Tightening the screws

Punting on privileged information by company insiders strikes at the root of market integrity, which is why SEBI’s dated Prohibition of Insider Trading Regulations, 1992, were badly in need of an overhaul. The redrafted regulations, notified last week, have managed to plug the loopholes exposed by investigations, remove ambiguous provisions, and incorporate learnings from landmark rulings such as the Rajat Gupta case in the US. The result is a fairly watertight law on insider trading that is far more lucid and wider in scope than the 1992 version.

The term ‘insider’, under the new law, sweeps into its ambit not just obvious insiders such as a company’s promoters, directors or employees, but also their relatives and those ‘connected’ to the firm by virtue of associating with it in other capacities. In India, the most blatant cases of illegal insider trading usually relate to events such as results, mergers, acquisitions and restructuring. By the time the official announcement is made, often the stock has already priced in the event, making a sham of the public disclosures. Recognising that such information leaks can originate from merchant bankers, advisors or even public officials who are privy to the transaction, the new law explicitly bars all such entities from sharing unpublished information. Trading on the stock while being in possession of such information, is deemed an offence. SEBI has faced trouble in proving mala fide intent in cases of insider trading in the past. As a result, the new rules presume guilt and place the onus of proving innocence on the insider. Insofar as it stands a basic jurisprudential principle — that one is innocent until proven guilty — on its head, this is an unfortunate approach to the issue. Also, the Indian law is now far more stringent than the US law, which requires proof of actual profiteering from illegal trades.

The redrafted regulations, combined with SEBI’s new powers to access call records of market players, should help improve the regulator’s record (which has so far been indifferent) in securing convictions for insider trading offences. Many of SEBI’s past orders in high-profile cases were overturned by the Securities Appellate Tribunal for lack of clarity on the legal provisions. However, it would be wrong to assume that a well-drafted law and SEBI’s regulatory zeal alone will be sufficient to stamp out the scourge of illegal insider trading in the Indian markets. For this, the stock exchanges, as first-line regulators, will have to take a more pro-active role in bringing dubious trades to the regulator’s attention. More importantly, listed companies need to shed their lax approach to public disclosures of material events. If all significant corporate actions were disclosed to the public at the first instance, there would be hardly any room for insider trading.

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