The alert for Sebi to look into a suspected front running or insider trading violation remains abnormal fluctuations in a stock’s price and volume activity. Once it detects transactions are related, the regulator moves in to use its other methods to make a stronger case.
Mumbai: India’s capital markets regulator is casting its net wider to catch the savvier violators of the country’s stock market laws. While the Securities and Exchange Board of India so far mostly relied on tips and information from exchanges and market intermediaries to investigate white collar crimes, an ever-growing domestic stock market meant that these methods lacked the teeth to build water-tight cases against insider trading violations. This forced the watchdog to up the game, combining technology including data analytics, call records, bank transaction links and even social media connections as evidences to nail wrongdoers.
“Earlier, trading patterns were the only mode of suspicion. Now these trading patterns are corroborated with other evidences like call data records (to see who called whom, when was the call made, how many times they called and the duration of those calls) and social media accounts (Facebook, Twitter, LinkedIn accounts to establish connections),” said a senior regulatory official.
The alert for Sebi to look into a suspected front running or insider trading violation remains abnormal fluctuations in a stock’s price and volume activity. Once it detects transactions are related, the regulator moves in to use its other methods to make a stronger case.
A prominent case where Sebi used its newly-acquired technology to nail offenders was the one involving more than half a dozen individuals for insider trading related to the shares of a non-bank finance company, which was about to be acquired. While trading patterns showed that the group of people could be connected, Sebi included their call data records, financial dealings, bank statements and social media accounts to establish the links. It reviewed over 100 bank statements of one of the persons and noticed more than 140 calls between two of them in the preceding weeks leading to the sale announcement.
Regulators and lawyers said front running and insider trading violations have always been difficult to prove in the absence of direct evidences in most cases. But with tailor-made algorithms building correlations between entities and individuals like never before, Sebi has been able to strengthen its case. The regulator’s systems process about 20 million trades daily along with the associated details to check the probability of an investor indulging in insider trading. In such checks, the suspected individual, associates, family members and even excolleagues come under the ambit.
A Sebi annual report for FY21 said the alert builds a suspect library which allows the system to catch repeat offenders at a later date.
The regulator’s extensive use of data analytics is reflected in the growing number of insider trading cases. In FY21, it took up 30 new cases on insider trading for investigation, while in FY20, it took up 49 new cases.
Late in 2019, Sebi chairman Ajay Tyagi said the regulator would spend ₹500 crore on its systems over the next five years.
Some of the methods that Sebi is using to catch violators these days have never been used before. For instance, in one case the regulator obtained the ATM feed from a bank to narrow down the suspect. Based on the images obtained from the bank and the picture on the KYC (know-your-client), the software compared the face of the person with the picture on KYC.
“But by using software tools, Sebi is able to collect more evidence. Insider trading cases depend on preponderance of probability. This evidence establishes the probability of wrongdoing.”
One aspect of the newly-introduced probe methods that has come under criticism is the use of social media connections as evidence.
Technology used to piece together insider trading cases has created “irrefutable presumptions of guilt”, said Finsec Law Advisors’ founder Sandeep Parekh, a former Sebi official.
“Once a person is connected to another through Facebook or LinkedIn, or even through phone conversations, the person often has to rebut claims that illegal information was passed on. In the absence of a camera fitted on a person’s head 24X7, that is impossible to rebut. Thus, we have insider trading charges against people who actually sold before good news has been made public,” said Parekh. “A combination of a smaller world and the presumptions raised by the regulator often create cases where innocent connections or conversations are presumed to be improper.”
For instance, in the insider trading cases against Palred Technologies as well as Deep Industries, Sebi relied upon Facebook friendship in order to prove communication of inside information and establish allegations.
“While Sebi continues to rely upon the content on the Internet to allege serious charges of insider trading and securities fraud, the judiciary has not validated Sebi’s manner of inferences on most issues, since the Internet is only a component of the secondary data sources under evidence law,” said Sumit Agrawal, partner of Regstreet Law Advisors, and a former Sebi official.