to the tipper or a tip to a close friend or relative who trades. Without investigating the companies, it will be difficult to ascertain if the information discussed on a WhatsApp group was inside information or was meaningful, speculative or covered under freedom of speech and expression,” said Agrawal.

To be sure, Sebi is approaching the case from the brokers’ end by analysing data recovered from seized devices, and the companies’ end through their compliance officers and relevant personnel.

Sebi on 27 December passed interim directions against Axis Bank Ltd, whose results were allegedly leaked on a WhatsApp group. It asked the bank to conduct an internal inquiry to determine the leak and strengthen its systems. Sebi has so far found seven companies where the data leaked on WhatsApp group was very similar to the actual price-sensitive information.

“What would also be interesting is the regulatory approach in determining the communication/trading level up to which Sebi construes it to be insider trading, as thousands may have been in possession of such information and many of them would also have traded whilst being in such possession,” said Chitlangi.