[Prateek Bhattacharya is an Assistant Professor and Assistant Dean (Scholarships), Jindal Global Law School, O.P. Jindal Global University.]
‘Insider trading’ refers to the illegal buying or selling of a security in breach of a fiduciary duty or other relationship of trust. Such sale of a share or security is carried out on the basis of material non-public information (the term used in the United States) or unpublished price sensitive information (UPSI) about that share or security. With the proliferation of publicly traded corporations in the last century, in which members of the public and other stakeholders invested their time, money, and trust, it became increasingly important for jurisdictions to evolve insider trading regimes designed to regulate such illegal transactions and to protect the interests of the public by preserving the integrity of the market. Insider trading regimes vary from jurisdiction to jurisdiction, and are representative of the economic and socio-political background of each such jurisdiction.
My recent paper, scheduled for publication in the NYU Journal of Law & Business, discusses the birth and evolution of the insider trading regime in India, examining the legislative intent behind the insider trading regulations and the far-reaching scope of their application. Insider trading laws in India can be traced back to the 1948 P.J. Thomas Committee Report on the Regulation of the Stock Market in India, which paved way for regulation of the conduct of corporate insiders and their friends (referred to as “inspired operators”) due to the overarching public nature of the Indian investment market. This was followed by other reports of the Sachar Committee, the Patel Committee, and the Abid Hussain Committee, all of which led to the formulation of India’s first standalone legislation on insider trading, SEBI (Prohibition of Insider Trading) Regulations, 1992 (1992 Regulations).
However, given the dynamic nature of the investment markets, the 1992 Regulations went under the scanner of the N.K. Sodhi Committee which, in its report, stressed upon the importance of “parity of information” in insider trading and the need for the regulations to have more teeth. These observations resulted in the SEBI (Prohibition of Insider Trading) Regulations, 2015 (2015 Regulations) which were replete with legislative notes to dispel any scope for confusion. These regulations were revised once again in 2018 by the T.K. Vishwanathan Committee, which placed the onus on the corporations to define their own policies and practices of what can be considered as being “legitimate” while also drawing a line between what would constitute legitimate conduct for corporate insiders (such as employees of a company) as being different from legitimate conduct for market intermediaries (such as auditors, law firms, or consultants).
The paper proceeds to examine the scope of the concept of “connected person” – under the 1992 Regulations, whether a person was connected and therefore an “insider” hinged on whether such person had “access to unpublished price sensitive information”. Thus, the net of “connected person” caught not merely corporate insiders, but also intermediaries such as merchant bankers, brokers, and relatives of such persons. In effect, this implied that any person can be deemed to be an insider so long as the nexus of “access to” UPSI can be met, regardless of the degrees of separation from the company. This concept was echoed under the 2015 Regulations which further clarified it by way of an indicative list as well as a legislative note that a “connected person” is intended to be one who would have access to or would possess UPSI due to their close association with the company and its operations. In fact, the 2015 Regulations contemplate that any person having access to UPSI ought to be considered as an insider “regardless of how one came in possession of or had access to such information”, thus establishing that the burden to show such access falls upon the SEBI, following which burden shifts to the person to disprove that they had access to the UPSI. The 2015 Regulations go on to distinguish UPSI from “generally available information”, while also requiring that where such UPSI does exist, companies must maintain a structured digital database containing the names of all persons and entities with whom the UPSI is shared. These and other concepts behind the 2015 Regulations as amended in 2019, have been discussed in the paper.
The paper further looks at the multi-faceted theories of insider trading such as the classical theory and the misappropriation theory, as recognized in the United States, and examines whether India’s insider trading regulations cover such theories. The classical theory, requiring an insider to “abstain or disclose” derives from the United States Supreme Court judgment of Cady, Roberts & Co.[1] Thereafter, in Chiarella v. United States,[2] the United States Supreme Court clarified that it was applicable only to persons who had a fiduciary duty to the corporation concerned. A few years later, that Court in Dirks v. SEC[3] opined that the question of whether insider trading rules had been breached boiled down to the purpose with which an insider disclosed UPSI to another party, i.e., whether the disclosure was made with an element of personal gain or not.
The misappropriation theory follows an intellectual property-based approach where the UPSI is considered to be the intellectual property of the corporation, and the unauthorized possession or disclosure of the same amounts to intellectual theft or appropriation of its property. This brings to light the breach of insider trading laws by way of mere communication (i.e., “communication offence”) and not restricted to only trading based on the UPSI, where the communication was made for improper purposes, hence amounting to a breach of the fiduciary duty of the insider to the corporation. Notable cases on the misappropriation theory include Carpenter v. United States,[4] United States v. O’Hagan,[5] and, more recently, Salman v. United States.[6] The primary Indian case which has discussed the misappropriation theory is Rakesh Agarwal v. SEBI,[7] where the Securities Appellate Tribunal found that the purpose behind insider trading law should be to prevent cheating. Accordingly, it was concluded that the 1992 Regulations were intended to prohibit the dealing in securities which was done with a view to misuse information for obtaining unfair advantage, and over-interpretation of this legislative intent or over-regulation by the SEBI would amount to stifling genuine transactions.
Upon such examination of the theories of insider trading, and comparison with the laws of other jurisdictions, this paper concludes by noting that the powers accorded to the Securities and Exchange Board of India (SEBI) are comprehensive and self-sufficient by adhering to the standard of “access to UPSI”. However, SEBI does require assistance from the legislature insofar as new-age technology cases such as those of the WhatsApp Leaks. Brought to light in November 2017 by Reuters, instances of prescient messages regarding the performance of 12 companies were reported to have been leaked onto WhatsApp groups. In such cases, issues such as SEBI’s limited investigative powers and its resource crunch are highlighted, as well as potential jurisdictional clashes with the Telecom and Regulatory Authority of India, insofar as investigative aids such as wire-tapping is concerned. While the matter is currently sub judice before SEBI, the paper observes that the regulator is well posed to tackle future threats to investor confidence, market integrity, and the Indian economy, primarily due to its 2019 amendments which have narrowed its search parameters to the persons listed by companies in their own electronic databases.
– Prateek Bhattacharya
[1] 40 S.E.C. 907 (1961)
[2] 445 U.S. 222, 227 (1980)
[3] 463 U.S. 646 (1983)
[4] 484 U.S. 19 (1987)
[5] 521 U.S. 642 (1997)
[6] 137 S. Ct. 420 (2016)
[7] 2003 Indlaw SAT 37