The article is written by Anumeha Agrawal pursuing BA.LLB (Hons.) from Symbiosis Law School, Pune. On June 16, 2020, the Report of high-level committee under the Chairmanship of Justice (Retd.) Anil R. Dave was published, the report provides Measures for Strengthening the Enforcement Mechanism of the Board and Incidental Issues. The report is divided into four parts, the current article summarises and analysis the third part of the Report- Quantification of disproportionate gain/ unfair advantage and loss caused due to default and related issues.


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The quantification of illegitimate profit or loss to an investor is complex and important for determination and grant of equitable remedy. Several factors are considered for such calculation like the determination of net gains and amounts that may be deducted, joint and several liability, applying the correct financial economies, tax consideration and nature of the violation.

The relevance of quantification of profit and loss

Securities laws require the Adjudicating Officer to take into account the following three factors for calculating a suitable penalty to be levied on the violator:

  • The amount of disproportional gain or unfair advantage, as a result of the default.
  • The amount of loss caused to the investor(s).
  • The repetitive nature of the default.

The Apex court in Trojan & Co. Ltd v. R.M.N.N. Nagappa Chettiar gave the manner of quantification concerning securities fraud:

Ordinarily, the market rate on the earliest date when the real facts become known is taken as the real value of the shares.

When the market is vitiated in consequence to the said fraud the real value of shares is to be determined on a consideration of a variety of circumstances disclosed by the evidence led by parties.

In the absence of a market to calculate the real value of the shares subsequent events are taken into account provided these events are not attributable to unrelated activities retaining the shares.

Hence, when a person is defrauded to purchase shares at a certain price, from the real price, the victim is entitled to recover from the defaulter the difference. 

Need for revision

The Committee enumerated the following reasons to develop a clear mechanism of quantification of profits and loss to the investors:

  • The existing manner of quantification of profit is very basic and can be enhanced in the view of technical and financial resources available with the Board.
  • There is currently no precise manner of quantification of loss to investors for levying the penalties.
  • Meeting which was held with the members of the High Power Advisory Committee under the Settlement Regulations, the need for laying down a quantification was stressed upon.
  • SAT required the Board to set out these principles.
  • The Committee’s Report on Settlement Mechanism recommended settlement based on a factual consideration of all types of cases including insider trading.
  • Quantification, in the long run, would be a major deterrent in cases relating to fraud, tipper-tippee liability, front running.
  • Quantification will also enable the Board to justify its order before appellate forms, otherwise, reduce the penalties and disgorgement amounts since there is no appropriate guidance.

Global Scenario


The economic activities of the capital market of a nation are key segments to boost economic growth and a healthy capital market if the stock exchanges are well regulated. 

The United States of America is known for its enforcement of securities laws. Their methods of quantification reflect in their quasi-judicial orders. The federal court was alone competent to impose penalties as well as order imprisonment based on profit and loss factors. 

For the calculation of gains and loss caused to investors in case of insider trading the USA judicial system has taken several methods, the courts tend to adopt the best methods to distinguish between ‘legitimate gains’ and ‘illegal gains’.

The regulation of insider trading laws is important because investors are likely to be more confident in the financial statements of companies that operate in countries with strong insider trading laws.


Disgorgement is an equitable remedy by which the authorities ensure the defaulter gives up the amount which it acquired unjustly in furtherance of the default. It also has a deterrent effect on subsequent fraud. The remedy is not punitive therefore it makes it necessary to identify the amount involved in the wrongdoing.

Calculation of Illicit Profit or Disgorgement in Insider Trading

There are several approaches that the Courts have followed in the past to calculate ‘profit’ weighing in different factors, some of which are:

Net Profit Approach

The profit approach of calculation of illicit profits considers the total increase in value realised through trading in securities. The gain is the actual total profit made from a defendant’s illegal securities transactions it may also include legal gains hence its application is not preferred.

