Sebi goes overboard on insider trading; its norms can be grossly unfair to innocents

The market regulator Sebi has tightened its insider trading regulations apparently to nip the mischief in the bud – any communication of undisclosed price-sensitive information is enough to make an insider, privy to such information, guilty and cough up a minimum penalty of Rs 10 lakh. Hitherto, acting on such information was a prerequisite to hold one guilty of insider trading or facilitating it – a requirement in the US, as indeed elsewhere, where its regulator the SEC has a far envious track record vis-à-vis the Sebi on tackling the menace. The Sebi has been in the habit of initiating regulations that have not been attempted elsewhere. A few years ago, it made rating of IPOs mandatory after initially making it voluntary with both the moves having no parallel or precedent anywhere in the world, including the US. Sadly the move hasn’t done anything to bolster the sagging confidence of the retail investors for whom the rating is meant. An IPO is to be rated on a scale of 5, which is fine but the rating agency cannot offer its comment on the issue price. What is the use of IPO rating when the prospective investor is not offered a clue on the reasonableness of the premium given the fact that post 1992 in a milieu of 100 percent book building companies were getting away with mind-boggling premiums? [caption id=“attachment_2075457” align=“alignleft” width=“380”] Image: IBNLive[/caption] Lack of listing gains and the dim prospect of post-listing losses are the factors responsible for the dwindling interest in equity of the small shareholders. Unconscionable premiums have been responsible for small investors being shortchanged. Much the same is being attempted on the insider trading front – a seemingly noble move but the one that is going to falter at the altar of implementation besides being grossly unfair to the innocents. The Sebi’s track record in reading the riot act to the insiders is none too flattering. When it hasn’t been successful in nabbing the actual beneficiaries of insider trading what is the use in arming itself with the power to proceed against the communicators of insider information? Of course, the communicator gets arraigned along with the beneficiary when proceedings are launched as it happened in the US where Rajat Gupta of McKenzie & Co, the communicator, as well as Rajaratnam, the one who acted on the communicated insider information are both cooling their heels in a federal prison. But it makes little sense in proceeding against the communicator alone because mens rea i.e. the criminal intent is proved only when the inside information is acted upon. Rajat Gupta was convicted because soon after emerging from the board meetings of Goldman Sachs as well as Proctor & Gamble he whipped out his cell phone and passed on vital information about these companies to his Sri Lankan friend Rajaratnam who made a killing on the stock exchange thanks to the information communicated by Gupta. Had Rajaratnam not acted on such information Gupta would not have been arraigned much less convicted. At any rate gunning after the communicator would be a herculean, impossible and futile task. The actual insider trading is often established with the help of trading patterns and filters used by the stock exchange surveillance mechanism. The information, thus thrown up, often aids in nabbing the beneficiary who automatically gives away the name of the communicator unless, of course, the communicator and the beneficiary are the same. The point is nabbing the communicator even before the inside information has been acted upon is neither feasible nor desirable except perhaps that those coming into possession of insider information may be hereafter on guard and not wag their tongues. The inequity of reading the riot act prematurely on the communicator would be apparent from the following example. Let us say finance director of a listed company submits his company’s financials to its banker who, in turn, passes on the information to his front man or partner in crime and makes a killing. The finance director in all fairness should not be proceeded against but under the new fangled powers, the Sebi would get the power to come down heavily on him as well. What makes the Sebi’s overreach even more dangerous is the simultaneous ushering in of reverse jurisprudence – it is on the alleged insider to prove his innocence that militates against the norm in India (except perhaps in the anti-terrorism law POTA that existed during the NDA-I regime) as indeed in other civilised societies that one is presumed to be innocent until proven guilty by the prosecution. The Sebi’s over exuberance thus is on two counts – reverse jurisprudence and proceeding against mere communication of inside information. The bottom line is frightening to say the least – any top-notch finance person associated with a listed company could become an easy target. He may be hauled over coals for the crime he hasn’t committed. His predicament would be the Sebi would smugly make the accusation without a shred of evidence. The US law steers clear of these two overreaches – it is for the prosecution to establish actual benefit from insider trading, period.