Why it will be difficult to prove Kochhar's 'guilt'

Regulators and investigators around the world have access to sophisticated tools making it possible to detect white collar crimes. This is where Indian investigators and regulators have been found wanting, says Sudipto Dey.

The Central Bureau of Investigation and the Enforcement Directorate (ED), the agencies investigating former ICICI Bank managing director and CEO Chanda Kochhar and her husband Deepak Kochhar and their business dealings with the promoters of the Videocoon group, have pressed charges centering on a quid pro quo relationship between them.

The onus will now be on the investigators -- and the regulators -- to prove that the charges stick in the court of law.

That, say forensic experts, would require investigators to establish that the quid pro quo relationship led to a trail of direct or indirect financial benefits for the parties involved.

This becomes all the more challenging to establish in the absence of a trail of financial benefits, putting to test the tenacity and capacity of the investigators, they add.

Legally speaking, there is a fine distinction between insider trading and a quid pro quo relationship.

According to Arpinder Singh, who heads forensic and integrity services at EY, insider trading generally refers to a person taking unfair advantage of asymmetrical business information for unfair gains.

In a quid pro quo situation, there are two parties where one is reimbursed for something of value, he adds.

Forensic experts such as Reshmi Khurana, head of business intelligence and investigations at Kroll, points out that both could be part of the same problem.

“When an insider uses non-public material information to trade on a stock (directly or via third parties who are acting on its behalf), it is assumed that he must have received some personal benefit in return (quid pro quo) which could be in the form of a kick back, benefit from a rising or falling stock price, or greater control over the entity,” she says.

Typically, insider trading is tougher to prove as there may be difficulty in establishing how a person came to possess that piece of information and establishing that the transactions have been executed based on that.

On the other hand, says EY’s Singh, “It may be easier to establish a sequence of events and prove that a quid pro quo relationship exists,” says Singh.

According to Samir Paranjpe, partner, Grant Thornton India, when the exchange of tips or confidential information is with a clear understanding of an extended benefit, pecuniary or otherwise, there lies a quid pro quo arrangement.

“Insider trading conceptually involves taking an unfair advantage of the access one has to confidential and unpublished information,” he adds.

Regulators and investigators around the world have access to sophisticated tools making it possible to detect insider trading proactively.

These include data analytics programs, surveillance mechanisms, whistle-blower hotlines that help identify insider trading and provide the evidence needed to establish the practice.

“That has proven to be a strong deterrent in developed markets. The implementation of the law and support from the police and other agencies is also critical for implementing it,” says Khurana.

Regulations in many more mature markets are evolved also in terms of specialist discipline and practices around insider trading.

“Whistle-blower mechanisms and other pro-active measures, like insider trading audits, implementation of corporate governance best practices, health check reviews and proactive certifications around compliances help in evolution of regulations in these markets,” says Kartik Radia, partner and head, business advisory services at BDO India.

That is where Indian investigators and regulators have been found wanting.

Insider trading cases have a low conviction rate largely because it is difficult to establish exchange of information.

“In many cases, regulators are increasingly moving to establish individual culpability so that management can be held accountable,” says Singh.

The typical legal challenges, says experts, are the long-drawn legal processes involved in proving the existence of real personal benefit, working within an individual’s rights on privacy and regulations around it.

Highlighting the limitations under which Indian investigators operate, Paranjpe points out that in the West, there have been several high-profile insider trading cases where convictions took place on the basis of evidence collected through wire taps/phone taps.

“That’s a route which is not formally available to Indian regulatory agencies,” he says.

In emerging economies like India, white collar crimes, such as insider trading and transactions on account of quid pro quo relationships, are still not given the kind of importance that they should, experts point out.

“Financial crimes, such as, insider trading need to be treated on par with other criminal activity,” says Khurana.

Accordingly, the regulatory framework as well as the compliance and detection mechanism at companies needs to evolve to meet this threat.

“Encouraging a strong and independent compliance function within organisations, responding with decisiveness and clarity when such issues are brought up or escalated within the organisation, should help tackle challenges related to these issues,” says Singh.

In Ms Kochher’s case, the onus is on the investigators to live up to the challenge.

Photograph: PTI Photo