That Sebi’s track record in convicting insider-trading pales into insignificance when compared to SEC is obvious, but Sebi has made a good start in changing its insider-trading rules to give it more teeth—we will, of course, have to wait for the fine print to see how effective the new rules actually are. Sebi’s latest regulations widen the definition of an ‘insider’ to include people who are connected to a company by virtue of them being in a contractual, fiduciary or employment relationship with it. While Sebi has made it abundantly clear that immediate relatives fall within the ambit of insiders, shifting the burden of proof—that no insider trading has taken place—to the insiders is a very good move and leaves little wiggle room. While Sebi has said anyone with access to unpublished price-sensitive information (UPSI) is an insider, it is not immediately clear if public servants are to be considered insiders, which many of them are since they are involved in policy-making that impacts the fortunes of companies. However, it seems unlikely they will be treated as insiders; it is also likely that in the event a government official is accused of insider-trading, the onus of proving him guilty would be on the regulator rather than on himself. One would also want to know whether the penalties are going to be made stiffer than they are now and whether a monetary fine is sufficient to deter offenders.
Sebi has been quite practical since, in the case of a PE investor or a strategic one, some level of UPSI is made available during due diligence. The safeguard here is that, should a deal take place, the UPSI has to be made public two days before a trade. While there are many who would argue that competitive information being shared publicly might not be in the interests of the company, given how rampant insider trading is in India, it is in the interests of non-promoter shareholders that this is done. And for company CEOs or the like who always have UPSI, the introduction of trading plans—1 lakh shares of the CEO will be sold on the 7th of every month for the next 6 months, say—is a good way to beat the charge of insider-trading.
While Sebi’s new rules are a good start, to get to SEC’s level of success will take a lot more. For one, Sebi has just 600 employees versus 4,000 for the SEC. Nor is it enough to have more staff, all information has to be digitised—a look at the junk Sahara and Saradha submitted to Sebi makes this clear. Unlike SEC which nailed Rajarathinam based on wire taps, Sebi still doesn’t have this power. Equally important, it doesn’t have sophisticated computer systems to match trades with sensitive information and/or news stories—around the time of Rajarathinam’s conviction, UK’s FSA launched its Zen transaction reporting and market surveillance system which would throw up suspicious trades around corporate events like M&As or news stories. At that time, the SEC was looking at buying an even more sophisticated system. Till Sebi is similarly equipped, it is unlikely it will make a big dent in insider trading, though a good beginning has been made in the form of the new rules.
