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Customer Care No.

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Facebook friends may be


treated as connected
persons for the purposes of
Insider Trading: SEBI
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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 15thJanuary, 2015 had
notified SEBI (Prohibition of Insider Trading)
Customer
Care2015
No. 91-11Regulations,
[Regulations 2015] and has been

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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 4thFebruary, 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 www.taxmann.com
was later revealed
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3.2 Unpublished Price Sensitive Information-Date from which it can be said to have arisen
UPSI is that information which is not yet made public by the company but which, if published, would
materially affect the ruling market price of the shares of the company. It is to be noted that in any insider
trading, the main component for making profiting is that the UPSI should be known well in advance.
Obviously, in this case, the slump sale of the business of the company, the proposal to distribute
substantial special dividend and of course the buy back through which return of money can be done were
known well in advance and that has persuaded the parties to do Insider Trading.
On analysis, it was found that the first board meeting of PTL held to formally approve the slump sale of
business and consider declaration of special dividend was on 10.12.2013. The said announcement was
made to public through Stock Exchange two days later. But the discussions relating to the slump sale of
business with the proposed buyer was initiated almost a year earlier on 5 thSeptember, 2012. The Nondisclosure Agreement with the buyers was signed on 18thSeptember, 2012. Thus, SEBI concluded that the
date 18thSeptember, 2012 as the date on which the UPSI had come into being. The transactions of the
parties on and from this date till the date when the UPSI was made public were held to be Insider trading of
shares which was in violation of the law.
Extracts from SEBI's order
"The PSI regarding the slump sale of software solutions business to Kewill group came into existence on
September 18, 2012, i.e. 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
Customer
Care
No.an91-11considered
to be
'unpublished price sensitive information' (hereinafter referred to aswww.taxmann.com
'UPSI') which had

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Analysis also revealed that the price of the shares of PTL on 5thNovember, 2012 from which date an
insider was found to have acquired the shares was Rs. 10.71. The price thereafter rose to Rs. 39.20 on the
day when the UPSI was made public.
3.3 Determination of the parties found connected for purposes of Insider Trading
In the aforesaid case, connections with the other parties were found on various grounds. In fact Mr. Palem
Srikanth Reddy, the Chairman and MD of PTL was a connected person under the Regulations and the
company accepted that he, along with two other persons, were privy to the UPSI relating to slump sale.
He was also accepted to be privy to the UPSI relating to special dividend. On scrutiny, it was also known
that Mr. Ameen Khwaja was found to be common director/promoter with the Chairman on another
company which incidentally had also provided services to PTL. Further investigations revealed that this
company was also proposed to be merged with PTL. It was also revealed that several family members of
Mr. Ameen Khwaja had dealt in the shares of PTL while Mr. Ameen Khwaja did not deal in the shares
directly. SEBI concluded that such dealing of shares by the family members of Mr. Ameen Khwaja was held
to have carried out insider trading. These dealings in shares clearly indicated that the shares were dealt
with under Insider Trading.
3.4 Definition of "Insider"
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 i.e. any one in possession of or having access
to unpublished
price
sensitive information should be considered an 'insider' regardlesswww.taxmann.com
of how one came in
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4. Facebook - Basis of determination of connection
Probably, it is for the first time that SEBI has treated Facebook as a relevant factor to determine connections between
persons or to establish connection. In this case, SEBI observed that having "mutual friends" on Facebook will form the
basis of determination of connection. Further, SEBI observed and noted that Mr. Pirani Amyn Abdul Aziz is also found to
be connected to Mr. Ameen Khwaja through mutual friends on Facebook. Mr. Aziz was employed with Deloitte Tax
Services, a group company of Deloitte Touche Tohmatsu India Pvt. Ltd which had conducted the due diligence of PTL
during the slump sale. Facebook is a relatively open social media network and friends are often made and removed /
deleted without knowing in detail the background of the parties. In fact, such friends are often strangers with whom there
are no other connections and sometimes there may not be even offline contact for quite some time. Since SEBI made an
observation and did comment on the connection in the Order, it is quite clear that SEBI would resort to all the social
media to determine connection or to establish 'connection' for investigation purposes of insider trading violations. Apart
from this other social media are twitter and linkedin etc. On investigation, SEBI considered connections on social media
on internet between the parties i.e. through Facebook as relevant factor to determine connections between parties.
The definition of connected person under SEBI (Prohibition of Insider Trading) Regulations, 2015 has been widened and
thus encompassed to include any person who has a connection with the company that has given him or in possession of
unpublished price sensitive information. Thus, a banker or immediate relative of a banker or an official of a stock
exchange or of clearing house or corporation who may not seemingly in occupation of any position in the company but
are in regular touch with the company and its officers are all included under the definition of connected person because,
these persons are presumed to know of the company's operations. Thus, through whatever connection is possible, if a
person is in a position to access unpublished price sensitive information about any company or class of companies, then
he is a connected person.

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