The Indian Insider Trading Law Debate

In the context of Rajat Gupta’s conviction in the US, my column published on June 25 in Business Standard underlines how Indian law on insider trading operates more stringently than in the US.

The response and feedback has been varied. Many find fault with the regulator for not being effective with use of its powers, and lacking in enforcement skills. Others feel that unless an accused is sent behind bars, there can be no real demonstration that the law works.  Yet others have said it is the clarity in the Indian law that hurts the regulator, and that one should have conceptual expansiveness to enable the regulator to bring charges successfully.  There has also been debate about some recent losses that SEBI has suffered in the courts.

The reality lies somewhere amidst all of these perceptions.  A loss in the appellate forum is not necessarily a reflection of the law being weak. It can also be a reflection of a wrong case having been chased.  That someone does not actually go behind bars is not necessarily a symptom of the strength of the law not having been truly demonstrated.  Worldwide, criminals operating from behind bars is a menace, and if imprisonment were a deterrent, there ought not to be so many repeat offences.  If there is lack of clarity in what constitutes compliance, even well-intentioned market players can be hauled up for breach, violating the canon of need for predictability in the legal system.

Equally, one important truth is that wide-ranging absolute power in the hands of an enforcement agency always dents the detection and prosecution skills of the police force.  Absolute power makes the agency complacent, secure in its belief in its ability to inflict injury on its own terms.  When the police indulges in “encounter” killings, the cadre gradually forgets and loses the skills necessary to bring home charges successfully to achieve conviction in a court – it believes it can put the accused to death, and need not bother with small niceties such as prosecuting and proving itself before an independent court.

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  • “Equally, one important truth is that wide-ranging absolute power in the hands of an enforcement agency always dents……”
    On the inherent potentials, and the inevitable consequences ‘power’, or too much of it, vested in any authority , not necessarily in any so called regulatory authority, entails, a search for the profoundly underlying fundamental truth, traditionally obtaining, may ultimately lead one to what a great thinker of our times said; that was to the effect , – power corrupts human mind; absolute power corrupts absolutely.

  • I agree with your overall assessment that SEBI is not exactly hampered by any lack of investigative or enforcement powers in relation to insider trading. Also, your concern about the lack of a `Chinese wall’ between SEBI’s executive and quasi-judicial functions is well taken. However, I would like to make two specific points reg. your article.

    It is true that the insider trading (IT) law in the US is judge made. That is not necessarily a good thing. While it may afford the judges to adopt a flexible definition, it also has a downside. The doctrinal basis of IT prohibition in the US has swung from `equal access to information' (Taxas Gulf Sulphur) to `fiduciary duty to the shareholders' (Chiarella) to `deception on the source of information' (O'Hagan). There is no clarity as to why IT is fraud and on whom. In particular, the O'Hagan doctrine seems to sever the link of IT prohibition from securities fraud and make it a kind of informational property theft. In a recent case, `SEC v McGee', the SEC initiated civil action against certain persons for trading on the basis of MNP information obtained during an Alcoholics Anonymous (AA) session. To establish that AA members owed each other a duty of trust and confidence, the SEC referred to the AA Code of Conduct, in particular its `Twelfth Tradition' requirement of confidentiality! When you need to appeal to the AA Code of Conduct to claim securities fraud, something is surely amiss! There are also concerns that a vague and constantly shifting definition of IT may violate due process requirements.

    Secondly, Rajat Gupta did not insist on his case being taken to the criminal justice system for a higher standard of proof. Rather, he wanted the SEC to file a CIVIL complaint in a Court (with the benefit of a jury trial but the same standard of proof), instead of a proceeding before an SEC administrative judge. The government hit back by slapping a criminal case. I must say that was a big gamble for Mr. Bharara and his team, as this case might well have dented their `no loss' record on IT front. In the end, they were able to secure a criminal conviction! You can find Rajat Gupta's complaint against the SEC at .

    Mangesh Patwardhan

  • @anonymous
    "It is true that the insider trading (IT) law in the US is judge made. That is not necessarily a good thing."
    Reacting (in a lighter vein)>
    Why single out 'IT' law; is it not the whole truth, nothing but the truth, that every other law one can think of, say 'Income Tax'(IT) law, is more (rather mainly) a judge (in its widest meaning) made law, than legislature made. Does not a mere glance, for comparison, at the IT Act in one hand, and volumes and volumes of reported court (including tribunal) cases in the other (nay, on the shelves of a law office), adequately bear testimony to the fact that SUCH IS THE WHOLESOME TRUTH.
    By the way, is that why, the age old saying , -‘law is an ass’ ?!
    Is not the common man justified in keep expecting for ages that it is for the legal fraternity to embark on a research , to the end of finding an answer; if not a solution!

  • Also, i find fault with what u stated in the Business Standard article. In the USE v Possession debate, the law in the US is that trading when in possession of insider information clearly raises a presumption of trading on the basis of insider information. Only one or two defences can be used to rebut it.

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