SEBI in a landmark judgement considered facebook friends as related party. The result of such judgement led to a penalty of more than Rs. 2 crores. This will change the way the officers of a company look into the social media platforms and their approach in dealing with these platforms.

 

How it all started?

 

It all started in the year 2012 when SEBI conducted an investigation into the scrip of Palred Technologies Limited  (PTL) regarding violation of Insider trading norms.

 

The company 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 decided to declare 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that the CMD, CEO were part of a cartel of more than 15 people termed as ‘insiders’ and were in possession of unpublished price sensitive information on the basis of which they traded in the scrip of PTL.

 

What actually happened?

 

It was found that Mr. P. S. Reddy had communicated the Unpublished Price Sensitive Information (UPSI) to Mr. Ameen Khwaja, Ms. Kukati Parvathy and others.

Mr. P. S. Reddy and Mr. Ameen Khwaja were the promoter directors of Pal Premium Online Media Pvt Limited. It was discovered that Pal had provided services relating to ‘search engine’ to PTL during the period 2011 to 2013. Further, after the ‘slump sale of business’ by PTL to Kewill group, discussions pertaining to the merger of Palred Media and Entertainment Pvt Limited and Pal with PTL had begun on December, 2013, which later got approved by the Board of Directors of the Company.

 

In view of the same, Mr. Ameen Khwaja is also alleged to be an ‘insider’ and ‘connected person’ in terms of the Regulations 2(e) and (c) of the Regulations.

 

Mr. Ameen Khwaja appears to have not traded in the scrip of PTL during the period of investigation. However, his immediate family members Ms. Noorjahan A. Khwaja, Mr. Ashik Ali Khwaja, Ms. Rozina Hirani Khwaja, Ms. Shefali Ameen Khwaja and Mr. Shahid Khwaja were found to be trading in the scrip of PTL during the UPSI period. Though they were not the regular trader of the scrip, but purposefully did so.

 

Facebook friends will be treated as Related Party: SEBI

 

Sebi’s whole time member Prashant Saran said that Mr. Pirani Amyn Abdul Aziz is connected to Mr. Ameen Khwaja through mutual friends on ‘Facebook’. He was employed with Deloitte Tax Services India Pvt Limited, which had conducted the due diligence of PTL during the slump sale.

 

SEBI, herein, treated Facebook as a factor to determine connections between persons. In this case, SEBI observed that having “mutual friends” on Facebook will form the basis of determination of connection.

 

What does an Insider mean?

 

Insider means any person who is

 

(i) A connected person; or

(ii) in possession of or having access to unpublished price sensitive information.

 

The definition of insider in Regulation 2015 is also widened; which states any one in possession of or having access to unpublished price sensitive information should be considered an ‘insider’ regardless of how one came in possession of or had access to such information as the ‘generally available information’ has already been defined.

 

Any information reasonably designed to provide broad as well as non-discriminatory dissemination of the information to the public at large would not be considered to be the inside or price sensitive information.

 

It can be argued that any information which is restricted to a particular region or place say for e.g. information contained or published in a regional newspaper may not be considered to be generally available as it is not available to public at large. Thus, any information which is not accessible to the public on a non-discriminatory basis would be deemed to contain price sensitive information and any one in possession of it would be termed as an ‘insider’. Further, the onus of showing that a certain person was in possession of or had access to unpublished price sensitive information at the time of trading would therefore be on the person levelling the charge.

 

Order of SEBI

 

“The PSI regarding the slump sale of software solutions business to Kewill group came into existence on September 18, 2012, the day when the non-disclosure agreement was executed between Kewill group and PTL. The non-disclosure agreement (having a confidentiality clause) was a binding contract on both the sides. Disclosure of the agreement would certainly have an impact on the deal. Therefore, the same can be considered to be an ‘unpublished price sensitive information’ (hereinafter referred to as ‘UPSI’) which had definitely originated on September 18, 2012 and the same had remained unpublished till August 10, 2013 at 13.01 hours in terms of the Regulation 2(ha) (vi) of the PTI Regulations. The period of such UPSI was from September 18, 2012 to August 10, 2013.”

 

Judgement

 

As per Section 19 read with Sections 11(1), 11(4)(d) and 11(B) of the SEBI Act, 1992, the watchdog SEBI has ordered impounding of the “alleged unlawful gains of a sum of Rs 2,22,14,383  from the date of buy transactions to January 31, 2016, jointly and severally from the above persons.

 

This judgement makes it clear that one should be very careful while trading with another in case they are friends or they have friends in common over any social media platforms.

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