SHARING CRIME

India’s market regulator wants to see your WhatsApp chats

Quartz india
Quartz india

Some of the chatter within private WhatsApp groups is now a matter of grave concern for India’s market regulator.

The Securities and Exchanges Board of India (SEBI) is probing the alleged leaks of the earnings of some listed companies ahead of their actual release to the exchanges. It has reportedly ordered internal inquiries at India’s marquee companies- HDFC Bank, Axis Bank, and Tata Motors.

Insider information on corporate earnings is more precious than gold for stock traders. Recently, there have been instances where such information flew on the Facebook-owned popular messaging platform.

“These groups are closed sets of people, where everyone knows each other…It’s a give-and-take relationship. In the way it works, I act on the information and forward it to you. You are then obliged to share something similar with me in the future,” a portfolio manager told Quartz, requesting anonymity. From the regulator’s point of view, it’s a lapse of governance and security systems.

Insider trading is not a new phenomenon. Neither are rumour mills working overtime during earnings seasons. In any case, tip-offs are not limited to earnings or WhatsApp.

“These things happen globally. But abroad, the surveillance is so strong. We have seen so many (insider trading) cases where top honchos get arrested. Rajat Gupta (and) Rajaratnam are examples. But here (in India) things get hushed up,” said the head of an investment advisory firm, who did not want to be named.

He was referring to the infamous 2012 case in which Gupta, the former Goldman Sachs director, was convicted of tipping off Raj Rajaratnam, a hedge fund manager. The information Gupta shared pertained to an investment Berkshire Hathaway was about to make in the US firm.

More recently, a strange turn of events was witnessed in India, too.

On Jan. 25, 2018, without any obvious trigger, the stock of Punjab National Bank fell over 7% in an otherwise firm market. It was only on Jan. 29 that the state-run lender formally filed a complaint about the biggest banking scam in India’s history, allegedly perpetrated by diamantaires Nirav Modi and Mehul Choksi. Market veterans smelt something fishy in the stock movement before the scam was revealed to the public.

“It’s a classic example of a developing market that is very porous…Many a time we see a price spurt or a volume spurt, days or weeks prior to the announcement, which means someone privy to insider information has entered the stock,” the fund manager said.

Plugging the holes

Selective leaks of information could happen from anywhere in the chain or hierarchy.

Price-sensitive information often passes through many eyes—from the chief financial officer’s team to the technology team to the auditors (internal and external) and their IT teams, which may sometimes even be outsourced. There are also public relations teams—again, often outsourced—which are privy to some details. Sometimes the leaks could happen even from the exchanges, the investment advisor said.

Plugging all these information holes is easier said than done.

However, a law deterring the sharing of such information—even if one doesn’t trade on it—on social media already exists, Sandeep Parekh, a lawyer with Finsec Law Advisors who used to head SEBI’s enforcement division, told Reuters in November 2017.

“This is one example where the advancement in technology has surpassed regulations,” according to the portfolio manager. In the case of Tata Motors, SEBI said, “…at this stage, ,the source/origin of the UPSI (unpublished price-sensitive information) leak cannot (be) ascertained.”

Meanwhile, the bigger challenge is tighter security systems and accountability to keep information safe within firms, besides cracking down on such white-collar crime.

“It’s high time SEBI pulls up its socks and takes action…I guess about 10% of the money in the market acts only on insider information and anticipation of earnings and announcements. If SEBI takes action, it will cause some short-term pain but it will make the market cleaner. It will be a sign that the market is moving from being a developing one to a mature one,” the portfolio manager said.

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