Market conduct regulations need to be expansive enough to take cognizance of a broad spectrum of human behaviour that can assail market integrity.
The DNA of these laws is principle-based and allows regulators and courts to apply law to facts, ascertain culpability and accordingly, bring parties to book. Recent insider trading cases are fascinating examples of such nuanced applications.
In orders in the WhatsApp leak investigation, SEBI penalised parties for circulating information regarding the financial results of two listed companies, in advance of its publication.
One would recall that a few years ago, SEBI directed some listed companies, whose financial information was compromised, to launch an internal investigation and aid in locating the leak.
It also embarked on an extensive inquiry of its own but was unable to get to tipper zero who procured the information and then triggered its viral transmission. These orders penalise two specific individuals employed with financial intermediaries found to have disseminated information about Bajaj Auto and Ambuja Cements prior to publication.
The SEBI notice was limited to allegations of communication only and did not extend to trading. In the order itself, the culpability of these tippees-turned-tippers was predicated on the nature of the data being so specific, that their professional background should have made them cautious about sharing it.
Also, given the handicap that end-to-end encryption poses for regulatory investigations, SEBI was of the view that perpetuating the problem should, in itself, be penalised to deter further misuse, regardless of whether the primary tipper had been traced. Therefore, the tippee's accountability is independent and not an extension of the tipper's liability, as in many other jurisdictions.
These decisions are more interesting when read alongside SEBI orders passed last month in the matter of Mannapuram Finance. The question here was whether trades by certain asset management companies were influenced by specific data points in a research report by Ambit Capital.
The notice alleged that this information was shared by the company with Ambit Capital in advance of being disclosed to the exchanges and hence trading by recipients of such a report, i.e., the AMCs, would be an offense. Exonerating the noticees, the adjudicating officer held that the fund houses could not have known of the source since the presumption is always that such reports contain only public information.
Accordingly, the noticees were extended the benefit of being an 'unaware tippee'. Since the information was also discussed on investor calls and in media reports, SEBI took the view that it would not remain "unpublished".
Whilst there are many distinguishing factors we well, two common questions of law arise. The first is in the treatment accorded to the recipient of UPSI. While the Mannapuram orders recognise that trading by derivative/remote tippees who could not have been aware of the nature of the information is not actionable, the Whatsapp orders proceed on the premise that the tippee ought to have been circumspect and hence liable, even if he was (at least ostensibly) unaware of the origins of the information chain.
Second is the standard applied to gauge "general availability" of information. The Whatsapp leak case makes it clear that regardless of being widely disseminated, the data was still not available to the public until disclosed by the companies. The widespread contagion of such information would not exonerate parties who were accessories to its very transmission.
In contrast, the Mannapuram orders recognise that availability of information on investor calls, media reports, etc can be used to diminish its "unpublished" nature and transmute it to being "generally available".
On a lighter note, while one could say that a retail investor's access to WhatsApp forwards is perhaps more conceivable than to research reports, the broader dimension here is that as a quasi-judicial authority, SEBI is eschewing mechanised application and adopting a discerning approach even to similar facts.
In doing so, the nature of parties, their state of mind, the binary nature of the information in question, method of dissemination and of course, the moral hazard such conduct poses to the market at large, play a critical role in fastening liability.
This is especially true in the domain of tipper-tippee actions, where there are multiple factual parameters that could either mitigate or aggravate culpability.
Those familiar with the trajectory of the US tipper-tippee liability regime would know that their jurisprudence too has seen significant evolution, on issues pertaining to personal benefit, quid pro quo and of course the level of knowledge that a derivative tippee has.
This subject has historically been so judicially driven in the US, that attempts are now on to formulate a legislative template and introduce certainty into enforcement outcomes. In India however, where detailed principles already exist, it is heartening to see jurisprudence coming of age and embarking on a self-optimising journey.
(The author is Partner, Cyril Amarchand Mangaldas)
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