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Insider trading is one of the most serious and difficult to regulate malpractice that takes place in the capital markets. The Indian laws provide for a penalty of Rupees 25,00,00,000 or three times the amount of profits made out of such an act, whichever is higher, on any person who commit the offence. Currently, the SEBI (Prohibition of Insider Trading) Regulations, 2015 govern and prohibit the practice of trading based upon unpublished price sensitive information. However, these regulations have proved to be ineffective in tackling the growing menace and there is a need to bring about reforms in the existing legislative framework. This article aims at providing an insight on the offence of insider trading. It traces the development of the existing laws, points out the lacunae and also provides suggestions that can help in making the laws more efficient.
Well regulated stock markets are a key to ensuring a healthy capital market. There has been active enforcement of regulations as well as criminal laws for preventing and punishing market abuse and insider trading. Section 195 of the Companies Act 2013 defines Insider Trading. It involves the abuse of unpublished price sensitive information possessed by key managerial persons or directors of a company, or any other person who has such information and indulges in buying, selling or trading in securities based on such unpublished price sensitive information.
Insider trading is one of the most serious and rampant malpractice that exists in the capital market. Through this article, an attempt has been made to give an insight on the lacunae in the existing legal framework dealing with the offence of insider trading. First, the article gives an overview of the existing legal framework in India. It then moves on to point out the problems in the said legal framework. In conclusion, it also provides suggestions as to the changes and additions that can be brought about to make the regulations more effective.
2. INSIDER TRADING REGULATION IN INDIA
There is a general misconception that Insider Trading is a prohibited activity. Undertaking Corporate Insider trades subject to the governing regulations is considered as legal insider trading. Any violation of the existing regulations amounts to a prohibited activity.
With rapid expansion of the financial markets in the country, the crimes associated with financial crimes were also at a rise. Introduction of new economic policies with the aim to integrate the Indian economy with the world economy opened several channels of foreign investment coming into India. These occurrences paved the way for setting up of insider trading laws in the country.
The Government of India set up the Securities and Exchange Board of India in April 1988 with the objective of regulating the securities market and protecting the interest of the investors. SEBI was set up under the overall supervision of the Central Government’s Ministry of Finance. Soon, after, SEBI Act, 1992 was passed by the parliament to probide legislative and statutory backing to SEBI. Under this Act, SEBI has the duty to protect investor’s interest and regulate securities market.
“Prevention of Insider Trading” is one of the duties that is specifically mentioned in the Act. The Act also explicitly prohibits Insider trading in securities of listed companies as provides in Section 12-A. According to this provision, no person is allowed to directly or even indirectly engage in insider training. It prohibits a person who is in possession of any material or non public or unpublished price sensitive information to deal in any securities or even communicate the information to some other persons. Penalty is imposed under Section 15 G of the SEBI Act, 1992 on any person who violates or contravenes provisions of Section 12-A. the penalty can amount up to rupees twenty five crores or three times of the profits earned by engaging in such kind of activity. Insider trading also attracts criminal liability under Section 24 and is punishable with imprisonment.
In spite of the prohibition imposed by SEBI Act, 1992 there were rapidly increasing instances of insider trading. Thus, SEBI exercised the power vested in it under Section 30 of the Act and framed the SEBI (Prohibition of Insider Trading) Regulations, 1992. It provided more comprehensive regulations and manner for dealing with the menace of insider trading.
A need was felt to revamp the existing regulations in 2014, when India became the world’s ninth largest economy in terms of market capitalization. A committee under the leadership of Justice N. K. Sodhi was constituted to provide a review of the existing laws and suggest modifications. SEBI (Prohibition of Insider Trading) Regulations, 2015 were introduced replacing the earlier regulations to strengthen the existing legal framework and also align the Indian practices with the internationally accepted norms.
3. LACUNAE IN THE EXISTING LAWS
Insider Trading is one of the most serious and difficult issues that SEBI has to deal with. Enforcement of the existing insider trading laws in the country is questionable. The laws are rarely enforced and exist merely on books. The existing laws face a lot of issues and are filled with lacunae.
