ELEMENT OF AN EFFECTIVE INSIDER TRADING REGULATION – ANALYSIS OF INDIA, U.S.A AND U.K

“Markets are never wrong- opinions often are”

–        Jesse Livermore

Henry G. Manne Defines insider trading as “Insider trading generally refers to the practice of corporates agents buying or selling their corporation securities without disclosing to public a significant information which is known by them but which has not affected price of security”[1]The legality of insider trading is contingent on when the trading took place[2]. Insider Trading Regulations does not have a long history or is thing of the past in India because the country is still developing and its laws are always changing. India now adheres to the SEBI (Insider Trading Regulation) of 2015[3]. Countries like as the United States of America have had these rules for a long time, and as a result of the United States of Many other countries have followed America’s lead and enacted Insider Regulation in their own territories. The United Kingdom was one of the first countries to pass anti-insider trading legislation.

 Analysis of insider trading regulation in India in comparison with USA and UK

The quality and amount of corporate reporting, information intermediation, and information dissemination mechanisms differ significantly among countries.[4]Insider trading restrictions in the United States are among the most stringent in the world today. The Securities Exchange Act of 1934 was the first piece of insider trading law adopted in the United States which made insider trading illegal in USA. In India, the regulatory structure has only been in place for two decades. To begin, there is a regulatory structure in place to prevent insider trading, The SEBI oversees India’s financial markets. The SEC is SEBI’s counterpart in the United States of America.The UK’s insider trading legislation is governed by the Financial Services and Markets Act of 2000 (“FSMA”)[5]and the Criminal Justice Act of 1993 (“CJA”)[6]. Neither Act, however, specifies the term “insider trading”. In both legal systems, the SEBI and the SEC have administrative along with regulatory responsibilities. Insider trading in India is governed by the SEBI (Prohibition of Insider Trading) Regulations 1992[7], and some aspects of the SEBI Act, 1992, but in the United States. Insider trading is generally supervised by the Securities Exchange Act of 1934, which has substantial prohibitions that can lead to fines if they are broken. Insider trading became illegal in the United Kingdom in 1985 when the Company Securities (Insider Dealing) Act was passed. Part VII of the Financial Services Act of 1986 was enacted, which improved the legislation.

Insider trading regulation has proven to be the most difficult of the primary challenges in India that SEBI must address. The unpleasant moniker of “the impossible fight” has been applied to such regulation, prompting a reassessment of the issue. Insider trading accounted for 14% (34 instances) of SEBI’s investigations in 2016-2017, up to 12 cases the previous year, according to the SEBI Annual Report for the year 2016-2017[8]. Insider trading is common, and it’s getting worse every year. In addition, only 15 of the 34 cases that were investigated were finished. As a result, it is a cause for considerable concern. On the other hand, the majority of the SEC’s 405 standalone cases only 8% concerns with insider trading in the year 2020[9]. According to the most recent SEC data, the Commission filed cases in 2020 was less than the previous year,but imposed a similar level of financial penalties, and the sum of punitive damages sought set a new record. According to the FCA,48 of the 87 cases open at the start of the year were closed, while 33 were opened.[10]

While in India there is no separate legislation on the other hand UK have a separate Act which criminalize insider trading resulting in the number of investigations closed has remained relatively stable year on year, but the number of financial penalties levied has decreased slightly.

When the regulatory regimes in India and the United States of America are compared, it is evident that the regulatory system in the United States is not only more aggressive, but it has also developed drastically over the last eighty years. India’s regulatory structure, by contrast, is still in its early phases of development. In terms of statute applicability, India and the United States have similar laws, as the same statute applies to both criminal and civil cases culpability, while the situation in the United Kingdom is significantly different. The Indian Insider Regulation only applies to publicly traded firms; however, in the other two countries, this type of criterion is not followed. In India, any person is considered a “connected person” if they were in any way associated with the corporation six months before to the occurrence, although this is not the case in the United Kingdom.[11]

Scrutinizing the regulation on Insider Trading

Insider trading is one of SEBI’s most serious and hardest challenges to address, making it difficult for investors to trust the laws in place to safeguard their rights and interests from insider trading. It is very hard to catch the offender for SEBI and even if they are successful in doing so it is hard to prove the offence. The conviction for the offense of insider trading was easy but the situation in the western countries including USA and UK is not the same which can be very well seen through the conviction in the case U.S v. Rajaratnam[12]There are various concerns that need to be addressed properly in order for Insider Trading to be done in a better method.[13]

Ø  Unlike in the USA, that follow a high quality of surveillance system;in India there is a scarcity of technological know-how. India lacks a sophisticated surveillance system that is technologically advanced and surveillance mechanism. The major issue in the offense of insider trading is “proving the offence” Typically. The sole evidence of the relationship between the people who could be charged with this crime is telephone records and transcripts. SEBI, on the other hand, lacks such authority. That is to say that SEBI does not have the authority to tap the calls. It is crucial to note that SEBI requested approval from the government, which the government declined, claiming that the information will be exploited.

Ø  Another significant disadvantage is that India’s current laws do not have extraterritorial application. Considering the effects of globalization, crime has also become transnational, but Indian laws have not been updated to reflect this.

Ø  When a merger, acquisition, or takeover is going to take place, the likelihood of Insider Trading increasing. In India, there is no adequate rule to prevent this type of behavior in such a situation, while in the United States, Rule 14e-3 of the Securities Exchange Rules, 56 1942, has traditionally been made for such a situation.

Ø  As in other circumstances, investors can seek civil action to preserve their rights, as specified by Section 26 of the SEBI Act, 1992, which states that no court can take cognizance… However, if we look at the situation in the United States, there are private-sector remedies available, which can be found in Securities Exchange Rules 10b-5 and 14e-3, as well as Section 16-b and Section 20-a of the Securities Exchange Act.

Ø  The continuous adoption and modification of the present law is the need of the hour

Conclusion

Despite the positive developments brought about by the amendment, SEBI has not been able to fully use them.The continuous adoption and modification of the present law is the need of the hour as the current Insider trading regulation of India 2015 doesn’t cover everything. SEBI may learn a thing or two from its counterpart SEC. the USA laws on insider trading provides that an individual who provides with any kind of information which helps them to discover the insider trading scam will be rewarded which is 10% of the amount of money discovered. India is a step or two behind USA and UK when it comes to technological advancement, which is another reason that Indian Laws cannot be implemented properly. Another aspect can be that the law of the United States of America contains a number of liability clauses that are absent from Indian law.     

India should take its precedent from USA and UK insider trading laws and make the laws on insider trading more stringent so as to restore the faith of investors and individuals.

 AUTHORED BY: MANSI JOSHI