Rajat Gupta’s conviction by a New York court for insider trading has sparked off a debate about the state of insider trading enforcement in India. While several cases have been pursued by SEBI in the last two decades since insider trading has been prohibited by regulation, the rate of successful convictions or regulatory sanctions has been minimal.
An editorial in the Business Standard states that while “Mr Gupta will join some 40-odd insider traders who have been successfully prosecuted in the last three years by Preetinder Singh Bharara, the US attorney for the Southern District of New York (which includes Wall Street)”, the position in India operates in stark contrast:
Insider trading, price manipulation and rigging have always been rampant on Dalal Street. In the past three fiscal years alone (until December 2011), the Securities and Exchange Board of India (Sebi) investigated ... 57 [cases] pertain[ing] to insider trading .... Of these, 28 insider trading cases were solved .... There were some suspensions and prohibitions. Some warnings were issued. In [some] cases, Sebi ordered the disgorgement of issue proceeds, and it issued many consent orders. But nobody went to jail.
As we have earlier observed, regulatory enforcement in insider trading cases is a tall order, particularly given the unavailability of direct facts and evidence to prove charges. SEBI has recently relied on circumstantial evidence to initiate action on two cases (discussed on The Firm), but it remains to be seen whether they will be upheld if taken up on appeal.
In any event, efforts are being initiated to strengthen the evidentiary aspects of insider trading. As this report in the Economic Times (ET) observes:
Soon after the Raj Rajaratnam-Rajat Gupta insider trading case became public, Sebi had approached the government for powers to tap phone calls for suspected insider trading and other securities frauds.
However, the government did not agree, although some recent reports said that Sebi may finally get access to phone call records of people suspected of insider trading and other market-related illegal activities. The need of the hour, according to market players, is not only the use of the latest tracking technologies to crack down on such unscrupulous people on the Street, but also to set some reasonable timeframe to close these cases.
The ET report also has a summary of the leading cases investigated by SEBI and the current outcome of those.At the same time, it is not as if SEBI lacks adequate enforcement powers. Somasekhar Sundaresan has previously demonstrated as to how SEBI has greater powers than the US SEC on several counts. Ultimately, what matters is the effective use of the powers rather than their availability in the statute books.