Introduction and Meaning
Insider trading is an illegal practice where because of prior information which is confidential in nature and not disclosed to the public, the dealing in securities is done which causes substantial loss to the companies and its shares. This information is sensitive information about the shares and dealings of the company which leads to loss of share value and market price. It is a prohibited practice under the Companies Act, 2013 through Section 458 and gives power to SEBI to look into the matter. The SEBI (Prohibition of Insider Trading) Regulations, 2015 was brought to ensure that the ever-increasing cases of insider trading are dealt with adequately. For that purpose, the third amendment to it was introduced in September, 2019 which became effective from 26th December, 2019. Chapter-III A has been introduced through this amendment.
Through 2019 amendment, there have been made several amends to the provisions whereby people making the information available to SEBI related to the alleged happening in the company and its securities can be attended to.
First and foremost change is that they have defined as to who exactly is an informant under Regulation 7A (1) (b). Informant is basically the person who makes available the information to SEBI as to any kind of infringement of the insider trading in the company. This infringement might have already occurred or he believes that this might occurs. Thus, it accounts for both the instance that has occurred at the present and the one that might happen in the future. Also, this informant has to provide the information voluntarily. It implies that it should not happen through any other form like through any central agency or other authorities. The individual should make the information available on his own accord to the SEBI. SEBI will then, look into the matter and prosecute accordingly. He furnishes information to the Securities and Exchange Board of India through the way of Voluntary Information Disclosure Form which he can submit by himself or through his legal representative.
- Original Information
The regulations provide that the information to be submitted must be Original Information. This original information is also defined which highlights five points in relation to what might form part of such an information and would be considered by the SEBI. This Original Information which violate insider trading laws could be the one that comes through the research or analysis done by the person supplying such information; or from any other source, he acquired such information; or is not frivolous in nature or irrelevant; or does not constitute from any hearing or court proceedings or other forum; or is so specific and trustworthy in accordance to any investigation or inquiry or any other proceeding going on. It is necessary to note that only the original information supplied by the informant to the SEBI will be considered under the provision. But this regulation lacks in the way where it is exhaustive in nature and does not say whether any other circumstance through other ways can be considered for the furnishing of this information.
One of the important and significant changes brought through this amendment is that it provides for the confidentiality. The person who provides information related to insider trading is not necessarily required to disclose his identity. He cannot be compelled to reveal his identity or in cases even the information that is provided unless it becomes necessary for the evidence or procedural purpose. Moreover, this confidentiality is kept intact in the cases of disclosures required under Right to Information Act, 2005 under Section 8(1) clause (g) to (h). This is regarded as vital so that the person who is supplying the information does not face any kind of harassment or threats or any other discrimination of any form.
- Code of Conduct
The protection to the informant is given through the code of conduct of the company but now, he can also take the legal recourse where through this amendment, and the victimization of the informant by the employer can be penalized. The employer will be liable for prosecution in the matter or suspended or any other ways mentioned.
- Reward Introduced
The informant reward introduced is a way through SEBI sees that more of the insider trading cases will be reported at an earlier stage and can be curbed at the start. The informant will get the monetary reward for providing of information to SEBI for the illegal practice of insider trading conspiring or happening in the company. These two provisions of confidentiality and the reward make the individual to come forward with the original information. Along with that, the regulations also say that informant cannot be excused if he is involved in the matter or if he provides wrong information for malicious intention of getting reward. If such a situation arises, the penalty can be imposed on the informant for misleading the SEBI and thus, leading to the wasting of the time of SEBI. Therefore, by the provision under Original Information, itself, it provides that no frivolous or irrelevant should be supplied by the informant.
Problems and Solutions
The lacunas that exist through this regulation introduced are that it does not define what kind of penalty might exist for the frivolous or malicious cases filed against the company. It causes problem when the issue persists for a long time leading to the damage of reputation of the company or any employer or employee. The definition of informant does not clarify whether he should be a part of the company or not. It only mentions individual. The provision giving meaning Original Information stops at the five enlisted conditions and do not go any further than that.
The solution to this can exist by the way of giving a more inclusive definition for Original Information where the violation under securities laws is at an increase, it becomes all the more necessary. The informant’s definition should particularly define who might be an informant as an ex-employee or a competitor can enter this definition as well which might cause harm to the company itself. The specific provisions should be clearly stated that gives penalty in case of wrong information to the Board so that such kind of cases can be avoided and the focus can be put on the true cases.
In conclusion, insider trading not only affects the company concerned but also the economy as well. The shares of company falls by the sensitive information being provided to people who cause harm to the securities in the company and the people engaged as such. The position of securities in the country decline and the laws that govern them becomes redundant. Thus, it becomes essential to introduce laws that will help in catching insider trade before it even reaches a point to cause any kind loss to the securities through the system of exemplary norms and reward policies.
Author: Arushi Anand,
Vivekananda Institute of Professional Studies, 4th year