Market Absorption Approach

The market absorption is also known as the notional profit approach, it treats the relevant profit as the gains made by the insider dealer when the insider information was made public and the market has digested and reacted to such information. The gain is measured as the change in the market value of the shares on that date. The total amount of insider dealer’s profit whether realised or not was fixed once and for all. This method requires the proper choice of the relevant period when the market can be said to have absorbed the information and reflected it into the price.

Event Studies Approach

The event studies approach is also known as the standard approach which estimates the effect on stock returns of occurrences, like mergers, acquisitions, takeovers is widely used. The method used for this is by isolating the impact of inside information from other market factors because a genuine event studies approach requires regression analysis using logical reasoning and statistical methods.

The limitations of the approach are:

  • It requires time-series data therefore only useful for companies listed for a while.
  • The approach is determined by a statistically significant reference index, thus it is difficult in case of a large number of thinly traded stocks.
  • Choice of a long time horizon could include events that changed the company capital structure to help understand scrip specific movements.
  • It also requires testing of all hypotheses related to a linear regression model. If those hypotheses cannot be verified the results can be invalid.
  • Rumours related to stock spike the return during the stipulated period.
  • The approach assumes that the returns on a narrow interval are generated by the same linear model coming from a set of information belonging to a definitely wider time window.
  • It does not take into account differences in trading strategies of insiders that usually represent differs in their knowledge of the preferential information.

Potential Probabilistic Disgorgement Approach

The potential probabilistic disgorgement approach is a new procedure for computing the economic value of the information exploited by the insider, based on a probabilistic approach. It overcomes the issue of the event study approach of following only the simplest trading scheme but by the construction of all insider-trading schemes.

The advantages of the approach are:

  • Definition of parameters very realistic and difficult to break down.
  • It determines all possible paths of the stock under investigation under a predictive dynamic logic.
  • Is not affected by the fact that it is recently quoted as if the insider can trade the stock, the procedure can return utilizing the parameters-estimation procedure a disgorgement computation.
  • Does not require a regressor since stock path forecast depends only on prices of stock.
  • Does not require the definition of time horizons longer than the insider trading days for estimating parameters to be employed in the analysis thus not affected by the stock liquidity.
  • Customised methodology for the single subject under investigation as the model behaves differently according to the single insider trading strategy.
  • The stochastic process employed benefits from the Markov property.
  • Since it is an intuitive approach the implementation is easier.

International Practice

SEC usually follows Event Study methodology for calculating illicit profit and the use of different approaches depends on the varying circumstances of each case.

Hong Kong has adopted the market absorption approach to calculate disgorgement in The Insider Dealing Tribunal v Shek Mei Ling and HKSAR v. DU Jun.

The Italian regulator Commissione Nazionale per le Societa e la Borsa has developed two methods:

  • Modified Event Study Method.
  • Potential Probabilistic Method for calculating disproportionate gains due for disgorgement.

Comparison with Indian Securities law

The Committee then examines the applicability of such principles and approaches to the Indian Securities law regime and makes the following observations:

  1. The Indian law of insider trading is similar to the USA making it much easier to adopt similar legislation and methods of quantification of gains or losses.
  2. The anti-fraud provisions in both the jurisdictions are quite similar to the extent that the wordings of Section 12A of SEBI Act are borrowed from the Section 10b of the USA Securities Exchange Act 1934 and Rule 10b-5 of the SEC Rules.
  3. The concept of securities market price is a reflection of the information being assimilated has universal application. This is observed under the provisions of the SEBI (Prohibition of Insider Trading) Regulations, 2015, as well as by the Indian Supreme Court in the Trojan case.
  4. There cannot be an exact determination of the actual gains made by a defaulter as he is the only person aware of the precise amount. Thus the quasi-judicial authorities make the best approximation and this uncertainty is inevitable. 
  5. The relevant factors need to be determined by the authorities conducting inquiries, investigations, audit and inspection to ascertain the quantification of gains/ loss especially caused by related parties transactions.
  6. No one universally applicable way of quantification and each method has its defects and advantages depending on the factual matrix may be applied. 
  7. The US Sentencing Guidelines fraudulent inflation or deflation in the value of securities or commodities. The court in determining loss may use any method that is appropriate and practicable under the circumstances. One such method is:
  • Calculating the difference between the average price of the security or commodity during the period that the fraud occurred and the average price of the security or commodity during the 90 days after the fraud was disclosed to the market.
  • Multiplying the difference in average price by the number of shares outstanding.

