[*All views expressed here are personal and nothing contained herein reflects the views, opinions and beliefs of any organization.]
Given the illegal and secretive nature of market abuses like insider trading adjunct with the difficulties associated with its regulatory detection resulting from limited prowess of SEBI, it has historically been difficult for the regulator to ascertain the degree to which it occurs in practice.[1] Orders of SEBI, SAT and higher judiciary have played a critical role in shaping many of the elements of what constitutes insider trading. So effectively, the historical difficulty should have been eased over the past 30 years of enactment of the SEBI Act, 1992 and existence of SEBI. Recent Supreme Court decisions have indicated otherwise.
In the last year, the Supreme Court in two different cases before it, ruled that the motive on the part of the insider to seek profits is an essential precondition for a successful insider trading charge (SEBI v. Abhijit Rajan)[2] and that circumstantial evidence such as trading pattern and timing of trades was insufficient to prove a charge of disclosure of UPSI in absence of any direct evidence (Balram Garg v. SEBI).[3]
These rulings pertain to the very basics of enforcing insider trading regulation and come as a relief against orders that were being issued by the regulator in Balram Garg and many others where the provisions of the insider trading regulations have been evoked on basis of proof and grounds which posit reasonable doubts as to the contours of what constitutes insider trading. So the historical difficulty persists.
Notably, a reading of the provisions of Section 12 of the SEBI Act, 1992 demonstrates only a broad based prohibition on insider trading with the scope, manner and enforcement of the prohibition having been left to the wit of the regulator. On the other hand, the detailed framework with trading windows, definitions of insiders and connected persons as well as unpublished price sensitive information is derived from the insider trading regulations issued by the regulator by virtue of the powers vested with it in terms of the Act.
Effectively, insider trading regulation in India is meant to forbid exploitation of information asymmetry (resulting from a non comparable pedestal) that a trader may have over another and it derives both justification and appropriate limits from the policy of the legislation.
Without discrediting the advancements made by SEBI in polishing the policy on insider trading over the many years, the recent supreme court decisions could be considered as an opportunity to acknowledge the limitations of the regulator in enforcing the prohibition on insider trading and raises the need to study the precise rationale of the design of the extant policy (understood with actual decisions of the Board, SAT and judicial decisions).
It also merits a study of whether a different design of policy on the subject could provide the regulator with better direction and powers to meet an adequate standard of proof requirements. Lastly, it may also be important to analyse whether the design and enforcement adequately addresses instances arising as a consequence of increase in high frequency trading and dark pools.
Watch this space for more on this.
References
[1] Moloney, Ferran & Payne, The Oxford Handbook of Financial Regulation (2017).
[2] https://main.sci.gov.in/supremecourt/2020/1791/1791_2020_4_1501_38300_Judgement_19-Sep-2022.pdf
[3] https://main.sci.gov.in/supremecourt/2021/26746/26746_2021_9_1501_35070_Judgement_19-Apr-2022.pdf