Prescient messages about Indian companies circulate in WhatsApp groups

Mahindra Holidays and Resorts India

21/11/2017 05:12

(Updates with additional response from Dr. Reddy's and 
regulator) 
    By Rafael Nam 
    MUMBAI, Nov 21 (Reuters) - Three days before Dr. Reddy's 
Laboratories Ltd announced quarterly results this summer, a 
message circulated on a private WhatsApp group saying the Indian 
drugmaker would not post good numbers. 
    Dr. Reddy's was going to report a loss, according to the 
message on the "Market Chatter" group, which was posted on July 
24 from a mobile phone number that Reuters traced back to 
Nishant Vass, an auto analyst at ICICI Securities, a leading 
Indian brokerage. The WhatsApp group had 45 members, mostly 
traders. 
    The loss would have been a surprise to many analysts, as 
consensus forecasts compiled by Thomson Reuters at the time 
showed expectations of a profit of 3 billion rupees.  
    The message proved prescient: On July 27, Dr. Reddy's 
 REDY.NS  reported a loss of 587 million rupees (9.05 million 
dollars) under Indian accounting standards.  
    The chief executive of Dr. Reddy's said quarterly results 
were "below expectations", sending shares down as much as 4.4 
percent. 
    After the Reuters story was published on Nov. 16, Dr. 
Reddy's said that it had posted a net profit of 591 million 
rupees for that first quarter of the fiscal year ending in March 
2018 under the global IFRS accounting standard. 
    The company further reiterated that they "have adequate 
processes and controls in place in terms of confidentiality and 
security of information."   
    The post that circulated in the WhatsApp group three days 
earlier had predicted a loss of more than 500 million rupees. 
    A person who identified himself as Vass returned a call from 
Reuters using the telephone number from which the Dr. Reddy's 
numbers had been posted on the WhatsApp group. He denied writing 
or sharing posts in the group, adding later in a separate 
WhatsApp message from the same number that it was "totally 
baseless" that he had done so. 
    Reuters has documented at least 12 cases of prescient 
messages about major Indian companies, including Dr. Reddy's, 
being posted in private WhatsApp groups.  L2N1MR0IE  
    Two of the messages appeared in the transcripts of six 
groups reviewed by Reuters, including the "Market Chatter" group 
where the Dr. Reddy's numbers appeared. The others were shared 
on condition of anonymity by two other members of other WhatsApp 
groups. 
    The posts with prescient numbers in the WhatsApp groups were 
circulated hours or days before official company statements. 
    The messages shared could involve lucky guesses or astute 
forecasts based on publicly available information, and not all 
metrics shared among the 12 cases were exactly the same as 
reported. 
    Reuters could not determine where the numbers posted on the 
WhatsApp groups originated or whether any of the market 
participants who received the messages had traded on the basis 
of the numbers they had seen. 
    According to two lawyers who were formerly senior officials 
at the Securities and Exchange Board of India (SEBI), the 
country's capital markets regulator, if any numbers being posted 
on WhatsApp groups were determined by regulators to be 
"unpublished price-sensitive information", the people 
circulating them would be breaking the law. 
    "The mere sharing of information that could be unpublished 
insider information is outlawed, even if you don't misuse the 
information to trade on it," said Sandeep Parekh, a lawyer with 
Finsec Law Advisors who used to head SEBI's enforcement 
division. 
    SEBI did not respond to requests for comment. After Reuters 
published this article, the regulator said that it would 
investigate the matter. urn:newsml:reuters.com:*:nL3N1NN23I 
    India significantly toughened insider trading rules in early 
2015, expanding what constitutes "unpublished price-sensitive 
information" to include "any information" that is not "generally 
available" and that could have a market impact. 
    The law also expanded the scope of who constitutes an 
"insider" to include "anyone in possession of or having access 
to unpublished price-sensitive information" regardless of how 
they came "in possession of or had access to such information". 
    "You don't need to have gotten inside information from a 
company. You could get it from anywhere," said Vaneesa Agrawal, 
a partner with Suvan Law Advisors who formerly worked in SEBI's 
legal department. "As soon as you have information that could be 
insider information you are an insider, and you are not supposed 
to either pass it on or trade on it." 
    Circulating "unpublished price-sensitive information" can 
result in penalties of up to 250 million rupees and a jail term 
of up to 10 years. The monetary amount can be higher if it can 
be proven that an individual traded on such information. 
    ICICI Securities said in a statement that it had "zero 
tolerance towards any dissemination of unpublished price 
sensitive information and has an appropriate framework to 
safeguard confidentiality of information." 
    Dr. Reddy's said it was "not aware of any information 
related to its financial results being circulated externally 
ahead of statutory disclosures that are made officially by the 
company."  
         
