Sebi Makes Insider Trading Norms Crystal Clear; Convictions May Pick Up

Mumbai: The conviction rate in case of Insider Trading violations in the capital market may see remarkable jump in the near future as the move by the capital market regulator Securities and Exchange Board of India (Sebi) to tighten these norms and remove the ambiguities has made these Regulations more explicit compared to its earlier version.

Sebi at its board meeting held on Thursday last in Mumbai approved the Sebi  (Prohibition of Insider Trading) (Third Amendment) Regulations, 2019. Earlier, Sebi had issued a consultative paper seeking comments on the ‘Discussion Paper issued for these amendments and after considering public comments and  suggestions received, the Board approved these amendments.

In order to incentivise and encourage informants, Sebi has worked out a reward plans for them. Sebi said, informants would be suitably rewarded in case the Unpublished Price Sensitive Information (UPSI) by them provided leads to a  disgorgement of at least Rs 1 crore. The total amount of monetary reward shall be 10 per cent of the monies collected but shall not exceed Rs 1 crore. An interim reward not exceeding Rs 10 lacs may be given at the stage of issuance of the final order by the Sebi against the person directed to disgorge. The reward to the informants will be paid through Investor Protection and Education Fund (IEPF), Sebi said.

Mukul Shrivastava, Partner, Forensic & Integrity Services, EY said, “Typically, insider trading cases tend to be difficult to determine because of lack information, evidence or proof, leading to very low conviction rate. Sebi’s move on the reward and informant protection cell will incentivise reporting of suspected cases of insider trading by individuals, and would provide the regulator with actionable information to enforce action. This provision will see a higher number of complainants, and put significant pressure on the senior management as well as those handling UPSI to be clear on what constitutes insider trading, and that there cannot be any ambiguity or compromise on UPSI”.

The regulator said, it will set up an independent  office separate from the investigation and inspection  wings to handle information received in such cases. This will be named as Office of Informant Protection (OIP). This will exclusively handle cases relating to receipt  and registration of the Voluntary Information Disclosure Form (VIDF) and serve as a medium of exchange between the informant/legal representative and Sebi.

While defining an informant Sebi said, An  informant means a person voluntarily submitting  a form detailing credible, complete and original information  relating to an act of insider trading. 

The regulator said, the informant would be mandated to disclose the source of original information and to provide an undertaking that such information was  not sourced from any person employed with Sebi or any related regulator.

The Regulator said, the confidentiality regarding the identity of the informant and information provided would be protected through the OIP and maintained throughout as well as during any proceeding initiated by Sebi except where the evidence of the informant is required during such proceedings. A hotline would be maintained by the OIP to guide persons to file information  as per the regulations but not to register any complaint or information. 

Sebi said the information provided by the Informant provided for the purpose of  law- enforcement is exempted from disclosure under the provisions of Right to Information Act, 2005. Accordingly, the original information provided by the informant shall be exempted from disclosure.

The informant will get protection against victimization, Sebi said. Market participants dealing with UPSI would  be required to incorporate in their Code of Conduct, suitable provisions to ensure that no employee who  files a VIDF is discharged, terminated, demoted, suspended, threatened, harassed, or discriminated against, it added.

In case the OIP determines that the information   submitted is frivolous or vexatious, SEBI   may initiate appropriate action against the informant under the securities laws and any other applicable law. While bringing an action  against an informant, Sebi may consider the cooperation rendered in determining any enforcement action or settlement application while granting of reward to such informant, the regulator said.

While an insider may be prosecuted, the company itself may also be prosecuted for failing to have a robust framework as required by the regulation to minimize insider trading. Companies can also mitigate the impact by building and implementing an effective governance system, which will aim to discourage employees from indulging in insider trading practices and cultivate a culture of compliance within the organization., Shrivastava said.