Cleaning act

Insider trading generally occurs when a security is bought or sold while in possession of material, non-public information. It has been the focus of securities regulators worldwide and rightly so. In line with this global trend, market regulator SEBI recently introduced new insider trading regulations, reviewing the SEBI (Prohibition of Insider Trading) Regulations, 1992. The new rules have introduced a slew of changes based on the recommendations of the Justice Sodhi Committee.

Under the 1992 regulations, it was always debatable whether mere communication of unpublished price-sensitive information (UPSI) was banned or not. This issue remained long pending until SEBI clarified that mere communication without trade by someone on that was not punishable. The new regulations, however, prohibit mere communication or allowing access to UPSI, delinking it with trading by someone.

Though wide in its sweep, this is a welcome change that would instil responsibility in business houses to deal with sensitive information only on a need-to-know basis. Even the US does not have such a strict legal standard.

In the famous case of Rajat Gupta, SEC had to allege in its complaint in the New York District Court that the former McKinsey & Co global head illegally tipped hedge fund manager Raj Rajaratnam while serving on the boards of Goldman Sachs and Procter & Gamble, and on the basis of such material non-public information that Gupta provided to Rajaratnam, the Galleon Group generated illicit profits

Under the recently amended section 15G(ii) of the SEBI Act, the minimum penalty for mere communication would also be ₹10 lakh, which may seem particularly harsh. Proving communication of inside information when there is no trade may also be difficult.

The necessity of due diligence has been explicitly acknowledged by the new regulations and they provide for the need for communicating or procuring price sensitive information in genuine business transactions such as takeovers, mergers, acquisitions, private equity investments, etc with some safeguards. Hitherto, the law was silent on this issue and lawyers used to advise companies that such communication would be considered to be in the ‘ordinary course of business’.

Since the concept of insider trading was also included in the new Companies Act, there are several issues arising from SEBI’s new regulations. The Companies Act has borrowed the definition of ‘insider trading and ‘unpublished price sensitive information’ from the old 1992 regulations. The definition of insider trading under the new SEBI regulations is wider than the definition under the new Companies Act.

Therefore, it is possible that someone could be in violation of the SEBI norms, but not the Companies Act. Equally, someone could be in violation of both laws leading to double jeopardy. Moreover, the maximum term of imprisonment provided under the Companies Act for insider trading in five years, while under the SEBI Act, it is 10 years.

Since SEBI has been given the power to enforce the provisions of insider trading under the Companies Act for listed companies, it is possible that SEBI itself would have to decide under which law it prosecutes the insider. Else, we will have to wait and watch if the Narendra Modi government would include this aspect in the pending Companies Amendment Bill and make ‘Clean Capital Markets’ too, in clean India.

The writer is a former legal officer, SEBI. She assisted the Core Drafting Group of the Justice Sodhi Committee. The views are personal