Mumbai: Moneylife Foundation Study Shows Insider Trading Law is Evolving in a Haphazard Manner. It has been about 30 years since the Securities and Exchange Board of India (SEBI) made insider trading illegal after it got statutory status in 1992. However, “A Review of Insider Trading Cases” by Moneylife Foundation shows that insider trading law, through precedents set by SEBI orders and other judgements, is evolving in a haphazard manner — sometimes due to new situations and cases, but often due to contrary positions taken by SEBI, as well as the appellate tribunal. Consequently, except in standard and brazen violations, insider trading verdicts remain a matter of chance.
India has come a long way in developing insider trading regulations which have been strengthened through amendments over the years. The report focuses on the transition of jurisprudence on insider trading from the SEBI PIT regulations, 1992 to the SEBI PIT regulations, 2015, and the connected evolution of SEBI’s perspective and approach.
The Review says, “Ideally, decision-making authorities ought to follow a uniform approach while deciding similarly placed cases. Instead, the trend witnessed from SEBI orders is that its Whole Time Members (WTM) end up analysing cases decided by other WTMs to find a way to differentiate or draw a distinction with the one they are hearing. This only causes confusion among investors. When these cases go into appeal, the appellate tribunal is burdened with the responsibility of adjudicating whether the distinction made by one WTM is justified, by that time, another WTM would have taken yet another novel approach or stand.”
There have been many arguments about the legality or illegality of insider trading. But most scholars and investors agree that insider trading operates against the integrity of markets. It gives an unfair advantage to people who have access to such information, allowing them to make an unfair profit or avoid a loss by acting on such information. Rampant insider trading could kill investor confidence and need to be checked through regulatory action and adequate supervision.
According to the study, concepts like the burden of proof and preponderance of probability are key factors in insider trading cases, and unless there is clarity within SEBI, such varied and different interpretations and decisions are bound to follow. “While it may be difficult to have a cut and dried formula here, there must at least be a rational and uniform approach to avoid what could be called ‘differential treatment’ in some cases.”
The Review was prepared for Moneylife Foundation under the guidance of Adv Ravichandra Hegde, co-founder partner with Parinam Law Associates and his team with initial research by law school interns from National Law University, Odisha.
Here are the main findings from the Analysis and Recommendations
Based on a holistic evaluation of the prevailing laws along with observations made by judicial fora, the study has noted varied reasoning and interpretation by the decision-making authorities. It is important to watch how SEBI deals with these in an evolving situation.
The study shows that imputing criminal liability on insiders often leads to a testing situation, as mens rea (motive or guilty mind) is not essential to prove an insider trading charge under the SEBI regulations.
While there are certain reasoned caveats contained in the Justice Sodhi Committee recommendations while imputing liability, SEBI seems to have chosen to disregard the same and adopted an absolute liability approach.
The review finds that this approach is not sacrosanct and only makes it impossible to have a clearly laid down law. Evaluation of the likely “mindset” of an insider was one of the most important aspects deliberated and discussed in the Sodhi Committee Report. This would have balanced the see-saw of allegation vs finding. Instead, SEBI’s approach was to adopt a principle of “absolute liability” in deciding if there is insider trading. Although the approach to this is clear in the legal provisions, SEBI, in adjudicating cases had given it the widest possible interpretation.
The report emphasises on the need to incorporate ‘motive’ or ‘mens rea’ as a factor while determining guilt in cases where the allegation is of insider trading. While the SC has largely contributed to the correct interpretation of the law vide judgements such as Udyant Malhotra (supra) and Balram Garg (supra), appropriate amendments to the applicable law would enable the regulator itself to exonerate bona fide noticees when it is released from the clasps of the strict law requiring application of principles such as of ‘absolute liability’ as set out in the case of MC Mehta vs. Union of India. This would also further reduce the burden on the appellate courts to rectify the interpretation each time to meet the ends of justice.
The study concludes that decision-making authorities need to follow a uniform approach while deciding on similarly placed cases.
You can also access the entire report from this link
https://www.mlfoundation.in/memorandum/a-review-of-indian-insider-trading-cases/169.html
