In a somewhat unconventional interim order, the Securities and Exchange Board of India (SEBI) issued a series of directions against CNBC Awaaz anchor Hemant Ghai, his wife Jaya Hemant Ghai and his mother Shyam Mohini Ghai. SEBI’s preliminary examination of prices of certain stocks indicated a pattern of trading that potentially violated the SEBI Act, 1992 and the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (“PFUTP Regulations”).
Hemant Ghai hosted various TV shows on CNBC Awaaz, including Stock 20-20, which aired early mornings on weekdays and recommended stocks to be bought or sold each day. SEBI uncovered incidence of what is term Buy-Today-Sell-Tomorrow (“BTST”) trades carries out by Jaya Hemant Ghai and Shyam Mohini Ghai. The BTST is a type of trading that takes advantage of the T+2 settlement cycle. Stocks are purchased on the trade day (“T”), but sold the next day, i.e., prior to the completion of the settlement cycle, enabling the trading party to make a profit even before taking delivery or paying for the shares. In this case, SEBI’s finding is that the family members purchased certain stocks on the day before an episode was aired that strongly recommended those very stocks. Soon after the episode was aired, the family members sold the stocks at a profit driven by the increase in the share price following the recommendations made by Hemant Ghai. SEBI found that not only was the increase in price significant following the recommendations made on Stock 20-20, but that there was a strong spike in trading volumes as well. The SEBI order lists out examples involving specific stocks where this phenomenon occurred.
From a legal perspective, SEBI found violation of both the SEBI Act as well as the PFUTP Regulations. In doing so, it sought refuge under rulings of the Supreme Court in SEBI v Kishore Ajmera and SEBI v Rakhi Trading Pvt Ltd to suggest that the commission of the violations can be proved using a preponderance of probabilities and also that reliance on circumstantial evidence is sufficient in the absence of direct evidence. Specifically, there was a close correlation between the purchase of shares on the day prior to the relevant show, and sale of the shares on the day of the show, a pattern that was repeated several times over. SEBI also relied on circumstantial evidence to demonstrate that Hemant Ghai was the brain behind the trades executed by his wife and mother, including by using telephone call records to show communication between Ghai and the representative of the broking firm effecting the trades. Ultimately, SEBI imposed a range of measures against Ghai and his two family members, including restraint against buying and selling securities, from giving investment advice and freezing bank accounts.
Understandably, this is an interim order on an ex parte basis, with the parties now given the opportunity to make their case. Nevertheless, a number of aspects are noteworthy. First, this is a novel instance where SEBI has investigated such a potential violation against a TV anchor and taken expedited measures. Second, if the facts contained in SEBI’s interim order are ultimately established, the pattern of trading undertaken appears rather brazen. Such a conduct has an adverse impact on market integrity. Third, one can expect parties to dispute the leaps SEBI has taken to establish linkages between the parties from an evidentiary perspective, but SEBI may benefit from the somewhat beneficial jurisprudence laid down by the Supreme Court (mentioned above) having regard to the objective and purpose of securities laws. While the regulatory process is likely to ensure beyond this interim order, consequences have already ensued with termination of the anchor’s services from the TV channel.