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SEBI Says Facebook ‘Likes’ = Insider! Will It Pass Muster On Appeal?

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A Facebook like can make you an insider in a company. So says market regulator SEBI in its recent interim order against several entities accused of insider trading in the shares of Deep Industries Ltd. Experts are divided if SEBI’s approach will pass muster with the appellate tribunal if the matter is appealed.

SEBI is safe and the fact that they've relied on relationship on social media should hold up if this case goes to the Securities Appellate Tribunal, PR Ramesh, a securities law advocate at the Bombay High Court and former general manager, SEBI, told BloombergQuint. Sandip Bhagat, founding partner at S&R Associates, differed and said SEBI will need to present a more serious evidence than just a simple Facebook ‘like’.

Also Read: SEBI Scans Facebook ‘Likes’; Finds Evidence In Insider Trading Case

What’s The Case About?

Based on a National Stock Exchange alert, SEBI initiated an investigation into possible insider trading in shares of Deep Industries that provides services to oil explorers. Between July and October 2015, the company was awarded three contracts by Oil and Natural Gas Corporation Ltd. which had a positive impact on its share price.

SEBI observed that between July 17 and October 15, the fact that Deep Industries had got these contracts was unpublished price-sensitive information. During the period, the company’s director – Rupeshbhai Savla – bought company’s shares. Also, he didn’t make any other trade during this period.

V-Techweb India – a private company operating in the real estate space – and one of its directors, Sujay Hamlai, had bought Deep Industries’ shares during the period when the information regarding the contracts was unpublished and price sensitive. Both V-Techweb India and this director sold the shares soon after the information regarding the contracts became public.

In its order, SEBI concluded Savla to be an insider, and V-Techweb India and Hamlai as connected persons. And here’s where SEBI’s conclusion starts to get curious.

Now Savla is Deep Industries managing director and promoter, so there’s no dispute that he is a connected person and hence an insider, says SEBI’s order. To establish that V-Techweb India and Hamlai are connected persons and insiders too, SEBI logged into social media website Facebook. It found that Deep Industries director Savla and his wife were friends with Hamlai and his wife on Facebook. They had all liked each other’s photos on Facebook. Also, their profiles had restricted access and their posts could only be liked by friends. But it’s not clear from SEBI’s order as to how many people were friends with Savla and Hamlai on Facebook and could react to their posts.

Further, V-Techweb India and Hamlai traded through PhilipCapital India and one of the promoters -Mita Manoj Savla- of Deep Industries is also registered with this trading member.

In short, SEBI has relied upon the following to make its case:
- That V-Techweb India and Hamlai traded only in Deep Industries’ shares during the UPSI period and sold the shares as soon as the information became public.
- Hamlai qualified as a connected person as he could interact with Sava, and vice versa, on Facebook and that they both had profiles that had restricted access.
- V-Techweb India and Hamlai made trades through a broker that had one of the promoter’s of Deep Industries’ as its member.

So, will the appellate tribunal, if the matter is appealed, take a friendly view of SEBI’s approach. Bhagat and Ramesh shared their views on BloombergQuint’s weekly law and policy show The Fineprint.

Here are the edited excerpts of the interview:

What do you make of SEBI’s approach, specifically the fact that it has relied on Facebook ‘likes’ to conclude that these private entities are connected persons?

Ramesh: Let’s look at the ingredients that SEBI has used to bring this charge — it has relied on the connected persons definition that says “any person who is or has during the six months prior to the concerned act been associated with a company, directly or indirectly, in any capacity including by reason of frequent communication with its officers ....that allows such person, directly or indirectly, access to unpublished price sensitive information or is reasonably expected to allow such access.”

SEBI has gone ahead and relied upon directly or indirectly to include the relationships on the social media. So, SEBI is stretching any type of relationship which it can establish. If you see the facts in Deep Industries, the entities have only traded in this particular stock. SEBI needs to prove two things — first, they are interconnected and second, they traded on the basis of unpublished price sensitive information. Interconnection has been shown through the association on social media which is fair enough because the regulation today allows you to have a very wide interpretation.

In the matter of [securities trader] Kanaiyalal Baldevbhai Patel, Justice Gogoi of the Supreme Court has made a very interesting comment that the people charged with carrying out fraudulent transactions would not have entered into then had it not been for the information parted with by [portfolio manager] Dipak Patel. So, there is always a presumption that the conduct can be inferred from a certain relationship and but for that, they would not have traded. If you see the facts of Deep industries matter, the entities have only traded in this company’s shares and without their relationship, they would not have traded. SEBI is safe enough to extend there relationship on social media to meet the test of connected person.

Do you think Facebook ‘likes’ is evidence or ground enough for SEBI to have concluded that two entities are connected persons?

Bhagat: For establishing an insider trading charge, you have to show somebody is a connected person. If they are a connected person, they can be reasonably expected to have access to unpublished price sensitive information. This is an interim order where SEBI has said that you show cause that why we should not go ahead on this allegation.

They have said that any potential gains you have made, you put it an escrow account but parties have been given a chance to show cause why they should not be prosecuted. To me, if the sole evidence to show that someone is a connected person is Facebook likes, it is circumstantial evidence. But when you are going for an insider trading charge, then SEBI should be establishing a more serious evidence as opposed to as simple Facebook like. You need not be friends with a person on Facebook to like their post. That shows mere acquaintance. But you are looking at a serious charge like that of insider trading, you need to show higher, what courts call, preponderance of probability. It’s not a criminal charge; so you need not go to the extent of proving something beyond a reasonable doubt but at least it should be more than just a circumstantial evidence than Facebook likes. To me, the main thing here is: are you a connected person? Once you are a connected person, then the onus is on the connected person to show that they did not trade and that’s what the regulations say. So, the whole issue here is are they really connected simply because of Facebook likes? It can be shown as one of the factors to show somebody is connected but solely relying only on that, specially for a serious charge like insider trading, it is a little weak.

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