India struggles to curb rigging of stock markets
By INDRAJIT BASU in KOLKATA
As global focus turns to insider trading and China and the United States turn up the heat on this white collar crime, India is still ﬂoundering to control the menace dogging its stock markets for decades.
Last year, in a clampdown that rattled the global ﬁnancial sector, US stock market regulator Securities and Exchange Commission (SEC) charged former director of investment bank Goldman Sachs Rajat Gupta with conspiracy and fraud. Gupta was the highest-ranking executive ever charged with insider trading.
The same year also saw Gupta’s friend and co-founder of hedge fund Galleon Group Raj Rajaratnam sent to a federal prison for 11 years for insider trading, the longest sentence ever handed down for the crime.
In China, the country’s potentially biggest-ever case of stock market manipulation was exposed late last year when China Securities Regulatory Commission investigations found investment ﬁrm Guangdong Zhonghengxin orchestrating “pumpand-dump” schemes related to 552 different stocks and amassing an illegal proﬁt of $67 million.
If convicted, it will be the second formal punishment in China for stock market manipulation. The ﬁrst was in August 2011 when former stock analyst Wang Jianzhong was sentenced to seven years in prison on similar charges.
Such high-proﬁ le clampdowns have renewed concerns about the extent of insider trading in India. Although Indian stock markets have matured in recent years, they are still rife with
fraud ranging from insider trading to falsiﬁed ﬁnancial reporting.
Though the subcontinent strengthened insider trading laws and its stock market regulator, the
Securities and Exchange Board of India (SEBI), stepped up surveillance, experts say ef orts to curb the malaise have not been effective.
SEBI chief Upendra Kumar Sinha attributes continuing insider trading partly to ignorance and wrong advice. “Some of the good corporates, without realizing that this is something that is not right or on the wrong side of law, have been indulging in this because somebody has advised them that this is all right…,” Sinha told the Economic Times daily.
However, the Indian official warns that SEBI is watching the markets very seriously and will come down hard on insider traders. But the warning fails to assure experts that SEBI’s bite is worse than its bark.
“Insider trading exists (in India) though it is difficult to catch those who (actually) do it,” says D. R. Dogra, managing director of Indian rating agency Credit Analysis & Research Ltd.“While we do have laws to effectively dissuade such trading, the major issue is identifying such transactions and carrying out the process to its logical end. In India, that appears to be more of an exception than the rule.”“(While) in terms of regulations India is at par with any market, like the US whose laws are considered to be benchmarks, in implementation it is still way behind,” adds Mahavir Lunawat, a senior manager of tax and regulatory services at PricewaterhouseCoopers.
Satvik Varma, founder and managing partner at New Delhi’s Independent Law Chambers, Advocates & Corporate Counsel, echoes him, saying, “Proving insider trading is the biggest challenge in India.”
India’s track record of nabbing insider traders has been disappointing despite the fact that Indian securities law prohibited insider trading way back in 1992 after SEBI was born. But since then, the regulator has been able to prosecute just six high-profile insider trading violators, though over the last three years SEBI reportedly identiﬁed about 25 instances of insider trading.
Lunawat blames this on lack of resources. “The SEC has a far larger budget for checking insider trading practices,” he says.“And even where prosecution is initiated, the matter is usually settled through consent orders or on the payment of paltry penalties,” adds Varma.
Consent orders are out-of-court settlements that regulators globally use for market-related offences to rap of lenders where clear evidence to support prosecution is hard to obtain. According to SEBI guidelines, “Consent orders may be passed depending on the nature of the violation, by either admission of guilt or without admitting, or denying guilt.”
“The amount of penalty that an accused has to pay is paltry compared to what other developed markets impose and thus hardly poses a deterrent,” says Lunawat. The problem with settlements, according to Varma, is not just that the guilty get away with paying little. Consent orders also restrict the development of law and don’t shed light on the extent of the violation that alerted the regulator and led to an inquiry.
Clearly then, India has to ramp up both resources and the system. In a country that last year saw unprecedented public protests against corruption, including long fasts or hunger strikes, Varma advocates raising moral consciousness. “We also need to awaken the moral consciousness of people,” he says. “India needs a public outcry to (indicate) that it has zero tolerance for all kinds of offences, especially economic ones that increase economic disparity.