- Introduction
Insider Trading is one of India’s most prominent financial crime, which was prevalent since the early 1920’s. The term ‘Insider Trading’ can be defined as the illegal use of non-public information derived from a person associated with the company to profit /gain by purchasing/selling listed securities on the share market. The seriousness of the crimes relating to Insider Trading cannot be overlooked. Such crimes create a huge problem for the regulating authorities in tracing those involved in sharing and benefitting the information. All those benefitted are very well-connected thereby giving them the leverage to escape the liability and make enormous profit at the cost of other traders. In year 1986, the definition of Insider Trading was laid down by the Patel Committee, as “Trading in the shares of a company by the person who are in the management of the company or are close to them on the basis of undisclosed price sensitive information regarding the working of the company, which they possess but which is not available to others.”[1]
In the year 1940, the very first recommendation of implementing Insider Trading Regulation was received in India. Thereafter in the year 1948, a report was submitted by the Thomas Committee stating that all the directors, agents, officers, auditors should make proper disclosures. In 1956, with the enactment of the Companies Act, provisions to prevent Insider trading was introduced. According to Section 307 and 308 of the said Act, the directors and all the major key managerial persons were required to maintain a record of their shareholdings in the register and to make the complete disclosures of their shareholdings. However, these provisions were not stringent enough to prevent the crimes of Insider Trading.
By this time, the effects of insider trading were already been seen in the market. Not only the shareholders were losing confidence in the functioning of the markets, but were also refraining themselves from investing. And not to much surprise, even the foreign investments were adversely affected. As a result of all these the Indian Economy started suffering losses, leading the government to introduce various Committees in order to have a check on and curb such practices.
In the year 1979, the Sachar Committee submitted a Report stating that, “Insider Trading practices are being carried out in the markets and there is a need to have specific provision to restrict and prohibit such practices”. Subsequently, in the year 1986, the Patel Commission put forth the need to make several changes to the Securities Contract Regulation. Further in the year 1989 the report by Abdul Hussain Committee suggested that the offence of Insider Trading should be made liable under Civil and Criminal laws. It also suggested for the formation of a body known as SEBI to regulate and keep a check on the working of the markets.
On the basis of the reports submitted by the aforementioned committees, Securities and Exchange Board of India (SEBI) was established with the aim to regulate the market transactions and dealings. The provisions of the SEBI Act further empower it to carry out investigations, trials and impose a penalty upon those who breach the laws and carry out unlawful activities.[2]
- Regulations in India Regarding Insider Trading
The regulatory body that ensures proper corporate governance in India is the Securities and Exchange Board of India. This body keeps a watch for any unusual transaction related to purchase or sale of listed securities. The TISCO Case of 1992, paved the way for formation of the Securities and Exchange Board of India in the year 1992. In the Tisco, case the profits of the company sharply fell and there was a sale of shares in small quantities before the announcement of the half yearly results. The Court held that there was no insider trading as there is no evidence for the same. As there was a lack of regulations and procedures the culprits could not be made liable. This finally led to the forming of Securities Exchange Board of India (Insider trading) Regulations, 1992.[3] After the Regulation of 1992, a significant change was made to Insider Trading laws in India in the year 2015. Hence the “SEBI (Prohibition of Insider Trading) regulation, 2015”, was enacted to resolve the flaws in the earlier regulation as the unlawful transaction were not covered with thin ambit of the regulation. Another, significant amendment has been carried out in the year 2019 where efforts have been made to cover direct and indirect transactions.[4]
The Companies Act of 2013 also had a provision to restrict Insider Trading. Section 195 of the Act prohibited any communication of sensitive information by the key managerial persons. Later, this section was omitted as section 458 of the Companies Act delegates the power to SEBI to conduct trials against the accused persons and therefore there was a confusion that the accused should be held under the Companies Act or the SEBI regulations and therefore in 2017 the section 195 was omitted by a notification. Hence, the current regulations regarding Insider Trading in India are the SEBI (Prohibition of Insider Trading) Regulations, 2015 and Section 12A (Prohibition of Insider trading) and 15G (Penalty for Insider Trading) of the SEBI Act.
- Judgments on Insider Trading
The case of Hindustan Lever limited (HIL) Vs SEBI [5], was one of the earliest cases where SEBI acted against Insider trading, in this particular case around 8 lakhs shares were bought by HIL from the Unit Trust of India, and after some weeks a merger was announced between HIL and the other subsidiary. SEBI carried out an investigation and it was held that it was a case of Insider Information, an appeal was made to the Appellate authority and they confirmed the order of the SEBI rejecting the arguments given by HIL denying having the information or knowledge for the same. After this case SEBI made an amendment to the regulations and added and defined the word ‘unpublished’. This was the origin for the definition of the term ‘Unpublished Price Sensitive Information in India’.[6]
In another case of Reliance Industries limited (RIL) Vs SEBI [7], RIL had a stake of around 5 % in the L&T company and further there were two nominees for the company Mr. Mukesh and Anil Ambani. Further, RIL went on purchasing stake in L&T and almost got around 10 %. RIL further made a sale of these shares above the market price to Grasim Industries as a result of which the two nominees were removed and RIL was prohibited from further trading in shares of L&T. SEBI carried out an investigation and a case was filed against RIL in which they were held to be guilty of Insider trading. In an appeal the Appellate Tribunal reversed the order of SEBI stating that the information was not passed by the nominees of L&T and the same had no relation in communicating or passing of the information. L&T was not even aware of the deal and there was no evidence to prove the same. Therefore, RIL was not made liable for Insider trading.
