Richa Hudilwala
Insider Trading means buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security. One who has access to confidential information about company’s affair would have an unjust benefit over other investors. Insider Trading is a serious crime in India and often market scrutiny reveals it. The SEBI inspects Insider Trading through unusual trading undertakings.
As United States has huge success in curbing Insider Trading practices, the article highlights the comparison of US Legislation from Indian Legislations. It further argues the reasons which make India stand at lower pedestal in detection of Insider Trading crime and suggest measures to overcome this issue.
COMPARATIVE ANALYSIS OF REGULATIONS FOR INSIDER TRADING
The relative study of regulations of insider trading with respect to different jurisdictions becomes imperative because of its transnational nature. The effectual compliance of the prevention of insider trading depends upon multi-lateral collaboration among the nations trading globally. The United States have proven to be the most successful nation in tracing suspicious trade activities. This mandates sneaking in into the US legislation to analyze its watchdog mechanisms.
The Securities Exchange Commission (‘SEC’) is the regulating body for conducting securities trade in United States. In 1943, SEC promulgated Rule 10b-5 which prohibits “any manipulative or deceptive device or contrivance”. This rule had not been explicitly stretched to insider trading. Consequently, insider trading cases were rested on the presumption of one, who misappropriates confidential information or breach the fiduciary relation. In 1980, Rule 14e-3 brought out by SEC, makes it unlawful for persons to trade having advance knowledge of the material information of the trade. The United States have successfully proven to be the first country in forbidding the practice of insider trading effectively.
In India, Section 11(2)(g) of Securities and Exchange Board of India 1992 provides power to prohibit insider trading in securities in India. ‘Insider’ as per regulation 2(e) of SEBI (Prohibition of Insider Trading) Regulations, 1992 is “ persons who are or who were connected or who are deemed to be connected to the company and have access to ‘Unpublished Price Sensitive Information(UPSI)’”. Insider Trading is punishable crime containing penalty of Rs 25 crore or 3 times the profit made, whichever is higher.
The apparent difference in detection of insider trading cases necessitates the study of India from other legislations. Having a brief glance at the above regulations, it is quite apparent that there does not exist any vast deviation in Indian Statutes from the US Regulations. But still India ranks far below US in tracing this illegal trade.
WHY INDIA FAILS TO DETECT INSIDER TRADING?
Over the last few decades, India has become the epicenter of criticism because of its lackluster performance in curbing Insider Trading. Numerous reasons can be contribute to this loophole making the SEBI regulations seem ineffective in this perspective. Hereby, shaking the confidence of investors to invest. It makes shareholders conscious and makes them rethink about their rights and interests while dealing in the securities. Statistics show that from the last financial year 2015-2019, SEBI took 141 cases of insider trading but achieved success in only about half of them.
Some of the reasons of the above lacunae are:
Firstly, it is true that having declared an offense as criminal, it communicates a strong message to the society, that legislation has considered it to be grave and has taken a step towards curbing it. As already mentioned, Insider Trading is a Criminal offense in India, carrying strict penal punishment under Section 15G of SEBI Act 1992. But at times, it happens that such strict and hard measures may not bear fruit. Similarly, insider trading being Criminal offense does not lead to successful prosecution in India. Here, confidential information being the key to this crime, makes it more difficult for SEBI to detect the same. Due to privacy concerns, direct evidences are very rare. Insider Trading is often detected by circumstantial evidences. Therefore, various circumstances of the conspiracy need to be taken note of such as meeting of minds, conversations, chats, relation between parties, timing and other crucial surrounding facts. All of these can be easily detected in case of a Civil offense. Until recently, the SEBI did not have power to intercept phone call. Without trapping confidential information it is a tedious task to unfurl such conspirators. The burden of establishing a case of circumstantial evidence is less tedious in civil context, due to preponderance of probability rather than proving beyond reasonable doubt as in the case of criminal offense. In US, Insider Trading is both civil as well as criminal offense. It provides for compensation as well as imprisonment. The SEC cracked down huge number of insider trading cases by its civil enforcement. One of best illustrations of the above proposition is the decision of the Eleventh Circuit of US in SEC v. ALDER, which held that it is imperative to establish that defendant used the material non public information. Mere possession of information is not enough. It was decided that defendant has the burden of rebutting the inference by showing that information was not used.
Sometimes “an ant on its feet can do more than a lying elephant”. Applying the same principles, India should declare Insider Trading as a Civil offense as well as a Criminal one.
Secondly, as securities are traded internationally, proper and effective inspection and conviction require international collaboration. Such cooperation is required for assistance in detecting conspirators or obtaining any other material record. The US cooperation and agreements with foreign nations proved to be useful tool in curbing Insider Trading practices. It has always been the priority for the SEC to enforce Foreign Corrupt Practices Act. India should be inspired from the success rate of the US and should work toward seeking international assistance.
Thirdly, before detecting a crime, its acknowledgement is necessary. It is must to know that the offense has been committed, only then can its inspection resume. Without knowing of its commission, how can one prevent it? Many cases of Insider Trading remain undercover due to the potential hiding capacity of the wrongdoer. To overcome this, and to increase the unfurling of Insider Trading cases the SEBI (Prohibition of Insider Trading) (Third Amendment) Regulations, 2019 was brought which provides informal mechanism to detect inside trading in India. The main objective of the amendment is to make the insider trading prosecution effective. It seeks to reward the whistleblowers whose information leads to a disgorgement of at least INR 1 crore.
But the amendment is still not free from deficiencies. Firstly, SEBI does not provide proper mechanism for the misleading and fake complaints. To seek the reward of 10% of the monies collected, the chances of misuse of such incentive is much higher. Subsequently, such hoax complaints will lead to waste of time and resources. Secondly, the amendment does not provide for any stimulus for the informant to reveal the illegal trade occurring to the tune of INR 1crore.
CONCLUSION
It can be deduced from the above analysis that though SEBI has power under Section 11 of SEBI Act, 1992 to investigate insider trading matter but it has failed miserably. SEBI regulations are not inclusive and are loosely drafted. The work is not done by simply bringing the laws into the books, they are of nullity until implemented or executed properly to achieve the aim for which they were drafted. It’s high time that the government should look into this matter seriously by strengthening the existing regulations and making new framework of rules to prohibit menace of insider trading in stock market. Investigation process should be smoothened by making the necessary tools of inspection available to the regulating body. By taking into considering the above discussed lacuna, authorities should work to fix them. This crime should be eradicated from Indian financial economy at any cost.
The article mentions that “SEBI until recently did not have the power to intercept phone calls”. Kindly clarify when did this power get sanctioned?