An Insight Into Insider Trading And Its Reform

With the growing rate of episodes of manipulation of company securities, it is becoming imperative to review prevailing rules and regulations on the topic and conceive a framework for prohibition of securities fraud

Insider trading is defined as a "malpractice" where trade of a company's securities is undertaken by people who, by virtue of their work, have access to the otherwise non-public information which can be crucial for making investment decisions. Insider trading is an occurrence every corporate is struggling to get away with. With the growing rate of episodes of manipulation of company securities, it became imperative to review the prevailing rules and regulations on the topic and conceive a framework for prohibition of securities fraud.

The Securities and Exchange Board of India on 15th January, 2015 notified "Prohibition of Insider Trading Regulations, 2015, in its exercise of wide reaching powers conferred by section 30 of the Securities and Exchange Board of India Act, 1992 read with S.11 (2) (g), S. 12 A (d) and S. 12 A (e) of the Securities and Exchange Board of India Act, 1992. The SEBI (Prohibition of Insider Trading) Regulations, 1992 was repealed with subsequent effect on 15th May, 2015.

The new regulations SEBI (Prohibition of Insider Trading) Regulations, 2015 outline a stringent and more intensive regulatory regime thereby putting in place a stronger legal enforcement framework for deterrence of security fraud. SEBI established a committee under the chairmanship of Justice N.K. Sodhi to strengthen the regulatory framework in dealing with insider trading regulations in India. The committee submitted an extensive report recommending a new set of insider trading regulations in December 2013.

Some highlights of the new Regulations 2015 are as mentioned below:

1. Prohibitions on designated persons for exercise of ESOPs during the trading window closure period
2. No contra trade even in case of ESOP
3. Disclosure within 2 trading days of the transaction by every employee
4. A designated person who buys or sells any number of securities of the company shall not enter into an opposite transaction
5. Introduction of new concept of trading plans
6. The trading window shall be closed for adopting and considering financial results and other Unpublished Price Sensitive Information (UPSI) matters.
7. The trading window shall be closed when the Compliance Officer determines that a designated person or class of designated persons can reasonably be expected to have possession of unpublished price sensitive information
8. Appointment of a compliance officer to monitor and approve a trading plan
9. One of the most famous cases highlighting the vulnerability of the SEBI's 1992 regulations is Rakesh Agarwal vs. SEBI

In this case, Rakesh Agarwal, the Managing Director of ABS Industries Ltd. (ABS), was involved in negotiations with Bayer A.G (a company registered in Germany), regarding their intentions to takeover ABS. Rakesh Agarwal had access to the unpublished price sensitive information pertaining to takeover intentions of ABS. It was alleged by SEBI that prior to the announcement of the acquisition, Rakesh Agarwal, through his brother-in-law, Mr. I.P. Kedia had purchased shares of ABS from the market and tendered the said shares in the open offer made by Bayer thereby making a substantial profit.

The inquiries of SEBI confirmed these allegations. Bayer AG then acquired ABS. Further, he was also an insider as far as ABS is concerned. By dealing in the shares of ABS through his brother-in-law while the information regarding the acquisition of 51% stake by Bayer was not public, the appellant had acted in violation of Regulation 3 and 4 of the Insider Trading Regulations.

Rakesh Agarwal opposed that he did this in the interests of the company. He desperately wanted this deal to click and pursuant to Bayer's condition to acquire at least 51% shares of ABS, he tried his best at his personal level to source them with the essential number of shares, thus, resulting in him asking his brother-in-law to buy the aforesaid shares and later sell them to Bayer.

The SEBI directed Rakesh Agarwal to "deposit '34,00,000 with Investor Education & Protection Funds of Stock Exchange, Mumbai and NSE (in equal proportion i.e. '17,00,000 in each exchange) to compensate any investor who may make any claim consequently," along with a direction to

• initiate prosecution under section 24 of the SEBI Act and
• adjudication proceedings under section 15I read with section 15 G of the SEBI Act against the Appellant.

On an appeal to the Securities Appellate Tribunal (SAT), Mumbai, the Tribunal held that part of the order directing Rakesh Agarwal to pay '34,00,000 couldn't be continued, on the grounds that Rakesh Agarwal did that in the interests of the company (ABS).

Observation

The aforementioned case throws light on the incompetence of SEBI in demonstrating its cases so as to prove the allegations of Insider Trading. Most of this can be owing to the lack of evidence in cases relating to Insider Trading in India which make it challenging for the prosecution to prove the criminal liabilities that may be imposed on the person accused of Insider trading. Not to mention, the case involving criminal liability requires the allegations to be proved beyond reasonable doubts.

Similarly, in a recent Polaris Insider trading case, Mr. Arun Jain, Chairman and Managing Director of Polaris Software Lab (now known as Polaris Consulting and Services) and its former CFO R Srikanth had traded shares of the Company during their possession of significant and price sensitive information.

These persons had traded in the scrip of Polaris while in possession of the UPSI, allegedly in violation of (Prohibition of Insider Trading) Regulations and have allegedly committed the offence of 'insider trading'. The investigations have also revealed that Srikanth had failed to make the required disclosures to the company under the PIT Regulations. Regulation 7 (2) (a) of the SEBI (Prohibition of Insider Trading) Regulations, 2015 states:

"Every promoter, employee and director of every company shall disclose to the company the number of such securities acquired or disposed of within two trading days of such transaction if the value of the securities traded, whether in one transaction or a series of transactions over any calendar quarter, aggregates to a traded value in excess of ten lakh rupees or such other value as may be specified;"

In an order dated November 24, the SEBI has ordered impounding "the alleged unlawful gains of '1.85 crore (from July 18, 2008 to November 24, 2015) made by Jain and '19.69 lakh (from July 18, 2008 to November 24, 2015) made by Srikanth."

In December 2013, Securities Appellate Tribunal (SAT) had set aside a SEBI order that had barred Jain from the securities market for two years on charges of insider trading.

Penalties

No separate penalties have been prescribed under the Regulations. Penalty provisions under the SEBI Act, 1992 shall apply. As per the Act, insider trading is publishable with a penalty of INR 250,000,000 (Rupees Two Hundred Fifty Million Only) or 3 times the profit made out of insider trading, whichever is higher. Any person contravening or attempting to contravene or abetting the contravention of the Act may also be liable to imprisonment for a term which may extend to ten years or with fine which may extend to INR 250,000,000 (Rupees Two Hundred Fifty Million Only) or with both. The Regulations, also, prescribe certain disciplinary sanctions that may be taken by companies or market intermediaries to require due compliance of the Regulations.

Conclusion

The concept of insider trading has also been encouraged and has acquired importance internationally. These regulations have tightened the gaps of the existing norms.

Disclaimer – The views are of the author and not of Wockhardt Group