The Securities and Exchange Board of India (“SEBI”) on 10th June 2019 proposed an ‘informant mechanism’ to safeguard the interests of the investors and tackle insider trading. In light of the difficulty in tracking illegal transactions, the SEBI has released a Discussion Paper which would be enforced by amending the SEBI (Prohibition of Insider Trading) Regulations, 2015 (“2015 Regulations”) as mentioned therein. The proposed mechanism seeks to provide ‘near absolute confidentiality along with appropriate surveillance.’ Genuine whistleblowers would get a monetary reward of up to ₹ 1 crore as well as amnesty from regulatory action. This Article aims to analyse the evolution of Insider Trading laws in India, their applicability and the minutiae of the informant mechanism proposed by the SEBI.
[Sakshi Ajmerais a student of 2ndyear BA LL.B (Hons.) at the National Law Institute University, Bhopal]
What is Insider Trading?
Regulation 2(1)(g) of the 2015 Regulations defines an ‘insider’ as a person who is a connected person or one who is in possession of or has access to unpublished price sensitive information (“UPSI”). Regulation 2(1)(d) then interprets a ‘connected person’ as one who has been associated with a company, directly or indirectly, for a continuous period of six months prior to the commission of the act. UPSI is that price sensitive information which is not in the public domain. Regulation 3 of the 2015 Regulations prohibits the transmission of such price sensitive information to any person except for a legitimate purpose, performance of a duty or discharge of a legal obligation. Thus, these regulations have been designed to prohibit insider trading violations, both in terms of trading and information dissemination.
Evolution of the Laws Relating to Insider Trading
In 1948, the Report on the Regulation of Stock Market in India pointed out instances of directors, agents, officers possessing strategic economic information regarding the size of dividends, issue of bonus shares or the conclusion of a favourable contract, prior to its public disclosure. The Sachar Committee in 1979, proposed a separate statue to regulate insider trading. Consequently, in 1992, the first SEBI (Insider Trading) Regulations came into force. The Regulation was amended and renamed SEBI (Prohibition of Insider Trading) in 2002. The SEBI (Prohibition of Insider Trading) Regulations, 2015 (“2015 Regulations”) came into force on May 15, 2015. The same has been amended thenceforth.
Regulation 9 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR”) Regulations requires the Board of Directors of listed companies and market intermediaries to draw up a code of conduct to regulate, monitor and report trading by its employees or connected persons towards achieving compliance with the regulations. The Companies Act, 2013 under Section 195 provides that no person including a director or key managerial person shall enter into insider trading.
Penalty for Non-Compliance
A separate punishment for defying these provisions is not prescribed under the 2015 Regulations. The penalty for insider trading under Section 15G of the Securities and Exchange Board of India Act, 1992 (“the Act”) would be applicable. The penalty shall not be less than 10 lakh rupees but may extend to 25 crore rupees or three times the amount of profits made out of insider trading, whichever is higher.
SEBI’s Proposed Informant Mechanism
SEBI, on 10th June, issued a Discussion Paper proposing to reward and amnesty protection policy for informants who provide true, complete, credible, original, effective information on insider trading violations. SEBI’s whistleblower policy proposes to reward genuine whistleblowers with a monetary sum of 10% of the monies collected as a result of such disclosure subject to an upper limit of ₹ 1 crore or a sum as may be specified. The reward shall be paid from the Investor Protection and Education Fund (“IPEF”). The ‘informant mechanism’ proposed by the SEBI will enable early and more effective detection of insider trading cases. It will also watch over the victimisation of the informant. It seeks to provide ‘near absolute confidentiality along with appropriate surveillance.’
The move comes in response to a SEBI consultation paper on ‘insider trading activities’ which recommended the institution of a process to set up timely reporting of insider trading violations. The consultations also came up with a framework for a grant of reward with adequate checks and balances to incentivise such reporting. The policy would be implemented by amending the SEBI (Prohibition of Insider Trading) Regulations, 2015.
The salient features of the discussion paper are as follows:
- Voluntary Information Disclosure Form: The mechanism would consist of a dedicated reporting window and a voluntary information disclosure form. The informant will have to submit the details of complete information of the act of the communication of the UPSI or trading in violation of the code of conduct if it has occurred, is occurring or he has a reasonable belief that it is about to occur. The source of the information must also be disclosed.
- Office of Informant Protection (OIP): An independent office separate from the investigation and inspection wings may be established to device the policy relating to the receipt of VIDF.
- Confidentiality of the informant: The confidentiality regarding the identity of the informant and the information provided shall be protected through the OIP.
- Reporting and Hotline: The OIP has to submit a report of its functioning on an annual basis to the Board. A hotline to guide people to file information shall also be set up.
- Reward: The total amount of reward shall be ten per cent of the monies collected but shall not exceed ₹ 1 crore or such higher amount as may be specified. The informant would be eligible for a reward in case the information revealed by him is in compliance with the informant policy and leads to the disgorgement of at least Rs. 5 Crores as a result of such information.
- Quantum of Reward: An interim reward not exceeding Rs 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 shall be issued after the collection or recovery of the monies disgorged equal at least twice the final reward.
- Exemption under RTI: Information provided for the purpose of law enforcement would be exempted from disclosure under section 8(1)(g) and 8(1)(h) of the Right to Information Act, 2005.
The promulgated policy can be counterproductive. It seems to resolve the issue of ‘vested and frivolous complaint’ and reward whistleblowers for voluntarily disclosing information; however, it does not particularly consider people who wish to share information anonymously. Secondly, only cases where disgorgement has been to the tune of ₹ 5 crores or more shall be covered. This minimum threshold excludes the majority of smaller transactions from coming within its purview. Thirdly, it discourages complainants as the consequences of a wrong complaint are comprehensive and pernicious. Lastly, to reward and confidentially settle with offenders themselves, may set a very bad precedent going forward.
SEBI’s present Discussion Paper illustrates the zeal with which SEBI desires to curb insider trading transactions and punish the offenders. However, the effectiveness of the policy practically and the orbit of its operation is yet to be seen.