8. Change in value of security or commodity the court may consider among other factors the extent to which the amount so determined includes significant changes in value not resulting from the offence like changes caused by external market forces:

  • Such as changed economic circumstances
  • Changed investor expectations
  • New industry-specific or firm-specific facts, conditions or events

9. Thus, the Committee recommends the adoption of one of these approaches and in the light of Section 245 of the Companies Act, 2013 and the Commercial Courts, Commercial Division and Commercial Appellate Division of High courts, 2015.

Key recommendations and rationale

Need for guidance

There is no existing public guidance for quantification of profits or losses. Securities law imposes the burden of quantifying the factors in the quasi-judicial authorities and not on fact-finding authorities. Though the former is primarily dependent on the facts unearthed by the investigating authorities. 

Quantification needs to include the notice considering the natural law principle of audi alteram partem. 

The report discussed how the USA Sentencing Reform Act of 1984 served as a legal foundation for the issue of the non-mandatory public guidelines for federal courts in the exercise of their functions. Even the self-regulating organisations like the Financial Industry Regulatory Authority have developed publicly available Sanction guidelines.

The report on Settlement Mechanism advised the adoption of non-mandatory statutory guidelines in case of repetitive nature of the default.

The committee recommends issuing public non-mandatory guidelines may be issued for the benefit of all stakeholders which can be periodically updated.

Is quantification necessary in every case?

Section 15J of the SEBI Act, Section 19I of the Depositories Act and Section 23J of the SCRA are in mandatory terms.

The Supreme Court in Adjudicating Officer SEBI v Bhavesh Pabari stated that the quantification of disproportionate gain in case of contraventions like failure to file disclosure furnish information and redress investor grievances. 

The quantification should take into account the repetitive nature of the default and the focus should be on default, not the defaulter. 

No direct correlation between the charging sections of securities laws and the loss caused to investors exists. This is due to the nature of the capital market and its ripple effect makes the profit gained by the defaulter dwarfed as compared to the loss caused to the investors. This is called the non-zero-sum game scenario.

Quantification of the amount of disproportionate gain to levy monetary penalties is unrelated to the offences except in cases of unfair trade practices, insider trade, disclosure of acquisition of shares and takeovers and excess brokerage charged.

Quantification is also not necessary when the penalty is sufficiently large enough to negate any gains that the defaulter may have made.

Disgorgement is a remedy linked to gains made hence quantification is necessary, but since the loss of the investors is not equal to the gain of the defaulter the disgorgement and the unjust enrichment of the defaulter may not be exactly equal to the investors’ losses. Nevertheless, an investor may be liable to receive monies in case of unjust enrichment through disgorgement.

Quantification of loss to investors may also not be required where the default itself is victimless, like insider trading with no proximate harmed person.

Therefore the committee makes the following recommendations:

Quantification, wherever possible should be done based on composite default and liability imposition, should be on a joint and several bases.

Quantification and imposition of liability are not necessary on an individual basis when the penalty imposed on a joint basis is sufficient.

Imposing penalties based on quantification is appropriate where there are proximate victims and not in cases of victimless defaults.

When the loss to investors and the profit to the defaulter are more or less same either can be calculated for the disgorgement.

Standard for quantification

Quantification of ‘profits made’ and ‘losses caused’ requires the board to examine the behaviour of the defaulter as well as the investors who may have suffered as a consequence of the default.

Standard of the compliant man

The defaulter’s behaviour has to be compared vis-a-vis behaviour of a person who complies with laws, the monetary and non-monetary benefits received by a defaulter has to be compared with the benefits received by the compliant man. 