There is a lack of technological expertise. India doesn’t not have a technologically advanced and modern mechanism for surveillance. This has made it very difficult for SEBI to catch the offender. Another major challenge, even if SEBI is able to identify the offender is the difficulty in proving insider trading cases. The charges in these cases are mostly based on circumstantial evidence which makes it very difficult to prove the charges. In majority of the cases, the evidence available includes only telephone records and transcripts. SEBI does not even have the power or authority to tap phones.
Rapid globalization has led the offence of insider trading to take place even across borders. The existing Indian laws, however, does not have extraterritorial application and this is a major drawback. No investigation can be initiated or penalty be imposed on any foreign national who has committed the offence of insider trading, under the existing regulations. There are also cases where even though an investigation has been initiated in India, there are some evidences that are located outside the country. There is no provision to seek transnational support or assistance in this regard also.
There is a lack of private right of action for investors. An investor who has been a victim of the offence of insider trading does not have a right to institute civil proceedings privately before a regular court. The enforcement of the regulations solely depends on SEBI as it is only SEBI who can file a complaint in this regard. Thus investors are denied the opportunity to take an active role in securities market regulation. SEBI also does not have a right to take any anticipatory measure. It can only initiate an investigation when a provisions of the existing Rules or regulations has been violated.
Another the drawback is the option of obtaining a consent order. If the cases of insider trading are settled by paying small fines, it gives an impression that insider trading is not a serious offence. This, however, is not the case. It leads to lack of fear in the minds of people who are potential insider traders.
There is a burden on a single authority, i.e., SEBI to carry out all kinds of functions including legislative, executive as well as judicial involved in the regulation and development of the securities market. This leads to overburdening of SEBI and ultimately its inability to carry out all tasks efficiently.
Another common problem is the lack of resources- both financial and human.
4. CONCLUSION/ SUGGESTIONS
Identification of the problems at hand is the first step in problem solving. In order to deal with the lacunae in the existing legal framework, there are various steps that can be undertaken. The first being spreading of training, education and awareness about insider trading. If the common people aren’t aware about what wrong is happening against them, they cannot be protected against it. SEBI can engage in publishing manuals or booklets and ensuring it reaches the people who are affected by the offence of insider trading. There is a need to extend the application of insider trading laws beyond national boundaries to protect domestic markets and investors from insider trading committed by foreign nationals. Provisions facilitating transnational co-operation in investigations also need to be incorporated. Within India, there is need to create a private right of action for individuals aggrieved due to this offence. Also, it will be good decision if the consent order mechanism is not applied in insider trading cases. Instead, more severe penalties and criminal liability should be imposed to ensure that people understand the seriousness of the crime and a fear is created in the minds of the potential insider traders. There is also a need to change the approach of only punishing a person when the crime has already been committed. Pre-emptive or anticipatory action should also be facilitated. Media can be used as an advantage by creating hype and advertising the insider trading cases. This will increase awareness and avoid commission of offence by others. The scope of SEBI’s power and authority also needs to be expanded.
Even though SEBI has been dealing with this heinous offence in an efficient manner, there still exists a lot of lacunae in the existing legal framework because of which this menace is rampant. The existing laws need to be evolved and improved to make it more suitable to the existing situation.
 Anil Kumar Manchikatla Rajesh H. Acharya , (2017),”Insider trading in India – regulatory enforcement “, Journal of Financial Crime, Vol. 24 Iss 1 pp. 48 – 55.
 S. 195, Companies Act, 2013.
 Id at 1.
 R. Parthasarthy “Insider Trading Regulations: A Critical Appraisal” 1 Company Law Journal 102 (1993).
 S. 11, SEBI Act, 1992.
 S. 11(2)(g), SEBI Act, 1992.
 Chapter VA inserted by SEBI (Amendment) Act, 2002 w.e.f. 29th October, 2002.
 S. 30 SEBI Act, 1992.
 Samie Modak, “India’s market capitalisation cross 100 trillion” Business Standard, Nov. 28, 2014.
 Government of India: High Level Committee to Review the SEBI (Prohibition of Insider Trading) Regulations, 1992 (Ministry of Corporate Affairs, 2013).
 Santosh Nair, “Insider Trading: SEBI must knock few heads to drive message”, online available at http://www.moneycontrol.com/news/market-edge/insider-trading-sebi-must-knock-few-heads-to-drive-message_ 1233505.html.
Author: Garvit Tripathi
Editor: Kanishka Vaish, Senior Editor, LexLife India.