If the Securities and Exchange Board of India's draft guidelines are cleared in its current form, people who receive stock tips from company insiders could be penalised. However, market participants say, it will be tough to implement such regulations.
The market watchdog had on Tuesday put out a consultative paper on amendments to Sebi (Prohibition of Insider Trading) Regulations, 1992. The draft said that "the language of the regulation may be improved by way of clarification to specifically penalise a tippee of information from trading."
"It is very difficult to nab insider traders. Everyone knows informally that all tips originate from the management. But it remains to be seen how these regulations, once final, will be enforced," said S P Tulsian, investment advisor.
It is an open secret that investment bankers themselves "leak out" in the grey market the premium at which shares will be traded when companies are raising money through initial public offers.
This they do so that demand for the company's shares goes up. "At the very least, the management is not unaware of whatever rigging happens in a company's stock," said a broker.
Sebi's draft regulations also propose to bring the derivatives segment within its purview. Derivative trading was not available in India when the insider trading rules were drafted in 1992.
Earlier, anyone who got a tip could act on it, using derivatives, by buying or selling the shares without physically trading in those stocks. Similarly, one can easily create synthetic securities with the same (or higher) economic impact as an equity share of a company often with a high leverage.
To solve this problem, Sebi proposes to re-classify shares into "securities" for the purpose of disclosure, thereby eliminating the problem because securities are defined to include equity, quasi-equity, derivatives and any combination of the three.
Sebi proposes to exclude pure debt instruments from disclosure regulations, while they would continue to be included in the substantive violation provisions of Regulations 3 and 4.
"Thus an insider holding debt, and while aware of a problem in the solvency/rating of the company, sells such debt securities would continue to be liable under the prohibition," said the paper.
"Once final, these regulations will act as a deterrent for anybody who would want to take advantage of the system. However, Sebi should prepare a watertight case before it sends a show-cause notice to the people concerned," said a corporate lawyer with a top Mumbai-based firm. While no convictions have happened so far, there have been several close cases, he pointed out.
In India, one can go to jail for 10 years for violating simple or process oriented provisions, but Sebi now proposes to change that by "rationalising the proportionality attached to violations by restricting them to monetary penalties."
The paper also proposes to make insider trading regulations more reasonable and effective. Measures include harmonising provisions with takeover regulations so that there is no increased burden on an insider in terms of disclosure.
The regulator also proposes to exempt "harmless" acts such as issue of bonus/rights issues, which are not price sensitive, from the purview of insider trading rules.
In January, Sebi had put out a paper proposing that an insider in a company should surrender profits made in any equity-based securities transactions of the company, if both the buy and sell side of the transaction are entered into within six months of the other.
Termed "short swing profits", the proposed guidelines would check insiders having greater access to price-sensitive company information.
In a statement to the Rajya Sabha on Wednesday, Finance Minister, P Chidambaram said, "During the last two years, Sebi has initiated actions in 39 cases for insider trading."
A recent instance of a company being fined for insider trading was Infosys, which was fined by the American regulator, Securities and Exchange Commission (SEC).
Chief Executive Officer (CEO), Kris Gopalakrishnan was fined for failing to notify the company the change in his shareholding, within one business day, after he inherited 12,800 equity shares from his mother on December 24, 2007.
In the US, insider trading is a serious offense that is dealt with through appropriate disclosure systems.
For instance: In 2001, Sam Waksal, CEO of ImClone Systems was sentenced to seven years and three months for breaking insider trading laws.
He had learnt from his brother, the chief operating officer of the company, that the Food and Drug Administration would reject an application for the company's leading drug and acted upon it.