In cases of sale of securities, it matters whether securities were purchased during the violation or sometime before. In the former case, it is easy to identify the gains using the difference in price since the gains are directly tied to the unlawful activity. Whereas in the latter case, pre-existing gains that are legal need to be separated from the gains tied to the period of the unlawful activity. Similar issues arise when securities which have been manipulated on account of general market movement affect the defaulter same as all investors.

Standard of the reasonable investor

India, like many developed countries, follows a disclosure-based regime in securities law. An investor is presumed to be relying on the public information, impersonal market, and other information available in the market. 

Therefore a misleading statement or disclosure is presumed to have defrauded an investor even if the investor did not rely on the statement only the price which is an indication of the security’s value and all relevant information available on the market. Hence, the casual connection between the defaulter’s fraud and the investor’s purchase of a security in such a case is no less significant than direct reliance on misrepresentations.

This standard of the reasonable investor was recognised by the US Supreme Court in several cases and also applied in Indian securities litigation in Hindustan Lever Ltd. v. SEBI and other cases.

To impart strictness to compliance it is important to consider the cost of compliance avoided instead of imposing base penalties. The fixed costs like the cost of giving public notice in the form of advertisement can be estimated based on comparing it to similarly placed compliant market participants.

A similar presumption is allowed under Section 114 of Evidence Act, ‘common course of natural events, human conduct and public and private business’.

Investor’s Right of Restitution v Loss compensation

Standards are relevant for determining the losses incurred by the investors only for a measure of guidance for the determination of the penalty to be levied and not grant of compensation. And for this, the investors are assumed to act in a reasonable manner and determination done approximately.

Possibly the investors may have suffered a higher or a lower loss or even the number of investors affected may be larger due to the extremely interconnected manner of transactions of the capital market. But since the uncertainty is a result of the misconduct of defaulter, he has to bear the risk of it and cannot object to such approximations. 

The methods of loss quantification are only to guide the levy of penalties and not for providing compensation as SEBI does not have the power to grant compensation. Such power is vested in Civil Courts and commercial courts and the National Company Law Tribunal. Investors must independently discharge their burden in the proceedings brought by them.

Quantification of loss to investors

Quantification of loss to investors in respect of closed groups like PMS, MF InVIT is easier since investors take part in common scheme fund and the details of investment values and subsequent values are easily available. 

But the issue of multiple causations arises when a defaulter’s conduct has caused some actual loss to the victim but the defaulter alleges that but for the intervention of unforeseen circumstances the loss would have been smaller or would not have occurred at all.

Therefore even in case of multiple causations except for what can be assessed and separated based on the facts available to the Board, the defaulter bears the responsibility for the default created by the uncertainty of his default.

The need for asserting the importance of disclosures

The Committee observed that the Board has not acknowledged the importance of true and fair disclosures. The violation of disclosures is termed as technical by the regulator and the Tribunal in several of its orders. Section 34 of Companies Act, 2013 declares liability for fraud for misstatements in the prospectus for issue of shares, but there is no clarity in securities regulations which governs the issue of various kinds of securities and offer documents.

In the USA the disgorgement remedy is the securities market has been used for several violations, in particular:

  • Trading is done after disclosure violations
  • Negligence without fraudulent intent
  • Failure to comply with business norms not amounting to fraud

Once greater attention is paid to disclosures requirements any trading around the relevant period will allow the Board to compute the undue profits made and the losses caused to investors who were denied a similar opportunity.

Disclosures are important from the perspective of the investors also. Merely because disclosure that was not made indicates no change, especially ownership and financial information, compared to past disclosure does not mean it is technical.

The committee recommended the Board to widen the liability of misstatement of any kind of statement, even disclosures under section 34 of Companies Act, 2013.

And the period of investigation, inquiry, audit or examination should ideally encompass the trading around the period the disclosures were required to be made.

