The SEBI Prevention of Insider Trading Regulations, 2015 (just like the former 1992 Regulations) was proposed as a systematic law which intended to effectively regulate the right of insiders to trade in stocks and shares of their own company. In this paper we shall take a look at how effective the above legislation has been in limiting Insider trading. We shall deal with various concepts that derive from domestic and foreign jurisdictions and assess the application of these regulations against them. More specifically the paper shall deal with the: (i) difference of liability under insider trading in Indian and US law, and (ii) the watering down of the communication offence in India. This paper shall be heavily focussed on a comparative analysis between US and Indian law, with certain concepts discussed in light of UK and other European standards.

The most glaring reason that compels us to review these regulations is the strikingly low rate successful convictions for insider trading in India. There are two ways to understand why such inefficiency exists. Firstly, that the laws and rules in place are not sufficient to deal with this problem of insider trading. Secondly, that the implementation of these laws, by the Securities and Exchange Board of India (SEBI) through investigations, is not effective. Is this a result of the SEBI not having sufficient resources to carry out investigations? The power to review phone calls was only recently granted to the SEBI,[1] although it still does not possess the authority to initiate wiretapping of phone calls. The SEBI also fails to impose high penalties although the statute allows for a penalty of up to twenty-five Crores (25,00,00,000 INR).[2]

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Talking about the first method, we shall look at the issue of categorization of an insider trading offence in India from the 1992 Regulations to the 2015 Regulations and also compare the same with corresponding provisions in the United States, i.e. Securities Exchange Act, 1934. Insider trading has been understood in the Indian context as an offence when a person termed as an ‘insider’ or a ‘connected person’ to that insider, who is in possession of any ‘unpublished price-sensitive information’ (hereinafter referred to as UPSI) trades in securities relating to the above information.[3] For this understanding, heavy reliance shall be placed on the definition of the relevant terms as defined by the statute. More specifically we are concerned with the concept of insiders and their liability under the act. With reference to the case of V.K. Kaul v. Adjudicating officer, SEBI,[4] we know that, in India, the offence only arises upon trading while in possession of the UPSI. But this creates a very fundamental problem with regard to imposing liability on the person who although did not trade but was heavily involved in the communication of such UPSI. Under Regulation 3 of the 2015 Regulations, the SEBI has merely imposed an “obligation” and “prohibition” on persons not to communicate such information[5]. This requirement under the prior provision (1992) was framed under Regulation 3 of the 2015 Regulations and was worded quite similarly for the intent of this argument.[6] The actionable part of the regulation existed under Regulation 4, which clarified that the violation of the above provisions by any person would make such person guilty for insider trading.[7] Now the mere textual reading of Regulation 3 and 4 clearly indicated that communication of UPSI would amount to insider trading. However the 2015 Regulations, although categorize such communication to be “illegal”, they have not been acted upon by the regulator to impose liability on any person. The SEBI has effectively diluted the application of insider trading norms and set a much higher prerequisite to be met before any actionable claim be brought forth against any offenders.

A comparison with insider trading laws in the United States shall further shed light on how the above issue has been dealt with in a different jurisdiction. Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, lay down the law regarding insider trading, where a corporate insider possessing “material non-public information” trades in securities. The above provision has also been understood in such a way that even an “insider” who “tips” someone else to either buy or sell some shares shall be guilty of the offence of insider trading.[8] Hence, the “tipper” and the “tippee” both may be held guilty of insider trading. Bare perusal of the law, it may be seen that the Indian provision is not lacking in recognizing such communication offences, rather it’s the clarification provided in the regulation through the note below such provisions which prevent the application of such penal provisions.

In the case of V.K. Kaul[9], if the above principles were discussed or brought to light, it would not be unimaginable for the court to have impugned Mr. Malvinder Singh along with the original accused for the offence of insider trading. The tipper and tippee relationship is more often than not based out of pecuniary/personal benefits that the tipper would receive for providing the UPSI, yet the United States has also forgone this requirement of a pecuniary/personal benefit to the  tipper in order to have stricter restrictions on the mere exchange of material non-public information, i.e., UPSI.[10] The case of Salman v. U.S.[11],  the U.S. Supreme Court put to rest the above pecuniary benefit requirement which was put forth in Dirks v.  SEC[12], and held that gifting of personal benefit to relatives shall impute a personal benefit and that does not necessarily mean it must be monetary. Hence, were this to be applied in India, VK Kaul acts as a tippee whereas, since he receives information from Malvinder Singh, Mr. Singh shall also be categorized as a tipper.

The above perspective on the V.K. Kaul case, is very indicative of how much (or how little) power the SEBI can exercise. I would argue that communication leading upto and insider trading offence should also be punishable under the existing provisions. The fact that insider trading in India is a quasi-criminal offence, the standard of proof lies somewhere in the middle between ‘beyond reasonable doubt’ on the one hand and ‘preponderance of possibilities’ on the other. The nature of evidence required contrasted with non-requirement of mens rea,[13] further goes to show why a more textual legal regime needs to be enforced for insider trading. The argument against such regime is that, the identification of insider trading and the standard of evidence is nevertheless very high, and it has always been very difficult for the SEBI to conduct in depth investigations against all actionable claims; such interpretation would only add to the growing responsibility of the SEBI. A higher standard for insider trading at the initiation stage allows for the filtering of prima facie weak cases. Having said that, the SEBI should take this opportunity to ramp up its manpower and lobby for stronger authoritative powers from the Central Government, as these seem the most pertinent issues when it comes to identifying and successfully convicting insider traders.

In conclusion, we can have observed the various different perspectives on insider trading that prevail in India and the United States. In understanding the differences enumerated above it is essential to take note of the historical context and the variance in the legal structure in both these nations. India borrows heavily from the United Kingdom, whereas securities law immediately developed post the 1929 fiasco in the United States. The Indian Jurisprudence around insider trading is limited to the concept of trading offence, where only the person engaging in the trading activity is scrutinized. This paper is not arguing in favour of restricting all forms of insider trading, it recognizes that legal methods of insider trading through disclosure requirements and trading plans do, in effect, aim to protect market balance.

 References

[1] Indian Council of Investors v. Union of India

[2] Section 15G of The Securities and Exchange Board Of India Act, 1992

[3] Section 2(1)(n) of the Securities And Exchange Board Of India (Prohibition Of Insider Trading) Regulations, 2015

[4] V.K. Kaul v. Adjudicating Officer SEBI, [2012 ]116SCL 24 (SAT ), http://www.sebi.gov.in/cms/sebi_data/attachdocs/1404281635319.pdf

[5] Refer to Note under Regulation 3(1), 3(2)

[6] Securities and Exchange Board Of India (Prohibition Of Insider Trading) Regulations, 1992

[7] Supra n. 4

[8] Replogle, R. (2018). Insider Trading in the United States. [online] M.acc.com. Available at: https://m.acc.com/legalresources/quickcounsel/InsiderTradingUS.cfm [Accessed 28 Sep. 2018].

[9] Supra n.2

[10] Salman v. U.S., 137 S.Ct. 420, 196 L.Ed.2d 351 (2016).

[11] Salman v. U.S., 137 S.Ct. 420, 196 L.Ed.2d 351 (2016).

[12] Dirks v. SEC, 463 U.S. 646 (1983)

[13] The Chairman, SEBI V Shriram Mutual Fund AIR 2006 SC 2287 ; SEBI v. Cabot International Capital Corporation 2004 51 SCL 307 Bom.