Introduction
The Securities and Exchange Board of India (SEBI) has always been fraught with the arduous task of curbing insider trading but the difficulty in detecting and prosecuting the perpetrators still remains a challenge. This is primarily due to the fact that there is a dearth of clinching primary evidence which can prove the complicity of ones who commit insider trading thus, in turn having an adverse impact on the success rates and investigation timelines of such cases. SEBI has tried to eliminate this hindrance in the past by seeking powers to intercept and tap phone calls[1] to aid its investigation and surveillance machinery[2]. Moreover, it has also sought to grant immunity to whistleblowers or levy a lesser penalty on those who come forward with full and true disclosure of alleged violations. However, these measures have either not seen the light of day or their full-fledged execution is still a far-fetched thought.
On 10-6-2019, SEBI released a discussion paper[3] which proposed amendments to the SEBI (Prohibition of Insider Trading) Regulations, 2015. This paper presses the fact that mere regulator’s watch on illegal transactions is not enough to practically eliminate trading on the basis of unpublished price sensitive information (UPSI). In the current scenario, insiders are finding new ways to venture into illegal transactions including transactions through proxy which further makes tracking and proving any claims against such transactions even more taxing. Therefore, in a bid to uphold the sanctity of the securities market and to ensure better tracking, SEBI is intending to introduce an informant mechanism which brings informants to the forefront. The proposed mechanism will have a dedicated reporting window and also seeks to achieve near-absolute confidentiality with regards to the identity of the informants in order to alleviate any kind of deterrence stemming out from fear of discrimination, retaliation and prejudice.
This mechanism is not a sui generis phenomenon, as is evident from the effective application of similar mechanisms adopted by other countries to address the issue of insider trading. The European Union (EU) Market Abuse Regulation provides for a reporting mechanism on similar lines. The proposed mechanism is also somewhat similar to the vigil mechanism prescribed under Section 177(9) of the Companies Act, 2013.
Need
The Committee on fair market conduct has made several recommendations to strengthen the legal framework for prevention of insider trading. Further, in Sahara India[4] vide its order dated 31-8-2012, the Supreme Court stated that Section 11(1) of the SEBI Act, 1992 casts an obligation to protect the interest of the investors in securities by such measures as it thinks fit. However, the Nifty WhatsApp leak incident[5] which witnessed price sensitive data of several Nifty companies being circulated through WhatsApp messages ahead of their scheduled disclosure to exchanges, proved to be the final nail in the coffin. The issue was even more perturbing because most of the leaked data matched those numbers to the tune of the last digit which were released subsequently. SEBI, on the other hand did not have any inkling on the source of the leak, as it did not have direct evidence against the individuals involved in the alleged insider trading.
Hence, SEBI finds it difficult to establish its claims that trading took place while in possession of UPSI. Establishing transmission of UPSI and proving flow of such information makes prosecution of defaulters very difficult for SEBI.
In the light of the aforementioned recommendations and cases, it is indisputable that there is an inherent exigency of measures which restrain instances of insider trading. So in this regard, the proposed informant mechanism will be beneficial as the company employees are likely to be acquainted with the unscrupulous activities of the management which are necessary to be established so that the irregularities may be exposed and timely action can be taken.
Proposed Features[6]
Voluntary Information Disclosure Form (VIDF) — Any informant having complete, original and credible information relating to an act of insider trading can inform SEBI either directly or through an advocate by submitting the VIDF. The informant can keep his identity confidential by submitting the VIDF through an advocate but the confidentiality may be compromised under the following circumstances—
(i) Non-compliance with the given regulations.
(ii) If the nature of the information is such that the informant is required to be examined.
(iii) When it is required in court proceedings.
(iv) For verification at the time of granting rewards.
Lastly, the source of original information has to be provided along with the undertaking that the information has not been sourced from any employee of SEBI.
Office of Informant Protection (OIP) — The OIP will be set up as an independent office and shall be separate from the inspection and investigation departments of SEBI. The OIP will be responsible for devising the policy relating to receipt and registration of VIDF, assessing the veracity of the information received and analysing the application of regulations. Once the information is processed, the same shall be forwarded to the relevant department, which would in turn suggest suitable enforcement action and recover amounts by way of disgorgement. Thereafter, the OIP will make a final decision with regards to issue of grant reward to the informant. The OIP will also be maintaining a hotline that will smoothen the process of submitting information.
Reward — The informant will be rewarded by SEBI only if the information provided by him is true, credible, complete and original. Further, the action taken on the basis of that information should lead to the disgorgement of five crore INR. The quantum of the reward set by SEBI shall be 10% of the monies collected but shall not exceed one crore INR. Moreover, an interim reward not exceeding ten lakhs INR shall be given at the stage of issuance of the final order by SEBI against the person directed to disgorge.
