Insider trading has been a hot topic of discussion worldwide. It has been no less interesting in India, but chiefly because a large number of US cases of insider trading in the past three years involved people of Indian or Sri Lankan origin. The most high profile of the lot, Rajat Gupta, was recently sentenced to two years of imprisonment. Gupta who was born and mainly educated in India, earlier headed blue-blooded McKinsey & Co and sat on various boards including that of Goldman Sachs. His fall from grace from one of the most high profile and respected individuals to one of shame and criminal conviction will probably give rise to several books on the subject.
However, this piece is not about us looking outside at Western systems, but looking inwards at the Indian system and how it engages with, and fights insider trading. Here, I have a contrarian view. A view which few people will agree with at first blush. In my view the problem of insider trading in India is of a far less serious degree than in many western countries. This is not to say that it is not widespread — it may be. I'll explain my position shortly in case you are bewildered by this assertion. First let us restate a commonly held view of insider trading in India.
Attend any dinner conversation, and any discussion of corporate ethics will invariably have a mention of how rampant insider trading is in India. There will also be an invariable comment on how efficient the US system is in punishing such trades and how everyone gets away with such trades in India. There will also be accompanying snorts and chuckles to support this universally acknowledged truth. To be sure, there has been some statistical evidence of insider trading before a market event. So there is no denying the fact that there is insider trading activity going on — possibly based on some tips by employees of the company to friends and relatives.
However, the data on enforcement actions against classic insiders, like promoters and senior management and their relatives, points in a different direction. A vast bulk of the enforcement actions taken by Sebi relates to insider trading of merely one to five thousand shares. There are also cases involving a few hundred shares. There are some examples of much larger numbers, but most of them have either not been upheld by SAT (a recent order), relate to outsider trading (Hindustan Lever — where trades occurred in a target companies shares rather than where the inside information arose i.e. the acquirer) or are cases of front running, a different offence.
Since insider trades occur at these small numbers, catching such persons is far more difficult as it is easier to merge with the crowd and assert lack of any access to inside information. Also, connecting a person who bought a 1,000 shares with the actual insider through phone call records may not be sufficient evidence as a judge is likely to ask why a person who had access to inside information profited only in such a limited manner. In other words, short of access to the actual phone conversation, it would be difficult to prove that the trade occurred based on the access to privileged inside information.
Even though Indian law is strict and imposes a deemed insider status on a variety of people who can be expected to have access to information — like lawyers, auditors or relatives of senior management, courts have not imposed the standard strictly. This is natural because the deeming provision imposes harsh standards of ‘guilty till proven innocent’ and judges are naturally averse to such an inverted frame of evidentiary law. Particularly so when the numbers traded are small.
Third, insider trade tips occur in the privacy of a room or on a phone conversation, where both sides are interested in not disclosing the illegal event. Thus the evidence gathering is fairly difficult and must usually be by way of gathering circumstantial evidence. Given the serious nature of the violation, insider trading is seen as a type of fraud; judges often apply standards of evidence closer to those applied in criminal convictions rather than those of civil suits.
Lastly, Sebi has limited staff. Compared to an enforcement staff of over a thousand professionals in the SEC, twice the entire strength of Sebi, clearly the evidence hungry insider cases will be fewer in number than in the US. Last year, according to the Sebi annual report (2011), the regulator tracked around 30 new cases of insider trading. The relevant enforcement staff of Sebi would be under a dozen people working on such cases. Compared to the staff strength in enforcement, Sebi actions are actually quite large compared to their US counterpart’s trading of 57 cases of insider tracking (source: annual report of the SEC, 2011) with an enforcement staff strength which is almost a hundred times larger.
Therefore, in my view, there clearly are challenges in catching insider trading in India, because there are many people doing it and because they aren’t doing too much of it at the same time. At the same time the opportunity costs of not pursuing other violations which may be easier to prove because of direct evidence must not also be discounted. That is not to say such cases should not be pursued with greater force, which they must. But whipping Sebi for not doing much about curbing insider trading is not accurate.
Sandeep Parekh, Founder, Finsec Law Advisors and former ED, Sebi
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