RINGSIDE VIEW. Will insiders blow the whistle for reward?

The market regulator recently came out with an interesting discussion paper to nip insider-trading in the bud.

The paper proposed an informant mechanism wherein genuine whistle-blowers will be rewarded with up to ₹1 crore for exposing fraud and wrongdoing in a company relating to trading on insider information. Besides, SEBI also assures that it will provide near-absolute confidentiality, along with appropriate safeguards.

According to SEBI, insider-trading refers to trading in securities while in possession of unpublished price sensitive information (UPSI) about the particular securities.

“Insiders usually indulge in trading through a proxy to whom the relevant information is communicated... Like other securities market regulators across the world, SEBI also faces this challenge in checking instances of insider-trading violations primarily due to insufficiency of evidence of commission of the violation,” SEBI said.

Direct evidence of insider-trading is not easily available and that which is generally available is almost completely circumstantial. Since criminal law requires proof to be established beyond reasonable doubt, it is a challenge for SEBI to successfully prosecute such cases, it further said.

According to the paper, the confidentiality regarding the identity of the informant and information provided would be protected and maintained except where the evidence of the informant is required during the proceedings.

The paper also mooted rewarding the informant with 10 per cent of the monies collected but capped the maximum reward at ₹1 crore. “An interim reward not exceeding ₹10 lakh may be given at the stage of issuance of the final order by the SEBI against the person directed to disgorge. The final reward, after adjusting the interim reward, shall be issued after collection or recovery of the monies disgorged equal at least twice the final reward,” according to the proposal.

Though SEBI is making an honest attempt to check insider-trading, will this reward proposal encourage informers to come forward is a billion-dollar question, as most of the insider information are known only to the top echelons of the organisation. Even those who wish to reveal may prefer to remain anonymous for various reasons, including their own career growth.

SEBI has also said that in case the information submitted is frivolous or vexatious, it may initiate appropriate action against the informant under securities laws and any other applicable laws. This could act as a big deterrent to informers too. Instead, SEBI could ignore people repeatedly misinforming and concentrate on companies where more than one complaint is received from various sources.

From the regulatory angle, it could also ask the stock exchanges to run algorithms to check trading patterns and beneficiaries of corporate actions six months prior to and after the event is announced, based on daily data. If it suspects any malpractice based on this data, then it could pursue them based on the merits of the case.

Include siphoning too

It is also unclear why SEBI is keen to encourage whistle-blowing only on insider-trading when siphoning off of funds by promoters is a far bigger evil afflicting Indian companies. SEBI should concentrate more on that front and encourage whistle-blowers to check corporate frauds and accounting scams that result in the biggest wealth destruction for investors.

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