Facebook friends may be treated as connected persons for the purposes of Insider Trading: SEBI

This article gives an analysis of the latest SEBI's order on Insider Trading especially it is a case concerning Promoters of a listed company and persons connected with them who have allegedly engaged in insider trading. SEBI has chosen the social media 'Facebook' to determine and to establish connection between the parties who have committed Insider Trading.

1. Introduction

Securities Exchange Board of India (SEBI) had originally framed SEBI (Prohibition of Insider Trading) Regulations, 1992 in order to deter the practice of insider trading in the securities of listed companies. Afterwards several amendments to the said Regulations and also judicial paradigm through various case laws had also evolved to prohibit insider trading. But major overhaul of the Regulations have not been done. But SEBI on 15^th January, 2015 had notified SEBI (Prohibition of Insider Trading) Regulations, 2015 [Regulations 2015] and has been done in order to strengthen the legal and enforcement framework, toughen the insider trading rules, align Indian regime with International practices and to provide clarity to certain definitions and concepts.

2. Background

This article gives an analysis of the latest SEBI's order on insider trading especially it is a case concerning Promoters of a listed company and persons connected with them who have allegedly engaged in insider trading. This case delves into how SEBI investigates into and determines the connections between the parties. The interesting point of contention or the analysis include that one of the person in fact was connected with another through Facebook, i.e. even if established indirectly, was considered a relevant factor to establish connection between the parties. Further, the investigation also includes the manner in which the pattern of investments and their funding were scrutinized etc.

3. Facts of the case- Paired Technologies Ltd

3.1 SEBI's order no: WTM/PS/152/IVD/Feb/2016 dated 4^th February, 2016 in the matter of trading in the shares of Paired Technologies Ltd under Section 11(1), 11(4) and 11B of the SEBI Act, 1992

In the aforesaid order SEBI has held guilty Chairman and Managing Director (CMD) and Chief Executive Officer (CEO) of Paired Technologies Ltd (PTL), a micro-cap which runs LatestOne.com, an online mobile accessories store. The PTL had run into financial difficulties from which it recovered and achieved some stability and thereafter it decided to sell its business on a slump sale basis to another entity. It is to be noted that the price of the shares of the company was low following the period of recovery. But the proposed restructuring would enable the company to raise substantial cash and value. The company which has adopted and following such deal, decided to declare special dividend and also carry out a buyback of shares. Because of this, the shareholders received an amount far higher than the then ruling market price of the shares. Subsequently, the price of the shares also started rising substantially. It was later revealed through investigation that the CMD, CEO were part of a cartel of 15 people termed as 'insiders' and were in possession of unpublished price sensitive information (UPSI) on the basis of which they traded in the scrip of PTL. These persons allegedly connected with them had purchased the shares of PTL at the earlier low ruling price. While they held on to most of the shares so purchased, the fact is that they benefitted from the significant appreciation in the market price.

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