Whether or not Rajat Gupta accused of insider trading in theUnited States, derived any financial benefit from doing so is a matter that will need to be proved at his trial in theUS. But the key point here is that Gupta is being brought to trial. This has significant implications for Indian regulatory approaches to insider trading.
India also prohibits trading on inside information. There are strong laws and penalties for breach. Anyone convicted of insider trading can be asked to transfer proceeds equivalent to the cost price or market price of securities, whichever is higher. Plus, the SEBI Act provides for penalties as high as Rs 25 crore or three times the amount of profits made out of insider trading, whichever is higher. The Act also prescribes that insider trading is punishable with a prison term of up to 10 years.
Have the stringencies of the law deterred insider trading activities in India? A review of the major cases on the subject reveal a very grim picture, both in terms of Sebi’s willingness to prosecute defaulters and initiate criminal action against them.
Some of this is understandable since insider trading cases are difficult to prove. But even where prosecution is initiated, the matters are usually settled through consent orders or on the payment of paltry penalties. The problem with settlement without admission or denial of guilt is not just that the guilty get away with paying little. It’s also that such resolutions restrict the development of law on the subject and doesn’t shed light on the process by which the initial inquiry order was instituted. It’s fair to conclude that many of those prosecuted for insider trading do wield abundant political and financial backing. The way Indian regulator settles insider trading cases now makes putative insider traders very confident about low risks. That’s why despite SEBI installing market surveillance tools and introducing guidelines on dealing with conflicts of interest in the securities market, insider trading appears to be quite rampant. SEBI itself has been recently critical of the efficacy of consent orders as a deterrent.
Besides Sebi, the courts in India have consistently held that the fiduciary duties of a director are basically the same as those of other trustees. Directors are appointed by shareholders to act as their fiduciaries and manage the company on their behalf. They should not use the information in their possession, in their capacity as directors, to gain any advantage for themselves. It should be noted that all of these duties are legally enforceable and their breach places liability on erring directors.
The point therefore is that we need to raise moral consciousness. Sometime a public and full-blown prosecution, as distinct from a trial-by-media like that of Raj Rajaratnam or Gupta in theUS, helps achieve this. And let’s take note that culture plays a big role in all forms of governance. Let us therefore take advantage of the ongoing anti-corruption wave in the country to try to dispel all notions that Indian culture in any form encourages, promotes or protects those with money or powerful friends. We need our actions to communicate that India has zero tolerance for economic offences that further increases economic disparity. It is time that law enforcement authorities demonstrate by action that the law and rules apply to everyone regardless of whom they know and what they may have access to. People’s values can be changed either by instilling fear in them or by appealing to their sense of morality and ethics.
Even if some of what’s stated above sounds slightly utopian, let us adopt all means, to remind ourselves and tell the world, that even in India, crime doesn’t pay.
Satvik Varma is an advocate and corporate counsel based in New Delhi. He is qualified and admitted to practice both in India & New York.
FIRST PRINTED IN THE ECONOMIC TIMES ON 11 DECEMBER 2011.