As we can observe from these cases the conviction by SEBI for Insider trading is very less and the penalty imposed upon the convict for the commission of such illegal activities is way to less. Hence, in the next part of this Article we will discuss the problems with SEBI and the regulations in dealing with Insider Trading.
- Problems Regarding Insider Trading in India
There have been many arguments about the legality and the illegality of Insider Trading. But most of the scholars and investors state that Insider Trading is against the integrity of the market. This is because the it gives an unfair advantage to the people having access to such information as there is no risk or losses that such people suffer. Also, it causes the investors to lose their money as the people having such sensitive information carry out certain malpractices of manipulating and spreading rumours which leads to change the mind of many investors while trading in the stock markets. This further leads to loss of confidence of investors to invest in markets which is a very big concern for the economy and it also affects foreign investments. Therefore, the practice of Insider Trading is very harmful for the markets and there needs to be a regulating authority to keep a check and prevent such malpractices.
Also, another problem that is faced by SEBI is proving the cases of Insider trading as there is not always sufficient evidence to prove that a particular trade was a result of Insider Trading. As the people having access to such UPSI use third parties or make some other transactions through which they escape the liability and are held not guilty. Also in many cases the court has not been able to give proper judgment as the regulating authority has failed to prove any direct relations between the Information and the trade. As a result of this the investors lose their money, and the markets suffer the loss.
Another difficulty is that although there are provisions for Criminal Liability in the SEBI regulations but implementing them is difficult. As there is a need for Mens Rea to hold a person liable under Criminal law. It becomes very difficult for SEBI to prove the case of Mens Rea and so the accused often escape criminal liability and are held liable under civil law. Therefore, there is no fear in the markets and so this sensitive information is freely circulated.[8] For instance there have been cases that such information is being passed through WhatsApp messages on various groups. The SEBI has been trying to investigate these matters but have found no solid proof to make a case against the persons passing such sensitive information.[9]
Lastly, the Indian judiciary system takes many years to pass a judgment and the option of appeals gives the offenders enough time to manipulate the evidence and escape such liability under the SEBI regulations.
- Conclusion and Suggestion
It would be safe to conclude that, Insider Trading is no more a White-collared Crime. Countries across the globe have taken stringent measure to check and prevent on practices such as Insider Trading. In the United States of America, the Federal Court convicted Rajat Gupta the director of Goldman Sachs for Insider trading. The facts of the case stated that, Rajat Gupta was found guilty of passing sensitive information about the market to Raj Rajaratnam, a co-founder of the Galleon Group LLC hedge fund.[10] The ruling by the Court sentenced him to two years of imprisonment and a fine.
It is a high time for India to implement such measures for the persons who have been found guilty and not treat Insider Trading just as a white-collar crime. As there is only a less than three percent conviction rate in such crimes in India there is a need to amend the regulations and to add strict criminal proceedings and awards against such offences. There also needs to be another regulatory body along with SEBI to track down high profile cases and prevent such sensitive information flowing in the market.[11]
Also, the SEBI as a regulatory body needs to increase their staff as there is only one official having a look over six companies and so it is not possible for SEBI to track and regulate every such function of the companies.[12]
Further, as the number of cases are increasing every year, the Indian Judiciary needs to set up fast track courts for certain high-profile cases that involve a huge stake of the market as it would not only save the investor’s and the markets money but would also curb the illegal practice of Insider Trading.
References
[1] Das, Sonakshi. “The Know-All of Insider Trading – Decades of Corruptive Prevention.” Academike, 15 Jan. 2015, www.lawctopus.com/academike/know-insider-trading-decades-corruptive-prevention/#_edn8.
[2] Das, Sonakshi. “The Know-All of Insider Trading – Decades of Corruptive Prevention.” Academike, 15 Jan. 2015, www.lawctopus.com/academike/know-insider-trading-decades-corruptive-prevention/#_edn8.
[3] Kumar Gaurav. “Role of SEBI in Curbing Insider Trading in India – An Analysis.” I Pleaders, 4 June 2018, blog.ipleaders.in/sebi-insider-trading-offences/.
[4] Srivastava Anushweta & Shah Maharashi. “Latest Insider Trading Regulations: Prohibitions & Exceptions” TaxGuru, 30 Sept. 2020, https://taxguru.in/sebi/latest-insider-trading-regulations-prohibitions-exceptions.html.
[5] Hindustan Lever limited (HIL) Vs SEBI, (1998) 18 SCL 311 MOF
[6] Machiraju, H.R., (2009) “The Working of Stock Exchanges in India”, New Age International (P) Ltd., pp-164-165
[7] Reliance Industries limited (RIL) Vs SEBI, 2004 55 SCL 81 SAT
[8] Katarki, Suneeth. “India: ‘Mens Rea’ In Insider Trading – A ‘Sine Qua Non’?” Mondaq, 3 June 2015, www.mondaq.com/india/x/401724/Securities/Requirement Of Mens Rea As A Criterion for Penalising Insider Trading In India.
[9] Jayachandran. “Eliminating the Menace of Insider Trading.” Live Mint, 27 Nov. 2017, www.livemint.com/Opinion/qUBUyk9cbxSfItLarLAuvK/Eliminating-the-menace-of-insider-trading.html.
[10] Sharma, Betwa. “Rajat Gupta Found Guilty of Insider Trading.” Business Today, 16 June 2012, www.businesstoday.in/current/world/rajat-gupta-insider-trading-sentence/story/185519.html.
[11] Ibid.
[12] Ibid.
