Palred Technologies probe: The story of SEBI’s unique ‘Facebook’ account

08 June, 2016

That social networking has become an integral part of our professional lives is common knowledge, what with scores of companies also relying on the Facebooks, LinkedIns and Twitters of the world for different purposes including head hunting, business promotion, community development, customer surveys and even for sensitive matters like crisis communication.

But the capital markets watchdog Securities and Exchange Board of India (SEBI) has proved that the popular social networking service Facebook is way more than a social tool for leisure and entertainment. Through an innovatively purposeful use of Facebook, SEBI has successfully probed a violation of insider regulation.

It would be pertinent to briefly discuss the specifics of the case.  

A SEBI investigation of Palred Technologies Limited confirmed that:

  1.  Palred CMD was an ‘insider’,
  2.  His friends and their relatives, had access to ‘unpublished price sensitive information’ related to a proposed slump sale transaction between Palred Technologies and Kewill Group as also a proposed declaration of interim dividend post the slump sale, and,  
  3.  The suspect parties dealt in Palred shares during the period the said information was unpublished.

On the face of it, this seems like a normal SEBI investigation but what makes it special is the fact that SEBI used Facebook-accessed information to establish connections between two of the suspected persons. It’s indeed heartening to note that SEBI didn’t limit the scope of its probe to online corporate information alone. Instead, it stepped into the world of social media, for the first time ever, to determine the said connections. This is undoubtedly a welcome initiative by the Indian watchdog and in line with the prevalent practice followed by law enforcement agencies throughout the world – of using social media for probing violations and irregularities. 

A case in point is the Securities Exchange Commission (SEC) investigation of China-based Shuanghui International Holdings. The SEC froze the assets of the accused person, who allegedly made a profit of more than $3 million from trading in anticipation of Shuanghui’s announcement to acquire Smithfield Foods. Alarmed by the unusual trading activity, the SEC also probed the sphere of social media and discovered that one of the accused’s Facebook friends was his former employee and was later employed with a Thailand investment bank that advised a competing bidder for the said acquisition.

In SEBI’s landmark probe, the “Facebook” discoveries helped the board to conduct a fool-proof probe based on which it passed an ad-interim ex-parte order for impounding the allied unlawful gains. The accused duo was also directed, amongst other things, to provide a full inventory of assets and properties. SEBI made intelligent use of the seemingly inconsequential information on ‘mutual friends on Facebook’ for phenomenally consequential purposes.  

Social media is a powerful tool at the hands of governments, regulators and law enforcement agencies in making definitive discoveries in their probes

SEBI’s use of Facebook has ushered in a new era in the probe of difficult investigations like that of insider trading which are invariably difficult to prove. Insider trading implies an exchange of unpublished price sensitive information by a person who has access to such information and who, on the basis of such information, trades in the shares of a company to either derive gain or avoid losses. Where an ‘insider’ exchanges unpublished information with another person, they both derive benefits from it. This can easily go unnoticed. That’s precisely why the investigation into insider trading demands a commensurate information infrastructure capable of collating sensitive information from a variety of sources including unconventional media like Linked profiles, Facebook, Instagram and Twitter accounts.

As the SEBI initiative has shown us, social media is no longer a personal digital medium to bind people in informal relationships alone. It is also a powerful tool at the hands of governments, police departments, regulatory bodies and law enforcement agencies in making definitive discoveries in the course of their investigations.

Visual and graphical information like pictures and videos uploaded on Facebook, Instgram or even Twitter and LinkedIn updates can prove handy as conclusive proof in such investigations, especially in a country like India which has a huge population base and even relevant information is invariably diverse, disparate and widespread, and hence difficult to regulate.

Besides, the Information Technology Act, 2000 (“IT Act”) widely regulates the interception, monitoring, decryption and collection of information of digital communications in India. More specifically, section 69 of the IT Act empowers the central government and the state governments to issue directions for the monitoring, interception or decryption of any information transmitted, received or stored through a computer resource.

Law enforcement agencies can and should make innovative use of social media for a wide variety of purposes including:

  1.  Anticipation of law breaches and offences by making use of public information on social media sites on upcoming events and mega deals;
  2.  Keeping an eye on anonymous tips posted by tipsters and informants on various blogs and forums;
  3.  Speedy collection and confirmation of crucial facts and evidence using graphical and visual information like pictures, videos and podcasts;
  4.  Find the exact location of the alleged parties and the accused by accessing social media co-ordinates;
  5.  Establish connections between the various alleged parties based on their social media relationships and exchanges;
  6.  Run public awareness campaigns and issue notifications for widespread dissemination of key information in the quickest possible time.

Taking a cue from the SEBI probe of Palred Technologies, one feels that not only corporate and security market regulators, but even other regulators should start making extensive use of seemingly informal social media and website sources as an integral part of their formal investigation process.

Nitin Potdar is the M&A Partner at law firm J. Sagar Associates. Views are personal.

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1 Comment
Puneet Shah . 1 year ago

Excellent sir.

Palred Technologies probe: The story of SEBI’s unique ‘Facebook’ account

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