Sebi crackdown on Axis Bank leaks is a step in preventing rather than punishing insider trading

Rajat Gupta, the pedigreed NRI management consultant, who made the US his home, took the system for granted and whipped out his cell phone after attending a Goldman Sachs board meeting to pass on vital, price sensitive information to his Sri Lankan collaborator. Not long after that, the US market watchdog SEC nailed him by producing transcripts of his call records as evidence in the notorious insider trading case. What Gupta spoke on the cell phone in a moment of heady triumph in fact was his comeuppance! In India, the Sebi’s reputation in nailing insider trading offenders is nothing to write home about but its proactive action on WhatsApp leaks is commendable. It’s a step in the direction of preventing insider trading rather than doing the admittedly more arduous task of punishing it. In its first order what has come to be known as the WhatsApp leak case, Sebi on 27 December, 2017 ordered Axis Bank to strengthen its system and conduct an internal probe to fix responsibility as the initial investigation showed the leakage due to “inadequacy” of processes at the bank. Axis Bank has to complete the inquiry within three months and file a report to Sebi within seven days thereafter, the regulator said, after it found that the company’s results for the April-June 2017 quarter were “either identical or matched closely with the figures” that were in circulation on WhatsApp prior to official announcement. Sebi began a probe last month after a media report surfaced with respect to circulation of Unpublished Price Sensitive Information (UPSI) in various private WhatsApp groups about certain companies, including Axis Bank, ahead of their official announcements. Axis Bank’s initial response has been to quibble – the board met long after the WhatsApp messages purportedly containing the quarterly results surfaced. The truth is price sensitive information need not and does not wait for official sanction before they start doing the rounds. Indeed UPSI always precedes official release. That is what enables an insider to make a quick profit by buying or selling on the basis of such UPSI before the market can react. Stealth is the insider’s weapon. The USA punishes ‘short swing profits’– profits made by selling shares within six months of their purchase – by the specified persons including directors. The punishment is the profits have to be disgorged to the company. The admirable law is based on the presumption that such fleet-footed action is possible only by an insider on the basis of UPSI. We must emulate the US but that would not address the crime of insider trading done by lesser mortals. Axis Bank says it gives vital unpublished information on “need to know basis”. Companies do give vital information in the humdrum of business to banks, tax authorities and others without suspecting in the least that it could be deadly in the hands of the mischievous. There could be insiders lurking within the organisation holding no fancy positions but on the contrary in the bottom of the hierarchy say a clerk or assistant. He/she might chance upon a UPSI and make the most of it. What is baffling is instead of making the most of it himself or herself, the Axis Bank employee has gone to town! Insider trading is a selfish job. Rajat Gupta did it in connivance with the more resourceful Sri Lankan investor obviously for a share of the spoils or as a junior partner or by striking himself rich independently. The point is in the game of insider trading three is a crowd. WhatsApp and Facebook cater to crowd or a select crowd. Pray what did the nosy Axis Bank employee benefit from going to town? The hallmark of insider trading is quiet killing by a few, hogging in the process the entire profits made on the sly. It is possible that a new breed of insider-trading facilitators is springing up in the new age social media. They must be happy to be the newsmakers. They must be happy at being at the center of potentially profitable tidbit. But that does not render Sebi’s vigilance misplaced. Insider trading is an evil, period. It is nothing short of a financial crime. Both its greedy perpetrators and preening-with-false-pride facilitators must be punished.