Wednesday, March 6, 2013

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while the 2002 amendments provided that insider trading comes into being if an insider trades while “in possession” of unpublished price sensitive information (UPSI), section 15G of the SEBI Act, which contains the penal provision, still carries the previous position which is that the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!

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