India’s track record on acting against cases of insider trading is especially dismal. In the last three decades of Sebi’s existence, there has not been a single conviction for insider trade.
Over the years, laws for prevention of insider trading (PIT) has evolved, putting increased onus on companies to protect price sensitive information. But Sebi has failed to unravel a complete case due to lack of proper surveillance tools, challenges in establishing links and gathering evidence.
We trace how Sebi fares in cracking down on insider trading cases, what it looks for when investigating these cases and how regulations evolved in the past.
Track record on insider trading cases
As the name suggests, the act of trading in securities while having access to unpublished information which, if published, could impact price of the securities in the market.
Insider trading is deeply rooted in Indian markets, but if we look at the data the number of cases investigated are few and far between.
As per Sebi’s annual reports in 2017 and 2018, the regulator took up 85 cases for investigations and only 25 have been completed so far. Most of these involve lack of disclosure and trading on alleged insider information. But the crucial link of who communicated insider information to whom and what were the gains made due to these trades is sorely lacking. Starting from financial year 2011 to 2017 the regulator has completed probes in about 13-21 cases each year.
What Sebi looks for?
For tracking any insider trade, Sebi first seeks to establish who is an insider, which typically is key managerial personnel of a listed company, company board, auditors, personnel handling financial information or sensitive information, promoters and persons connected to promoters. Even close relatives of these officials are considered persons connected to insiders and thus can have access to information.
The second important aspect is clear understanding of what constitutes as unpublished price sensitive information. This could be anything ranging from company acquiring a major contract to good financial information.
Lastly, it sees who traded on the basis of the information.
How rules around preventing insider trading evolved?
The first major law was PIT regulation of 1992 which required companies to have a model code of conduct to prevent leakage of price sensitive information. The law underwent a 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 based. 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.
The most recent change happened post the TK Vishwanathan panel report. Starting April 2019, organisations needed to have in place a policy and procedure for conducting inquiry into incidents of a leakage of material information. Further, it was prohibited to communicate and have access and procure unpublished price sensitive information (UPSI). However, communication done for ‘legitimate purpose’ is permitted such as due-dilligence and certain third party vendors.
Why Sebi fails?
Insider trading is tough to detect and punish in any jurisdiction as it is, but the fact that Sebi has not been empowered with some basic investigative powers and tools is a major reason behind the low prosecution. Sebi was granted powers to call for phone data records only in 2014. Even today, Sebi does not have the power to tap phone records, a recommendation of the Vishwanathan panel.
Sebi in August 2019 formalised an informant mechanism which was expected to reap rewards in terms of getting better conviction. Under this, Sebi will reward an informant ₹1 crore if the tip-off provided by him or her leads to headway in investigating an alleged case of insider trading.
The benefits of introducing this mechanism, at least for the regulator, are obvious. First and foremost, it gives the regulator a platform to widen the net and increase the quality of evidence and investigative processes.
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