Corporate Law

Market Surveillance by SEBI: Catching up to Technology

Aastha Agarwalla

A sound regulatory policy is thus the need of the hour to curb insider trading in the securities market and catch up to advancing technology.


Undisputedly, the advent of the internet has altered the way people access information and revolutionized the securities market. Recently, the Securities and Exchange Board of India (‘SEBI’), whilst adjudicating the infamous ‘Whatsapp Leak Case’, grappled with the legal issue, whether communication of ‘unpublished price sensitive information’ (‘UPSI’) via Whatsapp violates the SEBI (Prohibition of Insider Trading Regulations) 2015. 

The Whatsapp leak case is a reminder that increasing usage of encrypted apps and social media networks will have severe ramifications on the regime of insider trading. Hence, it’s time for SEBI to operationalize the use of technology to conduct surveillance of the securities markets. In this post, the author examines the need to streamline a comprehensive surveillance framework for regulating insider trading violations.   

Contours of the technological challenges

The rapidly changing technology has been posing novel challenges for the market regulators, especially, in the past three years. In this regard, SEBI has been extremely circumspect in matters like Deep Industries and Fidelity Group entities, wherein the officials scanned Facebook accounts profile on the matrimonial website of the suspected persons, respectively, in order to ascertain the chain of events. However, these technological challenges came to the limelight predominantly in the Whatsapp leak case in 2017. Herein SEBI, pursuant to the news articles reporting circulation of UPSI on Whatsapp, seized approximately 190 devices and examined the chats extracted from them. After examination, SEBI found that the earnings estimates being circulated were a match with the actual earnings announced to stock exchanges subsequently.

Despite the successful extraction of Whatsapp chats, SEBI in its press briefings expressed how during preliminary investigations, they struggled with the inability to conduct an exhaustive inquiry due to Whatsapp’s end-to-end encryption. Unfortunately, this is not an isolated tale, as it’s becoming difficult to ascertain when the UPSI loses its secret status and enters the public domain. In terms of regulation 2(n) of the Insider Trading Regulations, ‘UPSI’ essentially means any information that is not generally available information, i.e. information that is accessible to public on a symmetric basis. However, due to innovative facets of technology facilitating wide ranging and fast circulation of information, it’s onerous to distinguish when information leaves its discriminatory character and cease to qualify as UPSI.  Thus, the question which remains is: how can SEBI adopt a proactive approach to ensure a level playing field, as these constraints are bound to get complex in future with the advent of features like self-destructive messages, timed secret chats etc.  

Analysis of the extant powers and measures: India and USA

SEBI gauging the growing technological constraints is encouraging adoption of financial technology in regulating the securities market. In 2005, it introduced an Integrated Market Surveillance System (‘IMSS’) to a perform market surveillance functions by collecting data on suspicious market activities on social media platforms through network systems, and thereby, tab market manipulations. However, the knee-jerk response by SEBI is far from an effective solution. In a response to a RTI filed by Moneylife, SEBI responded that no statistics on data captured on the surveillance or how many cases the system has detected can be computed.

Pertinently, India, unlike other matured jurisdictions, has vested limited powers with the market-regulator, which exacerbates the situation by acting as an impediment for an effective investigation. SEBI currently has power only to seek the call data-records of persons being probed and details of the telecom service providers, and significantly lacks basic surveillance tools such as intercepting phone calls. Elucidating the same, the Bombay High Court in the dictum of Indian Council of Investors v. Union of India & Ors noted that the power to seek call records cannot be exercised for conducting a fishing enquiry as it can only be exercised against whom any investigation or enquiry is being conducted.

On flipside, in the USA, the market-regulator – SEC is granted with expansive power to tap the phone calls. Rather, in the biggest case of insider trading in Wall Street history i.e. Rajat Gupta and Rajaratnam, the prosecutors wire tapped the phone conversation to implicate liability. It should also be noted that the technological challenges are not limited to the jurisdiction of India, as concerns have been expressed by the U.S. Securities and Exchange Commission (‘SEC’) about the usage of encrypted apps by Wall Street traders to hide illicit communication from internal compliance programs and regulators to disguise financial crimes. However, acting prudently, over the past ten years, the SEC has significantly enhanced its insider trading surveillance capabilities by establishing specialized units, and adopting new investigative approaches. Intriguingly, SEC uses statistical analytical tools on trading data to establish ‘potential relationships’ among traders and also use such relationship information to deduce whether they have sources of prohibited information that are common to them.

Surveillance Laws viz-a-viz Right to Privacy

Surveillance by law enforcement agencies has been at the heart of privacy-rights jurisprudence. It’s prudent to understand that in the light of emerging jurisprudence relating to privacy, SEBI’s surveillance power can be challenged. Recognizing right to privacy a fundamental right under Article 21, the Supreme Court enunciated the principles of informational privacy in its seminal judgment of K.S. Puttaswamy vs. Union of India  which has found articulation in the recently tabled  Personal Data Protection Bill, 2019 (‘PDP Bill’). 

The PDP Bill in section 35 extends sweeping powers to the government agencies to conduct surveillance on the grounds of national security, integrity & sovereignty and public order. The SC in Puttaswamy laid down that privacy can be invaded by the state actions to a permissible limit only after passing the three-fold test viz. law in existence; legitimate aim; and proportionality with the object sought to be achieved. Thus, any market surveillance measure by SEBI shall be valid, only if the measures undertaken are reasoned, proportionate and upto the standards of Puttaswamy Judgment.

In 2013, SEBI in order to curb practice of providing trading tips through social networking media such as Whatsapp, Twitter, Facebook, etc., in a consultation paper, proposed that, ‘No person shall be allowed to provide trading tips, stock specific recommendations to the general public through short message services (SMSs), email, telephonic calls, etc. unless such persons obtain registration as an Investment Adviser or are specifically exempted from obtaining registration.’ The recommendation has not yet materialized. The least the legislature can do is to place SEBI’s power at par with the integrated surveillance powers vested with the Central Board of Direct Taxes, Directorate of Revenue Intelligence, so on, under the Indian Telegraph Act 1885. Pertinently, in 2018, the T.K Viswanthan Committee advocated a similar recommendation that ‘SEBI may seek direct power to intercept calls to aid in investigation, akin to the power granted to the Central Board of Direct Taxes.’ Yet, no amendment has been introduced.

The legislature should rather come up with a specific modus operandi to be used by the SEBI while undertaking market surveillance rather than having an umbrella provision like section 35. For instance: SEBI should be permitted to engage in targeted surveillance after setting out the identity of the target, the grounds for surveillance, the gravity of the suspected offence, and the proposed period of surveillance, presented in a form of ‘risk report’. Nevertheless, the article recognizes that communications surveillance constitutes an important component in aiding in the prevention and investigation of insider trading crimes. It simply argues that it’s pertinent to adhere to nuances of proportionality, establish adequate checks and balances and ensure that the investigation agencies are not conferred with unbridled power to invade privacy.


A sound regulatory policy is thus the need of the hour to curb insider trading in the securities market and catch up to advancing technology.

The author is a student at Campus Law Centre. Faculty of Law, University of Delhi

1 reply »

  1. US Sec power with respect to the interception of calls in Rajaratnam case was because of the involvement of money laundering and not insider trading. I still doubt in any jurisdiction, such powers to the regulators have been bestowed with owing to privacy concerns