At-least basis 

In cases where a fraud has been perpetrated over a period of time, the amount of loss though not entirely quantifiable can be attempted to be made on at least basis. In US v Ebbers the Court of Appeals estimated a loss to the investors using this method:

One version of the market capitalization test would in the simplest form take the share price on the date of the fraudulent statement ( day X), and subtract from the share price on the day after the fraud is revealed (day Y) and multiply that amount by the number of outstanding shares.

The problem with this analysis if a shareholder may have suffered immediate loss commensurate with the fraud loss because potential buyers would have immediately disappeared upon the bad news or a buyer may have bought the stock after the fraudulent statement in reliance upon the integrity of the market price and suffer a loss in the amount of price paid less than intrinsic value which under calculation deemed to be that after the disclosure on day Y.

The loss to investors who hold during the period of an ongoing fraud is not easily quantifiable because we cannot accurately assess what their conduct would have been had they known the truth.

Principles relating to Quantification of Disproportionate gains for Insider trading 

Prevention of insider trading is dependent on fixing a suitable deterrent on the insiders who engage in tipping. When directors of other key managerial persons directly engage in tipping the profits made by such insiders who themselves trade are easy to be quantified and disgorged, therefore, this form of insider trading is rare. Instead, they tip off outsiders including their relatives which has the following advantages:

It is difficult to prove.

Even if a link is proven the person who commits insider trading may be a person of little consequence. And the profits made are withdrawn from the accounts thus making the proceeds irrecoverable.

Inside tipper can always claim to not have benefited from the whole event even though trading could not have been possible without breaching his fiduciary duties and contractual obligations towards the companies. Therefore joint liability should be imposed to justify levying of a deterrent penalty and debarment on such delinquent insiders.

Disgorgement for Insider Trading

SEBI initially attempted to develop disgorgement into an equitable remedy, however, it failed and it was reduced to a mere tool of compensation rather than an antitrust enrichment mechanism. In Karvi Stock Broking Ltd. v. SEBI, the regulator ordered disgorgement and imposed joint and several liability.

On appeal Securities Appellate Tribunal examined the nature of disgorgement as a remedy, as defined under Black’s Law dictionary disgorgement is the act of giving up something (such as profits illegally obtained) on-demand or by legal compulsion. The remedy is designed to ensure monetary equitable remedy that is designed to prevent a wrongdoer from unjustly enriching himself as a result of his illegal conduct. The burden of showing that the amount sought to be disgorged reasonably approximates the amount of unjust enrichment is on the Board.

Due to this decision disgorgement in India is limited to only those persons who have received the proceeds of default and only to the extent of the proceeds received) is per incuriam.

On the contrary in the United States, the equity foundation of disgorgement is correct and is generally limited to the extent of illegal gains made by particular defaulters, however, an important exception is joint defaulters. In the case of joint defaulters are limited to the amounts of monies received by a particular defaulter.

In SEC v. Contorinis the United States Court of Appeals, the primary issue analysed was whether an insider trader who trades on behalf of another person or entity using funds he does not own and produces illegal profits that he does not personally realize ca nevertheless require to disgorge the full amount of illicit profit he generates from his illegal and fraudulent actions. Because our cases have established that tippers can be required to disgorge profits realized by their tippees illegal insider trading.

The logic is that the fraudster should be compelled to return not only those profits from the fraud that he has reserved for his own use but also those that he has bestowed on others.

The Securities Laws (Amendment) Act, 2014 inserted explanation to Section 11B of the SEBI Act which reads as follows:

‘Explanation.—For the removal of doubts, it is hereby declared that the power to issue directions under this section shall include and always be deemed to have been included the power to direct any person, who made a profit or averted loss by indulging in any transaction or activity in contravention of the provisions of this Act or regulations made thereunder, to disgorge an amount equivalent to the wrongful gain made or loss averted by such contravention.’’

The explanation gives an impression that disgorgement can only be done from a person who made illegal gains by indulging in contravention of securities laws and such disgorgement shall be equal to the amount gained. However a deeming provision is not to be extended to what it does not state, the explanation does not use the word ‘only’ nor does it prohibit levying of joint and several liability.


