By Dhruti Lunker and Isiri SD
Acts of insider trading have been plaguing the securities market, thereby undermining its integrity and presenting an unfair and disadvantaged trading platform for the investors. SEBI under Sec. 12A of the Securities and Exchange Board of India Act read with Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations has undertaken the task of curbing all practices leading to insider trading in the country. Over time, the board has adopted various methods to restrain the practice of insider trading by exercising the power to intercept phone calls and other communications, to surveil the machinery etc. Despite controlling the practice of insider trading, detecting and prosecuting offenders has continued to remain a challenge primarily due to non-availability of direct evidence.
It is indisputable that insider trading is undertaken discreetly. Insider trading is enabled by communicating the relevant information to a proxy, thereby causing difficulty in establishing the transmission of the Unpublished Price – Sensitive Information [“UPSI”] as well as the fact that trading took place due to possession of UPSI. This creates a hurdle in accessing the direct evidence to determine and prosecute such offenders.
In order to combat these challenges, SEBI has introduced a new Informant Mechanism under the SEBI (Prohibition of Insider Trading) Regulations Amendment 2019 that incentivizes whistle blowers for providing original and credible information on acts of insider trading. Under this mechanism, any individual who has knowledge of or observes any act of insider trading or suspected act of insider trading can voluntarily inform the SEBI by submitting the Voluntary Information Disclosure Form [“VIDF”]. The informant must also provide the source of the information. The Form shall be submitted either by the informant disclosing his identity or anonymously, through an authorized representative who shall be a practicing advocate. The Office of Informant Protection [“OIP”] is an independent office for processing the veracity and authenticity of the information received, granting rewards and performing other allied functions. The OIP would serve as a medium of exchange between the informant/legal representative and SEBI.
The framework of the mechanism makes provisions to maintain confidentiality of the identity of the informant. In addition, the framework makes provisions for protection from victimization, by mandating every entity associated with the securities market to incorporate provisions in their internal codes ensuring protection against victimization to any employee filing such VIDF or assisting the OIP of SEBI under this mechanism. The key feature of this mechanism is the grant of reward to the informants in monetary form provided the information is supplied and at least Rs. 1 crore has been disgorged based on the information received. The reward is 10% of the monies collected not exceeding Rs. 1 crore and this reward is to be paid out of the Investor Education and Protection fund.
The Informant mechanism introduced by SEBI was much welcomed as it presented an attractive offer of incentivizing whistle blowers; however, it has certain pitfalls which shall be analyzed in detail. At the outset, there are chances that this policy is misused to file false and vexatious complaints to distract the officers’ attention from the real events thus leading SEBI on a merry chase.
Firstly, as per the draft amendment, an informant is defined as any ‘individual’ who voluntarily submits a VIDF relating to an alleged violation of insider trading laws. Here, the emphasis must be laid on the term ‘individual’ as it provides for only an individual to file a complaint. What happens if the internal compliance committee of an entity decides to file a VIDF? This question remains unanswered.
Secondly, the amendment proposes the introduction of a special wing called ‘the Office of Informant Protection’, independent of the inspection and investigations department. This might add a burden to the already prevalent offices under the Board and break the link between the source of information and investigation of any information received. The entire process may go futile in case of a miscommunication between the two concerned offices. Moreover, after the first round of assessment, if the OIP is of the view that the accused is innocent and decides to absolve it from any liability, there may be a huge impact as the entity’s reputation would have tarnished by the end of investigation. It would become difficult for the entity to regain the trust and confidence of its investors. Allegations of insider trading are serious and cannot be kept confidential for long.
Thirdly, with regards to disclosure of an informant’s identity, there is an option to disclose the information personally or through an advocate. The amendment fails to talk about the extent of liability of the advocate in case of failure to maintain confidentiality. Despite the option of indirect disclosure being permitted, it is tough to maintain the anonymity of the informant. Once the legal representative gets a hold of the offenders, it is not rocket science to identify the informant as they may be required to be present at the proceedings to give evidence. This exception leading to involuntary disclosure, may abstain prospective takers from participation as anonymity is a prerequisite for the informant’s safety.
