Harshil Vijayvargiya, Student of semester 6th, BSW, LLB (Hons.) Gujarat National Law University
One of the areas warranting stringent regulation in the securities market, and where lack thereof might act as a deterrent for investors, is Insider trading. Insider trading essentially refers to the trading of securities while being in possession of Unpublished Price Sensitive Information about the particular securities being traded. India’s track record in dealing with Insider trading has been dismal, to say the least. This is evident from the market regulator, SEBI's low success rate for convictions in insider trading during the last three decades.[i]
The areas where SEBI struggles most are evidence gathering and surveillance, among others. SEBI has attempted to overcome these inadequacies by introducing (Prohibition of Insider Trading) (Third Amendment) Regulations, 2019. The amendment introduces 'Informant Mechanism' which promotes the practice of Whistleblowing in order to restrain instances of insider trading.
This blogpost would take trajectory by first discussing the new mechanism devised by SEBI in relation to the prevailing whistle-blowing laws and regulation in India, followed by analyzing the significant provisions introduced by an amendment to the regulations and conclude with a discussion on the suggested future course of action.
A brief overview of Whistleblowing provisions in corporate and financial laws
Whistleblowing generally refers to calling the attention of top management to some unethical/mala-fide activities happening in the organization. S.177 (9) of the Companies Act[ii] mandates that certain classes of companies need to establish a Whistleblowing mechanism. Furthermore, Regulation 22 of SEBI (LODR) Regulations, 2015[iii] also lays down that every listed entity needs to have a vigil/whistle-blowing mechanism for directors and employees to report genuine concerns.
SEBI’s recent policy proposes to reward genuine whistleblowers with a monetary sum of up to 1 Crore rupees. It also stresses on anonymity and protection against victimisation of the whistleblower. At first sight, the policy seems to be inspired from the United States Securities and Exchange Commission’s ("US SEC") framework for the protection of whistleblowers which was systematised under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Even the European Union's Market Abuse Regulation provides for a similar mechanism.
Salient Features of the Amendments
1. Voluntary Information Disclosure Form
The amendment provides for Voluntary Information Disclosure Form ("VIDF") which could be submitted by an informant either by himself or through an advocate. The informant would be required to fill in the details of complete information of the original information pertaining to violation of any insider trading laws. Original Information has been defined in S.7A (h) of the regulations as any relevant information submitted in accordance with the regulations pertaining to violation of insider trading law.
The prerequisites defined in the S.7A (h) needs to be strictly complied with, inter alia, the original information must be credible; not already known to SEBI; it shouldn’t be frivolous. SEBI has done an appreciable job in drafting the form, as it is can be comprehended by a person having a basic understanding of insider trading norms and regulations.
2. Creation of Office of Informant Protection
The regulation has created an Office of Information Protection ("OIP"). It would be an independent office which would function separately from the inspection and investigation departments of SEBI. On receipt of the VIDF, the OIP has to communicate the substance of information that is received through VIDF to the relevant department or division of the board. It also plays an important role in maintaining the confidentiality of informant, maintaining a hotline for the benefit of informant among other things.
3. Reward
The most significant feature of the amended regulation is that the informant is eligible for a reward if collection or recovery of the monies disgorged equal at least twice the final reward achieved. The quantum of reward may be 10% of the proceeds collected or 1 Crore rupees (max). However, the upper limit on the reward may be removed or amended. An example can be taken from Dodd-Frank Wall Street Reforms and Consumer Protection Act of 2010, where the reward can vary from 10%-30% of the monies collected. The higher quantum of reward may positively tempt the employees, which would lead to a more proactive reporting mechanism.
4. Informant Confidentiality
Proceedings such as these may see dilution in the number of initiative takers if an informant feels that his anonymity may be compromised at any stage of the proceedings. Accordingly, utmost confidentiality must be maintained. The regulations have prescribed that the identity of the informant would be held in confidence and is exempted from disclosure under Right to Information Act, 2005. However, identity of the informant may need to be disclosed where the evidence of the informant is required during the proceedings. Furthermore, prior to the payment of reward, an informant would need to disclose his identity by himself or through his/ her legal representative. These two situations could act as a deterrent for some informants.
5. Protection against retaliation and victimisation
Many times an employee or any other person may be aware of the wrongful deeds of the corporate, however, they choose to remain silent in the apprehension of retaliation or victimisation. SEBI has accounted for these factors also and incorporated measures for prevention of victimisation and retaliation.
Regulation 7 (L) states that every listed company and intermediary must amend its internal code of conduct to incorporate provision which ensures that a person who files a VIDF shall be protected against any discharge, termination, demotion, suspension, threats, harassment or discrimination, directly or indirectly, irrespective of whether the info is considered or rejected by the board or the person is eligible or not eligible for the reward. The regulations state that the employer would be liable for a penalty, suspension, among other things if they violate the provisions of the chapter.
5. Amnesty
The regulations state that no immunity is deemed to be provided to any informant for violation of securities law, however, the board may evaluate the extent of cooperation rendered at the time of the final determination of penalty, settlement or any other sanctions. With regards to amnesty scheme, a good example of US SEC could be brought forth, wherein SEC has benefitted immensely from the cooperation of fund managers to investigate insider trading cases and helped them avoid prison term in return. It can be said that a proper balance should be struck wherein genuine cooperation could be achieved from the operators while not granting them unwarranted clemency.
The way ahead
Insider trading is arduous to detect and punishing the people involved is difficult in every jurisdiction. The amended regulation seems to be a product of the lesson SEBI learned from the NSE co-location scam, wherein a whistleblower’s letter addressed to SEBI complained about the malpractices in NSE Co-location facility. The whistleblower policy would surely help in increasing the quality of evidence and investigative processes; the two areas where SEBI suffers a lot. The policy is a welcome move, however, there are still some measures such as phone-tapping, which would help in curbing the menace of insider trading and nabbing the culprits as per reports of SEBI.
Furthermore, there is a need for increasing the man-power that SEBI possesses as the new whistleblower policy might increase the workload of the officials owing to the establishment of a new division namely, OIP. Increased manpower would also speed up the investigation process as if we look into the past two years record, 85 insider trading cases have been taken up by SEBI, only 25 investigations have been completed.
Overall, the zeal of SEBI is evident through the measures taken. It is hoped that the policy serves practical effectiveness too. Furthermore, it is expected that our financial regulator would continue evolving its laws to make the financial market more trustable for the investors and participants.
[i] Jayshree P. Upadhyay, How India cracks down on Insider trading? LIVE MINT, (Jan 28, 2020), https://www.livemint.com/market/stock-market-news/how-india-cracks-down-on-insider-trading-11580199120367.html [ii] The Companies Act, 2013, § 177(9), No. 13, Acts of Parliament, 2013 (India). [iii] SEBI (Listing and Disclosure Requirements) Regulation, 2015.
The opinions expressed herein are those of the author in their personal capacity and are not intended to be construed as legal, financial or investment advice.