SAT likely to reject fewer Sebi cases now: Ex-ED

However, the market regulator has to define the term ‘relative’ in insider trading cases says Gupta who also believes that it is fine if the regulator hasn’t come out with tighten norms against wilful defaulters, until it protects the defaulter company.

“Integrity of the market is dependent on its players. Hence, the regulator should make the life of a willful defaulter-the promoter or the management- difficult. It should not penalize the company or anyone who would probably be interested in the company,” adds Gupta.

Below is the verbatim transcript of JN Gupta's interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.

Latha: First on the insider trading rule – the Sebi has included some associated people like relatives, associate persons, buyers, sellers, key clients who would have price sensitive information. Is that the way to go?

A: You will have to look into entire background. We have been having insider regulation for the last 20 years and we have found that very few cases have succeeded in the market. The outcome could be two – either there is no insider trading or there is some problem with the regulation, its implementation and enforcement. We all know that insider trading is existing all over the world and in India it is not an exception, it is there, so that means there is some problem with the regulation, enforcement and interpretation.

One part has already been dealt by amendment to Sebi Act where Sebi has been given certain powers for call data records because Sebi always use to hit the wall when they were investigating. Now the issue has come of the legal framework. If one says that legal framework has come then the crime will stop, it is not possible because murder has been a crime for so long in the world; murders have not stopped, so insider trading will not cease to exist, whatever maybe the law but implementation has to start. So, what Sebi has done is this – based on experience in the past that many a times on the technical difficulty honourable Securities Appellate Tribunal (SAT) would set aside the Sebi orders. Therefore, they have tried to take care of all those difficulties which Sebi use to face on the technical ground by changing the definition, by explaining the definition, by defining what is unpublished price sensitive information, by definition of insider and all these things. So hopefully what will happen is on technical grounds rejections of Sebi order by SAT are likely to come down. Effectiveness will happen that how Sebi goes about in its investigation and report.

However, one thing which is there is by this enlarging of definition large number of people will come into the insiders domain. Sebi will have to be very clear that they do not increase the number of cases, for example I am related to somebody who is a managing director or something and have sold 50 shares – that person may not be knowing, I may not be knowing and this unnecessarily a case of 50 shares. So materiality will have to come into play into this. It is not a case that materiality is the only important thing but materiality will have to taken into account otherwise we may get thousands of insider trading cases where the real insider trading could be 10-20.

Latha: Who are the relatives?

A: That definition has not come but many people are relatives…

Latha: There are lots of siblings who are not on talking terms and they could be selling.

A: Yes, you look at Amarchand Mangaldas now; if that could be happening then it can happen anywhere. The fact of the matter is that I do not know what my son would be buying or selling in the market and in spite of living in the same house I would not say that he trades, for example if he is buying something on Flipkart I will not know, I will know only when the parcel arrives. So, you do not know what the activity of your siblings or son or daughter or their relatives is. Therefore, it’s a very difficult situation but we will have to live with it and maybe going forward when the regime experience increases probably some changes could happen.

Sonia: What about the de-listing norms that have been tweaked? The tough condition that most people are talking about is that on the date of the board meeting 25 percent of the number of the public shareholders need to tender in their shares.

A: Not on the date of public -- they had 25 percent number. That one thing you have got very clearly because till yesterday everybody was talking about 25 percent by volume. It is 25 percent by number which in my opinion is a difficult condition. I do not have the statistics but if you go by statistics, you will find that most of the successful offers were because the few number of people had tendered the shares and the objective of Sebi is to plug that thing that few people connected with the management or in contact with the management were able to make it. So Sebi wanted the public participation but this condition going forward we will test the waters whether it is possible or not but this is a little onerous condition. 

Latha: There was a gentleman on the channel who made a case that in the past few instances - Indo Tech Transformers – he said that there the management went to the extent of offering free courier services to get the shares of people who are interested to tender - assuming they were not dematerialised - and even then all they could manage was 10 percent and that is the maximum ever tendered in terms of number of shareholders. So, his point was this will practically kill all delisting. Would that be your view?

A: I would not be an astrologer and say what will happen but I would say that it is a rather difficult condition but Sebi must have thought very well that what is to be done because when in the paper they have given, they had given quite a number of options and they in their wisdom thought that this is the best option but after five or six months when the offers are there and some failures are there or success are there, probably it can be tweaked.

Sonia: There has been no specific plan to make it tougher for willful defaulters to raise money from the capital market. Would that disappoint you?

A: As of now Sebi has not come out with any rules for defaulters. They said that they are in thinking process. My point is very simple that the integrity of the financial market or the securities market or the capital market whatever it may, is dependent on each and every pillar of the market and everybody has to work in a coordinated manner. It should not happen that RBI has a separate policy, Sebi has a separate policy and they are not in talking terms. They have to be in talking terms, they have to be cooperative.

One has to make life difficult for willful defaulter; the person and not the company because company can never be a willful defaulter, it is the person behind the company either the management or the promoter. So, it should not happen that that person A who is a willful defaulter in a company A should not be allowed to go scot-free in company B and raise money from public and make it a future default. On the other hand it should not penalise the existing shareholder of the company A, B or whatever it maybe. So, there should be a method by which the shareholders who are not guilty or who are not party to the willful default should not be made to suffer. If somebody wants to takeover the company, somebody wants to support the company that fund raising should be allowed otherwise you will end up penalising the person who you never intended to penalise.