Mumbai: India’s stock market regulator on Tuesday constituted a 14-member panel, headed by N.K. Sodhi, retired chief justice of Karnataka high court and former presiding officer of the Securities Appellate Tribunal (SAT), for reviewing insider trading norms.
“…world over, the regulatory focus is shifting towards containing the rising menace of insider trading effectively. To ensure that the regulatory framework dealing with insider trading in India is further strengthened, Sebi (Securities and Exchange Board of India) seeks review of the extant insider trading regulatory regime in India,” a Sebi statement said, without specifying any timeline for the review.
Members of the committee include Mint journalist Mobis Philipose; Nirmal Jain, chairman and managing director, India Infoline Ltd; Motilal Oswal, chairman and managing director, Motilal Oswal Financial Services Ltd, Milind Barve, managing director of HDFC Asset Management Co. Ltd; and Rashesh Shah, chairman and chief executive, Edelweiss Group.
Insider trading, which predominantly involves unlawful trading in listed stocks through front running and making illegitimate gains based on the firm’s price-sensitive information, is currently regulated by Sebi through norms that are two decades old.
“Following the review in insider trading norms, Sebi will be able to deal with insider trading violations with greater ease. Sebi is also trying to get powers to get access to phone calls to track insider trading activities. To get such powers, the Act has to be amended through a Parliamentary approval,” said a government official with direct knowledge of the development. He declined to be named.
The creation of the panel follows a 9 November SAT ruling, which had set aside a Sebi order that penalized three persons for alleged front running—the first instance involving individuals. SAT questioned the efficacy of the law that deals with fraudulent market transactions.
Front running refers to the use of confidential information for buying or selling of securities ahead of a large order with an underlying objective of benefiting from the price move.
SAT had said that the existing regulations do not clearly define the term front running and even if a particular fraudulent transaction can be construed as front running, it applies only to market intermediaries, not individuals.
Securities market lawyers said that because the term is not defined clearly it makes it difficult for the regulator to book the guilty.
At present, the regulator is dealing with several large-scale insider trading cases, including the alleged insider trading by Reliance Industries Ltd (RIL) in shares of erstwhile Reliance Petroleum Ltd (RPL) in 2007.
The case relates to the merger of RPL with RIL and a short sale of shares in the former by entities related to the latter ahead of that amalgamation. A short sale involves selling borrowed shares with plans to buy them back later at a lower price. According to various reports on the case, the entities that short-sold RPL shares may have made profits in excess of Rs.500 crore. Recently, the case has been taken out of the scope of consent mechanism.
“The regulations in its current form is broad and capture a lot of legitimate conduct as well. For example, in certain cases, even when one has no access to insider information he or she has been charged with insider trading. There has to be rationalization,” said Sandeep Parekh, founder, Finsec Law Advisors.
Vyas Mohan contributed to this story.