Fourthly, for ensuring the safety of the informants, especially the employees of the entity that is accused of insider trading, the policy assures that no employee would be subject to any kind of ill-treatment or harassment for having filed the complaint. This is guaranteed by the requirement that obligates all the listed entities to include a clause against victimization in their Codes of Conduct. This clause prime facie seems very far-fetched.
Fifthly, it is mandatory for the informant to disclose the source of information in the VIDF. The information is supposed to be credible, complete and original. The clause fails to specify the sources that could be considered reliable. Further, when the informant discloses certain leads or pointers, it becomes the duty of the Board to get to the bottom of the issue. At times, it may not be possible for the informant to give out complete information.
It is also stated that for any informant to be a recipient of the reward, there should be a disgorgement of at least INR 1 crore. Thus, through this clause, it can be presumed that in cases where disgorgement of an amount lower than stated has taken place, the board is not obligated to reward the informant.
Lastly, it is significant to mention that there is a clause for regulatory action in case the disclosed information is classified as being vexatious or frivolous. Thus, this rekindles the same issue as to what could be classified as being ‘frivolous and vexatious’. These terms are subjective and it is unfair to initiate regulatory action against the informants if their complaints are classified as irrelevant. Thus, if the above mentioned fallacies are noted and the needful is done, the informant mechanism will prove to be one of the most efficacious strategies introduced by SEBI to curb insider trading.
Recommendations And Conclusion
In the 21st century, mankind is driven towards increasing their financial viability and is willing to do whatever it takes to fulfill their desires. For many, insider trading is an easy means to earn money. The only focus of the investors is to see their invested money double up. This has proved to be one of the factors for the rise in insider trading. It is an accepted fact that incentives are fundamental to economic behavior. It is a force that drives people to reach their goals. The rationale behind “reward for revelation” policy is that any person who has information about insider trading (not being involved in the trading himself) would be eager to communicate the same if he/she is rewarded in return. But this policy needs to be revised as it contains uncertainties concerning some of its features. The following recommendations would ensure a more fruitful and productive informant mechanism-
- Specific guidelines should be prescribed to determine the standards of ‘frivolous and vexatious’ complaints that invite regulatory actions.
- The extent of liability imposed on the legal representatives of informants needs to be explicitly mentioned.
- In addition to individuals acting as informants, internal committees such as vigil mechanism and internal compliance of listed entities should be permitted to file VIDF and act as informants.
- The clause that requires a disgorgement of at least INR 1 crore as a prerequisite for the grant of rewards should be removed.
- Anonymity is a delicate issue and can reduce the prospective takers of this policy. Thus, there should be a provision to permit the Court to conduct in camera proceedings for receiving evidence for those informants who fear disclosure.
Thus, if the above mentioned recommendations are considered, there could be a fair platform for all the investors to compete and uphold the integrity of the securities market.
The author are both third year students, pursuing their B.Com LLB Degree from the Tamil Nadu National Law University, Tiruchirapalli.
Dr. TK Viswanathan, Sebi seeks public comments on Report submitted by of Committee on Fair Market Conduct, Report of Committee on Fair Market Conduct, (Aug. 8, 2018), https://www.sebi.gov.in/reports/reports/aug-2018/report-of-committee-on-fair-market-conduct-for-public-comments_39884.html
 Draft Securities and Exchange Board of India (Prohibition of Insider Trading), (Third Amendment) Regulations, (2019), https://www.sebi.gov.in/sebi_data/meetingfiles/sep-2019/1567494034206_1.pdf.
 Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, Third Amendment, (2019) https://www.sebi.gov.in/legal/regulations/sep-2019/securities-and-exchange-board-of-india-prohibition-of-insider-trading-third-amendment-regulations-2019_44341.html
 Cyril Shroff et al., Bounty Hunting in Corporate India – Understanding SEBI’s Latest Discussion Paper on the Insider Trading Regulations, India Corporate Law, (Jun. 12, 2019), https://corporate.cyrilamarchandblogs.com/2019/06/sebi-discussion-paper-insider-trading-regulations-bounty-hunting/.
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