Sebi may seek powers to intercept, decrypt data on social media

Mumbai: The Securities and Exchange Board of India (Sebi) may seek wider powers from the government to intercept and decrypt data on social media channels, such as WhatsApp and Telegram, to crack down on insider trading cases. The capital markets regulator is considering filing an application to be notified as an enforcement agency under the Information Technology Act, said a person close to the development.

"Today, when Sebi seeks information from social media channels, they do not share data saying it is not an enforcement agency," the person quoted above said.

In the recent past, Sebi has conducted several search and seizure operations in various states across the country to crack down on market operators for allegedly manipulating stocks through social media.

Telegram channels and Whatsapp groups have been the popular platforms of market participants to share trading tips on stocks, derivatives and cryptos.

Of late, Telegram channels have been more popular because the application's features allow a larger subscriber base, enable auto delete, allow to start a secret message and have a self-destruct timer.

"No one today communicates insider information through the telephone. They use apps that allow the vanishing of messages," the person said.

At present, the government has notified 10 agencies to monitor data. These include the Narcotics Control Bureau, Central Bureau of Investigation, Enforcement Directorate and Central Board of Direct Taxes, among others. These central investigative agencies have been given the power to intercept and decrypt all the data contained in any computer system in the country.

In the past, Sebi has sought powers to tap phone calls twice but these requests were turned down by the government.

Sebi's move comes in the wake of a recent Supreme Court judgement in the PC Jeweller case, where the top court said Sebi should produce direct evidence such as letters, emails and witnesses to prove insider trading charges.

Securities lawyer said this judgment raises the level of the burden of proof on Sebi.

"The judgment while not entirely doing away with the use of circumstantial evidence, Sebi's reliance merely on the pattern and timing of trading in securities has been made insufficient to discharge this burden of proof. Other direct or circumstantial evidence is now made necessary to establish insider trading, which is virtually impossible to obtain," said a Supreme Court lawyer.

"The Supreme Court by including examples of likely evidence, such as letter, emails and witnesses in the judgment has consequently limited the availability of circumstantial evidence," the lawyer said.

The regulator had found that the promoter of PC Jeweller Ltd and his relatives, including a group entity, were guilty of insider trading in the company's shares.

Sebi alleged that they traded in the shares of PC Jeweller, while in possession of inside information about the company’s buyback proposal. The proposal was subsequently withdrawn after it did not receive consent from the lenders.

Sebi had relied on the trading pattern of the accused to show that they were in possession of the information regarding the buyback proposal, which was presumably communicated by the promoter. The apex court said trading patterns cannot be the sole circumstantial evidence to prove the communication of inside information.

“It would also be pertinent to note here that Regulation 3 of the PIT ( Prohibition of Insider Trading) Regulations, which deals with communication of UPSI (unpublished price sensitive information), does not create a deeming fiction in law,” the Supreme Court order in the PC Jeweller case said.

Sebi has relied upon circumstantial evidence in most cases to establish charges of insider trading. Securities lawyers said this hinders Sebi’s enforcement power.

“The task of proving insider trading is extremely difficult and the Supreme Court judgement makes significant implications for Sebi’s enforcement,” said Sumit Agrawal, founder Regstreet Law Advisors and former Sebi officer. “So far, only in a handful cases has Sebi been able to prove insider trading with documentary evidence and most cases depend upon circumstantial evidence. Therefore, the threshold of evidence has been increased by the Supreme Court with the recent judgement.”

Sandeep Parekh, managing partner, Finsec Law Advisors said, “The case highlights two things. First, it highlights that the burden of proof in a serious case like insider trading should be high and not based on circumstantial evidence. It is unclear why the two should not have been equated though. Second, it finds that the trading pattern of selling large quantities before ‘good’ information is made public demonstrates that there was in fact no mis-use of such information. While this case is limited by the facts that the parties were not deemed to be connected even though they were close relatives, the case will have some impact on other insider trading investigations.”