Truth about Indian insider trading law

Last Updated: Sun, Jun 24, 2012 19:50 hrs

Indian business icon Rajat Gupta has been convicted of insider trading in the United States of America. Being a role model for any Indian corporate career aspirant, the criminal conviction of the first Indian to head global consulting major McKinsey has drawn the expected comparison between the legal systems in his nation of origin and his chosen nation for doing business.

The lay perception in India is that the Indian legal system is sorely lacking and backward in insider trading law while the US is sophisticated in this department. Many Indian commentators will be quick to blame Indian laws for being inadequate. Others will clamour for even greater enforcement powers – the Securities Exchange Board of India (SEBI), under different chairmen, has consistently been lobbying for more powers to raid premises, seize records, and even to effect arrests. However, a dispassionate look at the factual position is warranted.

In reality, Indian law, and the attitude of SEBI and the judiciary towards insider trading is far more stringent than in the US – and in some instances, unjustifiably so. The excessive stringency leads to missing the woods for the trees, and therefore the perception that Indian laws are worse off has gathered steam. The consistent introduction of greater stringency to deal with the perception has increased the skewed nature of Indian law, and expectedly, has failed to address the issues that have led to the perception.

First, in India, we legislate for almost everything – therefore, we have specific language defining the specific types of conduct that would violate regulations prohibiting insider trading. Communicating unpublished price sensitive information is illegal in India. No further fact is required – whether the person who received it, traded on the basis of the tip received is irrelevant. Compare that with the US. The judge in the Gupta trial had to ask both sides to present to him their versions of the standard that a person communicating such information would have to fail, in order to be convicted. It was open to Gupta to show that the trades in securities that took place were not motivated by the information disclosed by him. The law in the US is judge-made. Our law is stipulated in black and white.

Second, SEBI is accused of not being strict in bringing regulatory action. However, when it does so, fighting it is an uphill task. Judicial attitude to insider trading is akin to judicial attitude to murder and rape. Gupta, on the other hand, may never see the insides of jail. The judge has scheduled, extraordinarily, the sentencing for four months later. An appeal court could stay the conviction before he gets sentenced, and it is likely the appeal court would decide that the jury was wrong in believing that the case against Gupta (applying the lighter US standard of default) was not proven beyond reasonable doubt.

Third, a substantial majority of insider trading cases in the US get settled. The SEC extracts the allegedly ill-gotten money and adds some more injury and life moves on. It is only those who protest too much that get penalised. In sharp contrast, SEBI has recently issued guidelines stating that it would ordinarily never settle any charge of insider trading.

Fourth, in India, SEBI can simply sit back and write an order under Sections 11 and 11B of the SEBI Act, stating that it is satisfied that regulations prohibiting insider trading have been violated. It can put a man out of the securities market, freeze almost his entire wealth, and render his economically crippled. The officer who passes such orders freely engages with the prosecuting team, and even strategizes with the lawyer purporting to represent the regulator in the quasi-judicial proceedings before him, without the presence of the accused. In short, the roles of the prosecutor and the judge are inextricably intertwined, with no serious check. Therefore, SEBI hardly needs to undergo the pain and effort of having to convince a criminal court to inflict statutory injury on a person.

On the other hand, the enforcement team in the US Securities Exchange Commission (SEC) would have to convince an administrative law judge who is segregated and removed from the enforcement team that such an intervention is warranted. Such a judge would have to conduct proceedings in a truly formal quasi-judicial manner.

In fact, Gupta insisted on his case being taken to the criminal justice system, where the case against him would have to be proven “beyond reasonable doubt”, rather than being tried before an administrative law judge for a civil penalty (where the standard of proof required is lower). He alleged discrimination against him for being singled out for civil proceedings by an SEC that was unsure of the strength of its case – the SEC, successful at this stage, was clearly a reluctant criminal prosecutor of Gupta.

Finally, the trial in the court of public opinion in India is by an uninformed news reporting system, hungry for sensational news. Greater technology has only led to amplification of an uninformed majority viewpoint rather than airing the views of the other side of the story. But that is not a story about law, it is about society.

(The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own.)  

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