Insider trading and role of SEBI

Abstract

Prevention of insider trading is considered as one of the important mandates of stock market regulators all over the world. Some people argue that insider trading actually increases market efficiency by bringing more information to the market. However, it is a violation of the fiduciary duty that management owes to the shareholders. Also, money is made by information asymmetry at the cost of normal of shareholders. This reduces the trust in the market and hence may hamper the investment climate of the country. Thus, it is important to prohibit insider trading. In India, the legislation was mainly developed when SEBI was set up in 1992 after the liberalization of the economy on 1991. The initial legislation has since then been modified to plug loopholes to cover a wider variety of people having inside information. Also, new challenges like increased amount of trading in sophisticated instruments like derivatives. The law also mandates organisations to follow preventive practices like creating a compliance mechanism for legal insider trading etc. Some of the cases like HLL vs. SEBI and Rakesh Agarwal vs. SEBI exhibit some of the loopholes in the legislations are still not rectified. The US legislation on insider trading is the oldest in this regard. It is very liberal in terms of interpretation. Thus the scope of the law has changed along the years as and when the understanding of the courts in this regard developed. In contrast the European directive is fairly simple and straightforward, though limits the scope of interpretation. The US also provides better investigative powers and supports to the SEC which results in better enforcement regime. Recently, there has also been a rising trend in the direction of increased inter country co operation to tackle the challenges posed by globalisation. The takeaways for Indian regulators form the international experience is to demand more investigative powers, streamline the enforcement mechanism (like eliminating involvement of multiple departments of SEBI), invest in algorithmic surveillance mechanisms etc. in addition to this, the law must be changed as and when required to tackle new challenges that are emerging.