The Committee is of the view that although the Explanation to Section 11B of the SEBI Act does not prohibit joint and several liability but for the sake of providing further clarity it should be amended as follows:

Explanation – For the removal of doubts, it is hereby declared that the power to issue directions under this section shall include and always be deemed to have been included the power to direct jointly and severally, all or any of the persons, who indulged in any transaction or activity in contravention of the provisions of this Act or regulations made thereunder, to disgorge an amount equivalent to the wrongful gain made or loss averted by such contravention.’’

Disgorgement action taken by employers against their employees

In various companies the action taken against their employees in case of insider trading is inadequate and there is a lack of clarity as to where the monies disgorged by such companies from their employees go.

The current insider trading regime is prone to misuse, as several violations are not reported to the Board and if done are often done inadequately. Many times the ‘employees’ are front men used by ‘employers’ to undertake trading activities and then ‘penalising or sanctioning’ them unfairly.

The penalty provision provided for contravention of code of conduct is as follows:

Penalty for contravention of code of conduct

1. Any employee/officer/director who trades in securities or communicates any information for trading in securities in contravention of the code of conduct may be penalised and appropriate action may be taken by the company.

2. Employees/officers/directors of the company who violate the code of conduct shall also be subject to disciplinary action by the company, which may include wage freeze, suspension, ineligible for future participation in employee stock option 68[plans], etc.

3. The action by the Company shall not preclude SEBI from taking any action in case of violation of SEBI (Prohibition of Insider Trading) Regulations, 1992

The open-ended language pertaining to the penalties that the employers may impose gives rise to the issue of ambiguity and excessive discretion as the penalties and sanction imposed often are only disciplinary in nature.

The SEBI (Prohibition of Insider Trading) Regulations, 2015 states that ‘without prejudice to the power of the Board under the Act, the code of conduct shall stipulate the sanctions and disciplinary actions, including a wage freeze, suspension, recovery, clawback, etc’. In the case of contra trades the monies should be deposited in the IPEF there is still no clarity in respect of disgorgement taken by the employer for other violations including insider trading.


SEBI should issue a circular to all employers who are mandated to frame a code of conduct under Regulation 1992 and 2015 related to insider trading. Such circular shall mandate the monies disgorged related to insider trading to be deposited in the SEBI IPEF within 30 working days.

An amendment should also be brought in 2015 Regulations to clarify the employer cannot impose a sanction against an employee if such sanction amounts to disgorgement of profits resulting from insider trading.

The penalty in respect of Insider Trading

Currently, the penalty for insider trading is provided under section 15 G of the SEBI Act which reads as follows:

Penalty for insider trading.

15G. If any insider who :

(i) either on his own behalf or on behalf of any other person, deals in securities of a body corporate listed on any stock exchange on the basis of any unpublished price-sensitive information; or

(ii) communicates any unpublished price-sensitive information to any person, with or without his request for such information except as required in the ordinary course of business or under any law; or

(iii) counsels, or procures for any other person to deal in any securities of anybody corporate on the basis of unpublished price-sensitive information, shall be liable to a penalty which shall not be less than ten lakh rupees but which may extend to twenty-five crore rupees or three times the amount of profits made out of insider trading, whichever is higher.

The section covers three different kinds of default and only clause (i) is actual insider trading, clause (iii) is linked to insider trading, it is sufficient for an insider to only counsel another to deal in securities, though actual trading may or may not happen. Clause (ii) is linked to insider trading as it is the act of ‘tipping’ and does not require actual trading by the ‘tippee’ for the tipper to be punishable.

However, under the section, even the persons liable under clause (ii) and (iii) are liable to the extent of three times the amount of profit made by insider trading, even if not done by them. This depicts the intention of Indian securities laws to impose joint and several liability on the ‘tipper-tipee’ relatable to the profits ‘from the act of insider trading’ per se rather than penalization on an individual gain basis.


A new provision should be inserted regarding the controlling person liability similar to the one present in the United States.