    MESSAGING THROUGH WHATSAPP 
    The messages about the 12 companies with prescient 
information obtained by Reuters involved mostly what were 
characterised as being upcoming quarterly results, including 
specific metrics such as net profits, revenues and operating 
margins. 
    They also included messages about upcoming bonus share 
issues or revenue guidance. 
    Seven of the companies are part of the benchmark NSE index 
 .NSEI : Dr. Reddy's, the drug maker Cipla Ltd  CIPL.NS , Axis 
Bank  AXBK.NS , HDFC Bank  HDBK.NS , Tata Steel  TISC.NS , the 
IT services company Wipro  WIPR.NS , and Bajaj Finance 
 BJFN.NS .  
    The other five were Mahindra Holidays and Resorts  MAHH.NS , 
Crompton Greaves Consumer Electricals Ltd  CROP.NS , the IT 
services providers Mindtree Ltd  MINT.NS  and Mastek Ltd 
 MAST.NS , and India Glycols  IGLY.NS , a petrochemicals 
company. 
    Wipro, Bajaj Finance, HDFC Bank, Mastek, Crompton Greaves, 
Cipla and Mahindra Holidays said they were not aware messages 
referring to their upcoming results or announcements had 
circulated in WhatsApp, and that the companies adhered to strict 
standards of guarding sensitive company information. 
    Axis Bank, Tata Steel, India Glycols, Mindtree did not reply 
to requests for comment. 
    WhatsApp, which is owned by Facebook  FB.O , responded to a 
request for comment by pointing to its terms of service, which 
state users can use the platform only for "legal, authorized, 
and acceptable purposes".   
     
    HEARD ON THE STREET 
    Many of the postings in the WhatsApp groups are referred to 
as "HOS", for "Heard on the Street". 
    In one typical post on July 25, Fanil Motiwalla, a 
contractor for a small brokerage, Arcadia Share & Stock Brokers, 
posted a set of numbers for Axis Bank, India's third-largest 
private lender. Motiwalla works as a sub-broker, who are 
typically hired as contractors by securities firms in India to 
recruit customers. 
    "This HOS is going around for Axis," Motiwalla said when 
posting the numbers, which included key metrics such as gross 
non-performing assets and net interest margins. 
    Later that day, Axis Bank reported results that closely 
matched the final numbers in Motiwalla's message. 
    Arcadia said it had policies in place to prevent employees 
from passing on "illegal information". 
    Motiwalla said he just reposted a message that had already 
been circulating in the market and he did not consider it inside 
information. 
    "How do I know if this is coming from inside information? 
This could come from many sources," he said. "This information 
comes from different groups, and we just post it." 
    Arcadia said every sub-broker it hired was given a copy of 
SEBI's rules, adding, "whatever the alleged message sent by him 
is not sourced from Arcadia," referring to Motiwalla. 
    ($1 = 64.8775 Indian rupees) 
 
    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ 
FACTBOX-How corporate numbers on Indian WhatsApp groups compared 
with actual results     L2N1MR0IE  
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> 
 (Reporting by Rafael Nam; Additional reporting by Euan Rocha; 
Editing by Paritosh Bansal and Philip McClellan) 
 ((rafael.nam@thomsonreuters.com; +9122-6180-7425; Reuters 
Messaging: rafael.nam.thomsonreuters.com@reuters.net)) 
 
Keywords: INDIA WHATSAPP/