Insider Trading In The Digital Age: The Role Of Social Media In India’s Financial Markets
Introduction:
In less than a generation, social media grew from simple means of communication into giving birth to major influencers in all industries, including finance. From the origins of telegraphs and blogs to a global system with billions of active users on platforms like LinkedIn, Facebook, and Instagram, it’s truly amazing.
This widespread reach has impacted financial markets, even affecting stock prices. However, it has also opened new ways for illegal insider trading—where people trade stocks based on confidential company information. Social media has become a source for such leaks, making it a concern for regulators.
To prevent insider trading, India’s market regulator, SEBI (Securities and Exchange Board of India), introduced regulations in 1992 and strengthened them in 2015. As social media continues to influence market behaviour, insider trading laws must evolve to ensure transparent financial markets.
Insider Trading Laws In India:
In India, insider trading is governed by the Securities and Exchange Board of India (SEBI) Act, 1992, and the SEBI (Prohibition of Insider Trading) Regulations, 2015[1]. The term “insider” comprises, but is not limited to, any person who has access to unpublished price sensitive information or is a “connected person” to a company. Connected person generally includes the following people: Any person, said to be connected with the company and with whom the company has had a professional, fiduciary, or employment relationship and such relationship has existed for 6 months before the time when the act of insider trading is committed. Thus, it includes directors, officers, employees, consultants, and anyone who communicates with the officers often enough to be able to get non-public, material information.
Unpublished Price Sensitive Information means any information that is not public and would alter the price of the company’s securities when disclosed, such as financial results or other events such as merger and acquisition and turnover in significant management, etc. Trading on such information is illegal since it gives the insider undue advantage over public investors who do not have access to such information. To overcome their intentions SEBI has established a trading window whereby an insider is prohibited from trading until such time as this sensitive information is made available to the public. The trading window is usually closed before any important corporate activities, like financial forecasts or major corporate Acts merger.
The regulations also provide that companies, as soon as practicable, should disclose UPSI to the stock exchanges to provide equal access of information, thus ensuring transparency. Insider reporting also includes reporting the trades he makes through the company and to the stock exchanges that check compliance of the trading activities of individuals. From 1992 onwards, Section 15G specifically in the SEBI Act made trading punishable by fines where penalties can run from ₹10 lakhs to ₹25 crores or three times any profits the insider would have made, whichever is greater. Violators can also face additional consequences such as criminal charges, debarment from trading, and imprisonment. These measures will prevent insider trading, maintain market integrity, and ensure that the field remains level for all participants in the market, thus confidence by investors in the Indian financial markets.
Insider Trading In The Era Of Social Media:
Insider trading has been a cause of concern for the financial regulators of the world for decades. This refers to the act of buying and selling securities from material, non-public information, this practice has become even more complicated to regulate due to social media. The unregulated and instant social media, such as Facebook, Twitter, WhatsApp, and LinkedIn, may spread sensitive, price-sensitive information that could affect the stock prices quickly.
Increasingly, it is becoming apparent that social media plays a significant role in the determination of stock prices, where even a single tweet or post can cause dramatic market fluctuations. With these platforms graduating from being pure social spaces and becoming critical mediums of financial information, they automatically become a carrier of Unpublished Price-Sensitive Information (UPSI). In continuing to maintain its vigil on keeping the market integrated, SEBI has been met with the very difficult challenge to trace and effectively regulate the now rapidly spreading wave of information within social media channels
A prominent example of social media influencing insider trading regulations occurred in the case of Deep Industries Limited (DIL) in 2018[2]. The Securities and Exchange Board of India (SEBI) passed an order on the basis of the Facebook connections between some investors and the Managing Director of DIL, Rupesh Savla. SEBI found that based on the interaction on their respective social media accounts, these individuals were well connected and thus could have been reasonably privy to UPSI regarding the considerable contracts of DIL with ONGC. SEBI found that friendships on Facebook through ‘likes’ on posts had been essential for establishing a relationship between the defendants and the company, which in violation of PIT regulations, made the insider trading actionable.
The problem here is the determination of the authenticity and significance of virtual connections. Social media platforms, where interactions may be casual or lighthearted, complicate the process of linking individuals to insider trading activities. The question arises whether accepting a friend request or interacting with someone on social media can be deemed as an indicator of having access to sensitive company data. Such a shift towards reliance on online social connections raises privacy concerns and the possibility of over-surveillance by regulators.
Another significant instance of the influence of social media was in February 2018, when SEBI investigated the leakage of unpublished financial results of HDFC Bank through WhatsApp. The leaked information closely matched the quarterly results of HDFC for Q1 of 2017 and was circulated before the official public announcement. SEBI’s investigation revealed that the information had been disseminated via WhatsApp, violating the PIT Regulations, which prohibit the communication of UPSI.
In addition to these incidents, SEBI also linked an insider trading case to a profile found on a matrimonial site, JainShubhBandhan.com, in December 2018, further showing how regulators are exploring non-traditional platforms like matrimonial and social media sites to trace connections in insider trading cases.
Inside trading regulations in India centre around the ban on UPSI-based trades. Such information must be disclosed within a set time frame to the stock exchange, and SEBI ensures that all investors have equal access. As social media continue to take an upper hand position in information dissemination, SEBI will have to dynamically regulate this evolving digital landscape to ensure fairness and integrity of markets.
Conclusion:
The rise of social media has deeply impacted financial markets, creating new challenges for regulators like SEBI in combating insider trading. With platforms like Facebook, WhatsApp, and even matrimonial websites becoming tools for sharing sensitive information, the line between casual social interaction and the dissemination of Unpublished Price-Sensitive Information (UPSI) is increasingly blurred.
The attempts by SEBI to tailor the already in-place insider trading regulations, evident from cases concerning Deep Industries Limited and HDFC Bank, bring forth the issues faced by regulation mechanisms while trying to manage information flows in the electronic age. Where social media enabled market-moving information to be propagated fast, questions have arisen as regards privacy, authenticity of relations, etc. Continued evolution in the regulatory framework under the watch of SEBI would thus enable much-needed fair access to information for all investors and address the continuously gaining influence of digital platforms. Transparency and fairness in financial markets must be ensured despite the ongoing evolution of technology.
[1] SEBI. (2024) Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015, as amended on June 26, 2024. Available at: https://www.sebi.gov.in/legal/regulations/jun-2024/securities-and-exchange-board-of-india-prohibition-of-insider-trading-regulations-2015-as-amended-on-june-26-2024-_84494.html (Accessed: 17 January 2025).
[2] Securities and Exchange Board of India (2018) Eep Industries Limited (Order of Whole Time Member, Securities and Exchange Board of India), SEBI/WTM/MPB/IVD/ID–6/162/2018
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