Protection against Victimisation — Listed companies and intermediaries would be required to alter their internal codes of conduct so as to incorporate provisions which ensure that no employee faces suspension, termination, demotion or discrimination, directly or indirectly, on grounds of filing VIDF or assisting SEBI.
Vexatious/Frivolous Complaints — If the OIP determines that any information submitted is of a vexatious or frivolous nature then SEBI may initiate appropriate action against the informant concerned under the securities and other applicable laws.
Amnesty — In cases where an informant facing enforcement action wilfully cooperates and assists SEBI, he/she may be eligible for a reward and settlement with confidentiality in the proceedings that may be initiated against him under the proposed amnesty clause.
Analysis
At first sight, the discussion paper seems to be heavily sourced from the United States Securities and Exchange Commission’s (SEC) framework for protection of whistleblowers which was systematised under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010,[7] and the three essential pillars of whistleblower protection policy which are anonymity, bounty and job security.
Under American law, the non-inclusion of the internal reporting requirement in the informant mechanism has been criticised as it tempts the employees to bypass internal compliance in pursuit of rewards. However, it is suggested that the internal compliance committee of a company should be combined with the informant mechanism so that SEBI does not face the same obstructions which regulators in US face owing to the short-sighted policy existing there in this regard.
Moreover, the discussion paper nowhere mentions the liability standards of the legal advisors if the confidentiality of the informant is compromised despite their best efforts. On the contrary, under American law, no liability shall be apportioned on the legal advisors in these cases.
Another shortcoming of the proposed discussion paper is that, it cuts down the smaller but more frequently occurring transactions from its purview. This goes against the very objective of the discussion paper which is to incentivise proactive reporting of insider trading. Hence, it will be better for SEBI to deploy additional resources and make insider trading investigations even more robust.
Additionally, the exception where informant’s confidentiality may be revealed on account of him being required to be present in court proceedings may, in turn, dilute the number of takers in cases where the informant is in a position to furnish primary evidence and is likely to be required for the enforcement as well.
Lastly, to achieve the objective of the discussion paper the upper limit imposed on the quantum of reward should be removed so that the employees are tempted and a proactive reporting mechanism is achieved. Conversely, under the Dodd-Frank Wall Street Reforms and Consumer Protection Act of 2010, there is no upper limit imposed on the quantum of reward and it varies from a range of 10%-30% of the total amounts collected[8] unlike as proposed in the discussion paper.
Conclusion
The discussion paper indicates SEBI’s intention to tighten its grasp on tracking down insider trading and take fitting action. The regulators appear optimistic that the increased protection and potential for financial awards available to the informants will foster increased transparency and a culture of accountability within the financial market.
SEBI must consider extending the informant mechanism to fraudulent and unfair trade practices. Lastly, this amendment would be a big weapon in the arsenal of SEBI as direct evidence gathered will leave fewer lacunae, reducing the chances of overturning of a SEBI order at the appellate stage.
† Fifth-year student, BA LLB (Hons.), National University of Advanced Legal Studies, Kochi.
†† Fourth-year student, BA LLB (Hons.), National University of Advanced Legal Studies, Kochi.
[1] Report of Committee on Fair Market Conduct, available at <https://www.sebi.gov.in/reports/reports/aug-2018/report-of-committee-on-fair-market-conduct-for-public-comments_39884.html>.
[2] Report of Committee on Fair Market Conduct, available at <https://www.sebi.gov.in/reports/reports/aug-2018/report-of-committee-on-fair-market-conduct-for-public-comments_39884.html>.
[3] Discussion Paper on amendment to the SEBI (Prohibition of Insider Trading) Regulations, 2015 to provision for an informant mechanism, available at <https://www.sebi.gov.in/reports/reports/jun-2019/discussion-paper-on-amendment-to-the sebi-prohibition-of-insider-trading-regulations-2015-to-provision-for-an-informant-mechanism_43237.html>.
[4] Sahara India Real Estate Corpn. Ltd. v. SEBI, (2013) 1 SCC 1 : (2012) 174 Comp Cas 154.
[5] NSE, BSE Write to Companies over WhatsApp Earnings Leak, available at <https://www.livemint.com/Money/kIFXwlUs6s8wjFhkYYkjzI/NSE-BSE-write-to-companies-over-WhatsApp-earnings-leak.html>.
[6] Discussion Paper on amendment to the SEBI (Prohibition of Insider Trading) Regulations, 2015 to provision for an informant mechanism, available at <https://www.sebi.gov.in/reports/reports/jun-2019/discussion-paper-on-amendment-to-the-sebi-prohibition-of-insider-trading-regulations-2015-to-provision-for-an-informant-mechanism_43237.html>.
[7] S. 922, Dodd-Frank Wall Street Reform and the Consumer Protection Act of 2010.
[8] S. 922, Dodd-Frank Wall Street Reform and the Consumer Protection Act of 2010.