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Insider Trading in India - The Loose Threads
By: Aniket Sahu, Advocate

Introduction

Insider trading pertains to the illicit practice of purchasing or selling a company’s shares based on information that has been unlawfully shared with a privileged few. Under Section 12-A of the Securities and Exchange Board of India (Amendment) Act, 1992, such actions involving the securities of publicly traded companies are unequivocally forbidden. This provision delineates that no individual may engage, either directly or indirectly, in the trading of securities while possessing confidential or non-public information. Furthermore, it explicitly prohibits the dissemination of such information to others in contravention of the Act and its accompanying Rules and Regulations. A violation of Section 12-A incurs a civil penalty as stipulated in Section 15-G, which may reach up to ₹25 crore or three times the profits derived from insider trading, depending on which amount is greater. Furthermore, insider trading is deemed a criminal offence under Section 24 of the Act, carrying severe repercussions that include imprisonment for a term of up to 10 years, a fine of up to ₹25 crore, or both penalties.
As the financial market continues to expand, the rising prevalence of financial crimes underscores the critical necessity for comprehensive policy development and decisive intervention by regulatory authorities. It is imperative to take swift action to safeguard against the fraudulent practices associated with insider trading.
History
India’s first encounter with insider trading occurred in the 1940s, highlighted by the Thomas Committee Report in 1948, which revealed that company officials, such as directors and auditors, were misusing confidential information regarding dividends, bonus shares, and advantageous contracts. In 1952, the Bhabha Committee recommended that directors report their share transactions in a register maintained by the company. This led to the introduction of Sections 307 and 308 in the Companies Act of 1956, which mandated companies to keep a record of directors’ shareholdings and required directors to disclose their transactions. The Companies Amendment Act of 1960 further expanded this requirement to include managers.
In 1978, the Sacher Committee advocated tougher regulations to combat insider trading, involving individuals exploiting confidential information for their benefit. Then, in 1986, the Patel Committee clarified that insider trading refers to the improper use of non-public information by company executives and suggested changes to the Securities Contract (Regulation) Act of 1956 to empower exchanges to implement more stringent regulations.

In 1989, the Abid Hussain Committee recommended that insider trading should be regulated by both civil and criminal laws, advocating for a more robust regulatory role for SEBI. As a result, SEBI implemented the Insider Trading Regulations in 1992, which were revised in 2002.

Identifying the Loose Threads

Insider trading refers to the unethical practice of using confidential information to trade securities, allowing some individuals to gain an unfair edge. Although various reforms have been implemented, regulatory authorities in India continue to struggle with completely eradicating insider trading from the financial markets. A regulatory official remarked that offenders are becoming more sophisticated and are avoiding detection through traditional means, prompting regulators to explore new detection methods. Insider trading usually starts with obtaining and disseminating Unpublished Price Sensitive Information (UPSI) for personal advantage. As investors gain more freedom and knowledge about the market, violations of insider trading regulations also increase. According to SEBI’s annual reports, the number of insider trading cases under investigation grew from 15 in 2017-18 to 70 in 2018-19, with the number of completed investigations rising from 6 to 19 during that same timeframe. This highlights the increasing use of legal loopholes by offenders, as well as SEBI’s continuous attempts to address these unjust practices through suitable regulations.

Insider trading regulations have changed over the years. The original SEBI (Prohibition of Insider Trading) Regulations from 1992 were updated and replaced by the 2015 version, which took effect on April 1, 2019. Amendments made on December 31, 2018, focused on various concerns.
1. Extend disclosure requirements to employees and connected persons with access to unpublished price-sensitive information (UPSI).
2. Clarify the concept of “legitimate purposes” to prevent circumvention of regulation.
3. Remove ambiguities in the regulations to create more certainty for market participants.

Amendments that took effect on December 26, 2019, established incentives for whistleblowers and safeguards against retaliation for those who report misconduct. However, insider trading continues to be a significant issue, highlighted by notable cases such as Ambit Capital and Crisil Ltd., which resolved insider trading allegations by agreeing to pay hefty fines. Enforcing insider trading laws involves more than just creating regulations; it necessitates strong enforcement measures. SEBI’s investigative capacity is restricted due to limitations like the inability to access phone records, a recommendation made by the Vishwanathan panel in 2017. This limitation hampers the effective prosecution and resolution of insider trading cases.
A recent case underscores persistent worries: billionaire investor Rakesh Jhunjhunwala is being investigated for purported insider trading related to Aptech Limited, where he has a substantial investment. This isn’t Jhunjhunwala’s first encounter with SEBI; he previously resolved an insider trading issue concerning Geometric by paying a penalty.
Even with regulatory changes, insider trading remains a major issue in India’s financial markets, emphasizing the necessity for enhanced enforcement and greater investigative authority for SEBI.
Ways to tie the loose threads

To address insider trading issues in India, SEBI should consider the following steps:

  1. Improving employee training and monitoring systems will aid in recognizing connections between individuals who have access to Unpublished Price Sensitive Information (UPSI) and those who gain from it.
  2. SEBI needs to clarify whether insider trading is classified as a civil or criminal offence to eliminate ambiguity in determining penalties.
  3. SEBI should be granted the authority to access digital records, such as wiretaps and emails, to enhance its ability to monitor insider trading activities.
  4. Informing the public about insider trading and its detrimental effects is essential for preventing illegal activities.
  5. Transactions involving Unpublished Price Sensitive Information (UPSI) should be cancelled to avoid unfair profits.
Conclusion
Insider trading is a significant issue in Indian markets. Although the Securities and Exchange Board of India (SEBI) has made progress in identifying those who exploit Unpublished Price Sensitive Information (UPSI), obstacles persist. Despite revised regulations and ongoing investigations, the absence of solid evidence makes it difficult for SEBI to prosecute offenders. By improving policy development and refining its organizational framework, SEBI can enhance evidence-gathering and investigation methods, promoting fairness in the financial market and creating equal opportunities for everyone.