The Employers and intermediaries who omit to put reasonable systems to control and limit the violations of securities laws must be held liable for the defaults that occur due to their negligence.

The provision should also clarify the liability of joint persons:

(i) Persons who employ other persons to assist such persons in the violation of securities laws.

(ii) those who provide substantial assistance to such person.

General principles for quantification of disproportionate gain due to default 


The gain and loss quantification is limited only to the amount which is the result of the default.

Defaults by company personnel

The right of an employer to dismiss for cause and cancel or claw-back compensation already given is different from the right of the Board to quantify relevant gain and disgorge. Clawback undertaken by the employer will not nullify disgorgement by the Board and vice-versa as neither is a replacement for each other.

Executive Compensation

In cases where executive compensation includes the acquisition of securities if there is a corrective disclosure, the grant generates a loss measured using the Black Scholes method of valuation. Where there is an increase in price due to disclosure before the position is liquidated, the gain would have to be measured by using the difference in inflation per share between grant and sale.

Other employee benefits

For other employee benefits such as retirement schemes, restricted stock grants, etc. experts use the analysis similarly to use that for bonus and option compensation.

Loss by insider trading

Loss caused due to insider trading is more complex as it is not just related to the profits made by the corporate insider but also the corporate who took no steps to prevent misapplication of the company’s property by its director. The Companies Act, 2013 Section 188(4) and (5) requires the corporate insider to indemnify the losses to the company. Sometimes the profits made are insignificant to the loss caused by a related party transaction.

Illegal activities

In case of illegal activities, credit for the monies or assets returned to avoid detection or after detection or initial investments and conceal the default of the illegal activity is not to be considered for levy of penalty.

No benefit is required to be given for costs incurred for running an illegal activity, including fixed costs. However direct trading costs, or if profits used for payment of taxes related to such profits is discretionary to grant such credit.

Investors’ property destroyed or lost

Where the property of the investors is destroyed or lost the fair market value when the default was detected by the investor or the authority whichever is earlier can be considered or the cost of replacement can be considered.

Unregistered or unapproved activities

In case of activities requiring recognition or any other authorization by SEBI and the activities are being conducted without requisite approvals, such fees due to SEBI will be treated as loss avoided and an illegal gain.

Loss of UPSI

The firms’ unpublished sensitive information includes trade secrets, confidential information etc which needs to be protected. A loss, leak or misuse of such information the estimate of loss is the estimate of the fair market value of such information and also any loss of business opportunity.

Loss cause is for a finite period

Where the loss caused is for a finite period and related to a separately identifiable cash flow, a lost profits approach is preferred due to the finite period of damages. A lost profits analysis is generally used in breach of contracts and common litigation cases. It uses the following methods:

  1. The sales projection method
  2. The before-and-after method
  3. The accounting for profits method
  4. The yardstick method
  5. The market share method

 Loss caused is for an infinite period

In circumstances where the loss of earnings is permanent and the business is destroyed completely the lost business value approach is generally appropriate. It utilised the following approaches:

  1. The asset-based approach 
  2. The market approach
  3. The income approach

Front running and co-location services

To combat front-running United States SEC views co-location services as a material aspect of the operation of the facilities of an exchange. Co-location enables access to a legalised data feed in a manner that counters geographical disadvantages where a trader is allowed access stock prices a split second before the general market by being ‘closer’ to the exchange. But the Committee is of the view that this amounts to providing preferential access and discriminatory trading practice thus does not recommend it.

Securities purchased and sold during the default

When the securities are purchased and sold during default the quantification of profit includes notional loss, a complication arises where illegal profit is mixed with a legal profit or the gain is in the form of loss avoided or where the historical cost price is much higher than the prevailing price at the beginning of the default. In such cases, the averaging period may be used to arrive at a suitable notional price to arrive at the difference between cost and purchase value.

Tax Evasion

The issue was raised in Rakhi Trading, the Hon’ble Supreme Court criticised the approach taken by SAT which held that since the trades were for tax planning and not in violation of SEBI Regulations, it is not inclined to get in the issue of tax planning as it was not mentioned in SCN as well. 

