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Check on insider trading

A recent proposal by the capital market regulator, SEBI, to check insider trading in shares calls for careful consideration even as it bristles with some practical difficulties. Its main aim is to force insiders to surrender to the company short-term profits made by them from transactions relating to the scrips. Specifying a time span of six months, the regulator has suggested that any “short-swing profits” accruing to an insider within that period either through a buy or a sell transaction will have to be passed on to the company. With such a regulation in place, company insiders will be discouraged from taking advantage of the information they have access to and profit from short-term swings. In the regulator’s view, insiders are expected to have a long-term investment horizon, not to make short-term investment decisions for speculative gain. The implication is that such transactions would be based on at least some level of superior access to information, whether material or not. The term “insider” is proposed to cover not only the top management but also all directors of the company and all officers who are the beneficial owners of at least 10 per cent of the company’s equity shares. Another alternative is to enlarge the definition to include, apart from the officers of the company, all beneficial owners with a holding in excess of 10 per cent, singly or in concert. Either way, the concept of designated insider will be narrower than the existing concept of a deemed insider.

The idea of making a share market participant disgorge ill-gotten gains is not new to capital market regulation in India or elsewhere. SEBI’s order of disgorgement against well known depositories and depository participants who allegedly submitted multiple applications in a few public offers has been appealed against. As in the developed world, in India too the need to speed up quasi-judicial processes is well recognised especially where they relate to matters such as insider trading. It has been made amply clear that a direction to surrender short-term gains carries no implication or admission of any form of guilt. Secondly, the mere fact of the trade will be sufficient for surrendering short-term profits. Finally, liability will be imposed without any wrongfulness being established. However, after notification, the new regulatory measure is almost certain to face roadblocks, including legal challenges. There will be genuine difficulties in keeping out of the new regulation’s ambit certain exempted categories such as employees’ stock options and shares arising out of inheritances. On the whole, SEBI needs to be commended for pragmatically addressing a problem that cannot be tackled by existing laws alone.

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