Insider trading is amongst the most prominent malpractice of stock markets and also one of the most difficult one to crack by regulators around the world. Attempt is made in this article to argue the practical and theoretical reasons of such less conviction in India for Insider Trading with a comparison to laws of UK. For clarity, this article is divided into two parts, firstly, this article will look at how SEBI derives power to investigate on insider trading and lack of proper surveillance tools and powers with SEBI and challenges in gathering evidence as a biggest reason of disastrous investigation in insider trading cases. Second part will compare Indian laws on Insider trading to those of USA and suggest some changes in present laws for better conviction in insider trading scams.
Insider trading offences are defined under Section 11 of SEBI Act,1992 under which SEBI has the power to investigate on matters and look upon the books of the firm. Insider Trading is basically buying or selling of securities by someone with access to unpublished information regarding securities which can affect their price in market. Such person is defined under Regulation 2(g) of SEBI (Prohibition of Insider Trading) Regulations, 1992[1] where an ‘insider’ is a person who is/was or is deemed to be connected to company. In India, SEBI (Insider Trading) Regulation, 1992 framed under the Section 11 of the SEBI Act, 1992[2] intends to curb and prevent the menace of insider trading in securities.
To crack any case of insider trading, SEBI first needs to establish who is an insider, which is basically any person connected with company in any position, like key managerial personnel, board of directors, auditors, promoters or even the peon. Even relatives of these persons are considered to be connected persons, connected to insiders and thus having a way to access information.[3] Then, SEBI needs to understand what constituted as UPSI in any case and this could be anything which can affect the price of securities like merger or acquisition, any deal or financial information etc. Lastly it checks who traded on the basis of UPSI. The implementation however is very different from what is there on paper as Parekh call it as “paper tiger”[4] which will be discussed further.
Laws for prevention of insider trading have evolved and are evolving over the decades and there is more onus on companies now to protect UPSI (Unpublished Price Sensitive Information)[5]. For example, in the case of Hindustan Lever Limited vs SEBI[6] and Dilip Pendse vs SEBI[7] one could very well understand that because of the lack of a proper investigative mechanism and corroboration of evidences a lot of offenders escape from the law or are given meager punishments. This in turn again promotes the illegal practice of insider trading as they now can take the aid of these loopholes. Therefore, investigative mechanism that are employed in the Insider trading cases should be improved. However, SEBI due to challenges in establishing links, lack of proper surveillance tools lack of proper surveillance tools and gathering evidence, has failed to make a proper example of seriousness of this offence. The very act of trading with knowledge of UPSI in securities could lead to impacting the price of securities to be issued heavily in the market.[8] It is not difficult to think of how deeply rooted this practice of insider trading could be in a society like India, but if we look at the number of cases investigated and then at actual convictions, it makes evident the ill implementation of insider trading laws. As per SEBI reports of year 2017 and 2018, SEBI took up 85 cases for investigation and completed only 25 so far. Most of these cases were about trading on UPSI and lack of disclosure, however, establishing the link between who communicated insider information and how did that affect the playout of securities in the stock market is lacking, leading to bad implementation.[9] Further this paper will look at what SEBI needs to track insider trading.
The first major law on Insider Trading was PIT regulation of 1992 which required companies to have a model code of conduct to prevent leakage of price sensitive information[10], however, till now the law even after major overhaul in 2015 on the basis of Justice NK Sodhi committee’s recommendation that model code of conduct should be principle based rather than rule. It also introduced a concept of trading plans which gave room to insiders to trade in the stock. Under this, insiders could announce a plan of buying or selling in advance, under the obligation to execute those trades.[11] Even in most recent changes after 2019 in TK Vishwanathan panel report organizations were required to have a procedure or policy to conduct enquiry into leakage of UPSI. It also permitted communication done for ‘legitimate purpose’.[12]
Even the present laws are unable to make strict effect on insider trading malpractice due to fact that SEBI does not have basic investigative powers leading to low prosecution. This can be understood from the fact that SEBI was granted powers to call for phone data records only in 2014 and even till today it does not have the power to tap phone records, which was recommended by Vishwanathan panel. Power to wiretap phone calls is a crucial tool used by other jurisdictions such as U.S. in obtaining evidence against insider trading suspects for the purposes of investigation and successful conviction. This power was denied to SEBI on the grounds of ‘misuse’. Currently, the Indian Telegraph Act, 1885, governs wiretapping. On the other hand, the U.S. Securities and Exchange Commission (SEC) unearthed crucial evidence by wiretapping the conversations between Raj Rajaratnam and Rajat Gupta, which ultimately led to their conviction.[13] Parekh argues that the burden of proof of proving a criminal charge is so onerous, the requirement of intent so strict and the court procedures so long and ‘due’ that conviction is an exception to the rule.[14]
It is also important to point out the lack of human resources in SEBI as having some 800 something employees for every breach in the nation practically makes it impossible to regulate malpractice of insider trading. It is also true that that while SEBI does not have some powers like phone tapping or only received powers like to call for phone records recently that are vital to investigate insider-trading violations, SEBI has also failed to utilize all of its powers to crack insider trading. It is important for Indian government to provide more working force in SEBI to regulate breach of corporate rules and in addition, the Government must consider granting wiretapping powers to SEBI. SEBI must also utilize the powers it has received recently, such as its power to review any phone records, and its widened search and seizure powers, etc. to improve its rate of investigation and successful conviction. It is an utmost important requirement to facilitate SEBI in cracking down insider trading scams as it will lead to better corporate governance and freshness in market for securities in India.
[1] Regulation 2(g), SEBI (Prohibition of Insider Trading) Regulations, 2015.
[2] Section 11, SEBI Act, 1992
[3] Regulation 2(d), SEBI (Prohibition of Insider Trading) Regulations, 2015
[4] Sandeep Parekh, Prevention of Insider Trading and Corporate Good Governance in India, 32 Int’l Bus. Law. 132 (2004). Pp. 133
[5] Sandeep Parekh, Prevention of Insider Trading and Corporate Good Governance in India, 32 Int’l Bus. Law. 132 (2004). Pp. 132
[6] Hindustan Lever Limited vs SEBI 18 SCC 311 MOF
[7] Dilip Pendse vs SEBI MANU/SB/0159/2009
[8] Prateek Bhattacharya, India’s Insider Trading Regime: How Connected Are You, 16 N.Y.U. J.L. & Bus. 1 (2019). Pp. 6
[9] https://www.sebi.gov.in/reports/annual-reports/aug-2018/annual-report-2017-18_39868.html
[10] Prateek Bhattacharya, India’s Insider Trading Regime: How Connected Are You, 16 N.Y.U. J.L. & Bus. 1 (2019). Pp. 9
[11] Prateek Bhattacharya, India’s Insider Trading Regime: How Connected Are You, 16 N.Y.U. J.L. & Bus. 1 (2019). Pp. 7
[12] Prateek Bhattacharya, India’s Insider Trading Regime: How Connected Are You, 16 N.Y.U. J.L. & Bus. 1 (2019). Pp. 11
[13] https://indiacorplaw.in/2018/02/sebi-failing-regulating-insider-trading-india.html
[14] Sandeep Parekh, Prevention of Insider Trading and Corporate Good Governance in India, 32 Int’l Bus. Law. 132 (2004). Pp. 133
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Very nice article, highly informative and to the point