The SC held that SEBI cannot be a silent spectator to unfair trade practices for an ulterior purpose like tax evasion etc.

A fraudulent trade is afraid irrespective of whether it had an identifiable effect on the market or not. 

The Committee recommended in cases of schemes which are created for personal benefits the disgorgement should be joint and several of both the intermediaries and profits of their clients as well as such large scale transactions cannot be done without their active participation.

Financial Economics

The magnitude of securities laws violations has increased to such an extent that they have been found fit to be included under the Fugitive Economic Offenders Act, 2018 which necessarily involves a violation of at least 100 crores.

Advanced mathematical methods are essentially statistical methods that are useful in instances where large sums are involved and simpler arithmetic and rule of thumb methods may have large divergences from the approximate values obtainable through statistical methods.

Statistical methods are not easily employed in low-value matters, here SEBI’s role as a regulator regulating a financially and technically complex market comes into focus.

Statistical methods are used in all fields and not just the financial world, including weather forecasting, big data analysis, census data analysis and formed an important aspect of Mandal Commission’s classification utilising extrapolation of caste census data from 1891 and 1931 censuses.

Though statistical methods seem complex these methods are commonly used in the securities market by a large number of financial experts. The Board also hires several financial experts like economists, statisticians, MBAs, CAs etc and are well placed to adopt these statistical methods.

Alpha- the abnormal returns

Calculating the excess returns using an event study uses statistics to assess the impact of an event on the value of a firm’s stock and the trading done. It enables determination of the abnormal returns generated in cases of informational advantage and it is the standard methodology used by USA SEC in insider trading analysis. It is called abnormal because it varies from the expected rate of return, it can be positive or negative.

Alpha is an important red flag as it is difficult to get a substantial alpha without appropriate justification, calculating alpha for trades by insiders and connected persons may be a very good indicator of insider trading or front running having taken place. The failure to substantiate the trade based on actual access to reliable data which led to the investment decision is a useful indicator of fraud especially if such a person were in a position to access unpublished price sensitive information.

Event study mechanism

The event study mechanism is a statistical technique developed by economists that estimate the stock price impact of occurrences such as mergers, earnings, announcements etc.the basic notion is to disentangle the effects of two types of information on stock-prices information that is specific to the firm under examination and information that is likely to affect stock prices market-wide.

There are three basic steps in conducting an event study:

  • Define the event window
  • Calculate the abnormal stock price performance around the event and
  • Test for statistical significance of the abnormal stock price performance

General guidelines

The Committee is of the view that non-mandatory public guidelines acknowledged methods applicable for all new cases for quantification of profit made and loss caused as a result of a violation of securities laws. These authorities may quantify the approximate profit made or loss caused based on the aforesaid in their Reports which shall be relevant for the Board for initiating appropriate enforcement action. Before doing a full calculation a rough estimation can be made by the investigation authorities to determine which method is to be adopted.

In comparison with global regulators, it becomes clear that the enforcement processes of the Board need a major overhaul. The Committee takes notice of the practices of the Japanese regulator, the Securities and Exchange Surveillance Commission which issues a Recommendation for Administrative Monetary Penalty to the Prime Minister of Japan and the Commissioner of the Financial Services Agency, these recommendations contained detailed calculations on a calculation of penalties.


The stark need for a manner of quantification of illicit gains by the defaulters and the loss to the investors cannot be overemphasised, it forms a major lacuna in the current securities law proceedings. The Committee adequately addresses the same, the manner suggested for such calculation and its pragmatic approach by applying the non-zero-sum of the securities law are likely to simplify the entire process and enable the adjudicating authority to grant an equitable remedy.

The shortcomings identified by the Committee particularly in disgorgement of profits made by insider trading are appropriate and the joint liability provision along with the accountability of the disgorged profits done by the employer will ensure disgorgement is utilised as an equitable remedy.



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