Review of Insider Trading Regulations

SEBI has constituted
a committee
to review its regulations on insider trading. The committee is
chaired by Justice N.K. Sodhi, retired Chief Justice of the Karnataka High
Court and former Presiding Officer of the Securities Appellate Tribunal (SAT).
The review comes two decades
after SEBI’s Insider Trading Regulations were enacted in 1992. The initial
decade witnessed very few investigations. Moreover, a high profile action
initiated by SEBI against Hindustan Lever was overturned by the appellate
authority. Due to this and other reasons, SEBI undertook significant amendments
to the Regulations in 2002 so as to enable it to successfully curb insider
trading with wider powers.
Although the substantive law was amended
in 2002 to make it more robust, SEBI has had mixed success under the amended
Regulations as well. Several orders of SEBI have been overturned by SAT due to
lack of evidence, although in a few cases SEBI has tasted success too. In a
nutshell, it appears that the difficulty lies not with the substantive law
which is quite strong, but rather with the procedural and evidentiary aspects
which are difficult to fulfill in insider trading. It is reasonable to assume
that the new committee will be required to pay attention to these aspects in
great detail apart from the substantive aspects of the law.
It is hoped that the committee
will consider a holistic review of the regulations. The previous approach in
2002 of introducing amendments to existing regulations does not seem to have
worked well. For example, while the 2002 amendments provided that insider trading
comes into being if an insider trades while “in possession” of unpublished
price sensitive information (UPSI), section 15G of the SEBI Act, which contains
the penal provision, still carries the previous position which is that the
trading must be “on the basis of” UPSI which imposes a higher standard on the
regulator.
Some of the key issues that are
likely to be before the committee are:

Defining the scope of an “insider” and whether that should include recipients
of information (such as tippees);

Defining the scope of “price sensitive information”. Precisely at what stage
would information become price sensitive? Whether at an initial stage or only
when details are available?
– When
can information be said to be published?
While some of the above substantive
issues are clearer in the present regime, it is the following that may require
greater emphasis:
– What
is the burden of proof required on the part of the regulator?
– Is
there a need for direct evidence or is circumstantial evidence sufficient? Most
cases involving insider trading may reveal only circumstantial evidence and
very rarely any direct evidence, which compounds the evidentiary burden.
– Is
there a need to prove “mens rea”?
Although the Regulations currently do not require mens rea, there is less clarity through judicial interpretation on
this count?
– To
what extent should the investigative powers of SEBI be enhanced? More
specifically, the recent debate (emanating from the US) has focused on powers
of wire-tap, etc.
Considering the numerous open
legal issues on this topic, the constitution of the committee for review of the
regulations is welcome.
Corporate
Law Moot Court Competition
:
Coincidentally, the Fifth NUJS Herbert Smith Freehills National Corporate Law
Moot Court Competition 2013 was held in Kolkata over the weekend (a report
available here).
A significant part of the moot court problem (accessible here)
consisted of issues pertaining to insider trading.
Niranjan and I had the privilege
of judging different rounds of the competition. It was indeed enjoyable to
witness 20 teams of law students compete against each other advancing arguments
and ideas of the type listed above on an area of the law that has assumed
considerable significance and that is now a subject-matter for law reform. The
arguments presented were well-researched and comprehensive and brought to the
fore some of the difficulties faced in investigations and regulatory actions of
the kind.

There is a wealth of young
talent and ideas out there as a result of this competition, if the committee
wishes to tap for its research!

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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