The Ministry of Corporate Affairs and the Securities Exchange Board of India (SEBI) have lately redoubled their efforts to put in place a water-tight governance framework for listed firms. But recent episodes of suspected insider trading through WhatsApp groups, in which analysts shared prescient tip-offs about upcoming results for top listed companies, reveals that the framework remains porous. Initiating a probe into this episode, SEBI has interrogated analysts, conducted raids on stock brokers and deployed search-and-seizure powers to confiscate laptops and mobile phones. While it is good to see SEBI taking a serious view of leaks and initiating suo motu action, bringing the perpetrators to book through such old-fashioned methods may be an uphill task.
Globally, gathering evidence in insider trading cases has never been easy for regulators, even where the medium used is a telephone and insiders are caught on tape. In this case, the leaks were already a few months old, the WhatsApp messages were encrypted and were in wide circulation, before a Reuters investigation brought them to light. This may make it rather difficult for SEBI to pin down the original company insiders responsible for these leaks. Given the difficulty of tracking down the originator of any social media content post facto , violations of this nature are today best curbed at source. In India, this means breaking the cosy nexus between managements of listed companies and analysts who track them. Though India has one of the strictest statutes on insider trading in the world (mere sharing of unpublished information is illegal and anyone possessing it is an ‘insider’), listed companies are quite prone to selective disclosure. During bull markets, companies looking to drum up support for their stock often oblige favoured institutional investors with special management meetings. It is also common practice for companies to host exclusive analyst conference calls immediately after key actions, where the management shares a detailed break-down of numbers and fields one-to-one questions. Going strictly by insider trading laws, the transcripts of all such interactions should be placed immediately in the public domain. But in practice, companies inordinately delay or even skip the filing, resulting in significant information asymmetry between the selected analysts and other public investors.
Given the rapidity with which information can be disseminated through new media, the speed with which the regulator can act is of paramount importance too. Here, there’s a crying need for pro-active surveillance by the stock exchanges to detect and immediately escalate suspected cases of insider trading, to the regulator. In the present case, it is disappointing to see that it was a news report and not a complaint originating from the stock exchanges that alerted SEBI to these leaks. Given that India’s premier stock exchanges are both fully electronic and boast state-of-the-art trading infrastructure, it is about time that they deployed their tech and data-mining capabilities to lighten SEBI’s regulatory load.