Insider trading is the Achilles heel of any market regulator. And over its 25-year existence, Sebi has had its fair share. In the fourth part of the series, Sebi @25, CNBC-TV18's Ashmit Kumar revisits the various instances of insider trading and how the market regulator has dealt with them.
Sebi's battle against insider trading began from its very inception in 1988, even before it had any statutory powers. And in 1989, it received a stronger arsenal in the form if some path-breaking recommendations.
These include — separate statute for regulating insider trading — and civil penalties and criminal proceedings against the guilty. So in 1992, the Sebi (Insider Trading) Regulations took shape.
But the ammunition meant little, since Sebi had a hazy definition of what really amounted to insider trading. Add to that poor enforcement and the punitive nature of the provisions, and you had an ill-equipped regulator.
The weaknesses, in part, surfaced with the famous case of alleged insider trading against HUL, which had bought shares in Brooke Bond Lipton India days before merger announcement in 1997. Here, the lack of clarity on the definition of insider proved to be Sebi's undoing.
Another famous case was that of Rakesh Agarwal, who was alleged to have been guilty of insider trading and was slapped with a fine of Rs 34 lakh. However, despite overwhelming circumstantial evidence, Sebi was unable to prove involvement beyond reasonable doubt and the order was overturned by SAT.
So in 2002 there came an overhaul. And the Sebi (Prohibition of Insider Trading) Regulations, 1992 was born. These provisions were more preventive in nature and focused on disclosures.
Apart from mandatory disclosures by directors and other officers, it called for similar disclosures by anyone holding 5 percent more in the company. It also called for all market-linked entities to set up preventive internal systems and report on compliance.
But while the regulator has taken up 172 cases of insider trading from 2000-01 to December of 2012, and has completed investigation in 160 of them, a low conviction rate continues to haunt Sebi.
But industry veterans have pointed to factors beyond the scope of Sebi.
Joseph Massey, MD & CEO, MCX Stock Exchange, says “There are several challenges beyond the regulator such as the excessive reliance on circumstantial evidence and the mandate to prove beyond reasonable doubt in case of such offences.
Then came the new consent guidelines. But there is still the need for additional powers. Introduced in May 2012, these disallowed the settlement of insider trading cases through the consent process — a major blow to those facing a prima facie case of insider trading.
JN Gupta, former ED, Sebi, “Sebi’s track record in cases of insider trading has not been great. There are no convictions in 2 out of 3 cases. Though other regulators have sweeping powers such as wiretapping, in India we can ask only for call-data records.”
That's where a high-level committee, under the chairmanship of former SAT presiding officer - Justice NK Sodhi, came in. Constituted in April 2013, this committee has a single point agenda — “To ensure that the regulatory framework dealing with insider trading in India is further strengthened, Sebi seeks to review of the extant Insider Trading Regulatory regime in India.”
Sebi chief UK Sinha has hinted at the regulator looking to borrow from the best global practices, which experts read as a reference to the sweeping powers made available to the SEC —like wiretapping and access to electronic mail which proved instrumental for the SEC in belling the big cats of Wall Street such as Rajat Gupta and Raj Rajaratnam.
But is this a case of overreach by the market regulator? Somshekhar Sundaresan Partner, J. Sagar Associates responds, “Sebi’S powers are higher than those of the SEC. We have a bloodthirst that is reflected in regulations. Sebi is empowered sufficiently to inflict grievous economic injury for such offences, but we'd rather see the guilty go to Tihar jail as opposed to economic death.”
But such criticism has done little to dent Sebi's plans to gear up for battle, with reports indicating that the market regulator has set its eyes squarely on messaging services to augment its surveillance capabilities. This, even as Sebi keeps an eagle eye on networking sites like Twitter and Facebook.