Why the regulatory ambit of SEBI and its powers must be widened
It has already been observed how the different provisions of laws, judgements and statutes protrude as a hindrance to the effective functioning of SEBI. Thus, there exists a need to widen the ambit of SEBI powers to provide it with a regulatory overhaul.
First and foremost, the legislature needs to derive the category of the offence of civil nature under insider trading and define its crystal-clear distinction from the already existing criminal nature. Though categorising the offence as criminal and penalising it under section 15G of SEBI Act, 1992 has set the precedence of the legislature to consider insider trading as an act which is seriously detrimental to society, it is also one of the major reasons why there is a plethora of unsuccessful convictions due to absence of any direct evidence and the lack of SEBI’s powers to procure the same. While establishing a case of insider trading, the investigative authority majorly relies on shreds of circumstantial evidence, whose validity is now consistently being discarded by the courts. By terming insider trading as an offence of civil nature, the investigative authority can rely on circumstantial evidence and establish the offence through the principle of preponderance of probabilities. Inspiration can be taken from the USA where insider trading is both a civil as well as a criminal offence. This is the very reason why the successful conviction rates in the USA are very high.
Secondly, SEBI lacks effective measures and tools to deliver justice to the investors who are subjected to an unfair loss when the offence of insider trading takes place. Effective measures may include tools which may help SEBI in procuring direct and substantial evidence in order to conclusively determine the offence. Such a tool could be ‘wire-tapping’, which will give SEBI the power to intercept and record phone calls since telephonic conversations are one of the surest ways and one of the most substantial pieces of evidence to determine whether there has been communication of price-sensitive information or not. But SEBI has not been bestowed with this power since tapping telephonic conversations is considered a gross violation of the right to privacy under article 21 of the Constitution. Only the Central and the State Governments have the power to intercept phone calls under section 5(2) of the Telegraphic Act, 1885 and any investigative authority can file an application requesting the government to grant them the power to do so. But time and again SEBI’s requests have been turned down by the Center, citing the reason that such an action can only be allowed in the cases of threat to national security, terror financing and money laundering. Money laundering and insider trading both are white collar offences yet the government has created an unfair distinction between the two when it comes to dealing with them. This indicates that the Center fails to take into account the interest of the public, especially the innocent investors who suffer large-scale losses in our country due to rampant acts of insider trading and consequently the criticism befalls the SEBI, which has the power to only ask for call record, that is, circumstantial evidence. Therefore, it becomes incumbent upon SEBI to push for such changes in the regulations to deem the offence of insider trading along the lines of money laundering and fraud, as is the case in the USA.
Thirdly, multiple improvements are necessary for the surveillance mechanism of SEBI. The annual report for 2020-21 shows that SEBI has been able to successfully complete the investigation process in only 40 cases, a drop of 17 cases from the previous year which elucidates a drop in efficiency, reasons for which have been explained further. With the passage of time, SEBI has come to realise that the most difficult task is to prove the establishment of the routes of the UPSI and collect evidence for the same. For this very reason, the SEBI(PIT) Regulations, 2015 provide for an informant mechanism. In the USA, a similar mechanism which goes by the name of Dodd-Frank whistleblower provision, which states that individuals who provide the SEC or the Commodity Futures Trading Commission with “original information” about a violation of federal securities laws, which leads to successful enforcement action and a monetary recovery of more than $1 million, are entitled to 10% to 30% of the monetary recovery. The SEBI mechanism also provides for such a provision but is criticised due to its failure to provide higher monetary rewards to the informants. Also, the absence of an internal reporting requirement in the United States has been heavily criticised in recent years because it encourages informants to circumvent an institution’s internal compliance system in pursuit of SEC rewards. Despite the fact that the extent of the whistleblower’s participation in the employer’s internal compliance system is a deciding factor in determining the reward, the issue of exceeding internal compliance has been ignored by the whistleblowers. For the smooth operation of the Informant Mechanism, it is suggested that the employer’s internal compliance be combined with the mechanism introduced under the PIT Regulations, 2019. If both systems are combined, SEBI will be able to conduct a more thorough investigation. It should also be taken into consideration that not only SEBI lacks enough power and relevant tools to deliver justice, but also it has been an under-staffed authority since its inception. Currently, there are a total of 980 employees out of which 905 are officers. The total number of listed companies in India as of FY 2021 stands at 7462 which means that each officer has to deal with approximately 8 companies, which clearly indicates the overburdened situation of SEBI.
And lastly, there is no provision of international assistance and collaboration that is granted to SEBI in order to deal with cases of insider trading which involve international securities. In the USA, the SEC’s top priority is to enforce Foreign Corrupt Practices Act and its collaborations and agreements have proved to be useful in order to curb the cases of insider trading.
The laws of insider trading, through holdings of appellate authorities and by SEBI orders themselves, are evolving arbitrarily, sometimes as a result of new scenarios and instances, but recurrently as a result of SEBI’s opposing viewpoints, as well as the appellate court. As a result, insider trading judgments, with the exception of ordinary and blatant infractions are still a question of luck. In a utopian world, a uniform approach would be adopted when dealing with cases having a similar factual matrix, however, the dystopian reality consists of every adjudicating officer, of any court, applying their own subjective analysis of the case and arriving at different conclusions. The inherent ambiguity in words and phrases such as ‘preponderance of probabilities’, ‘reasonable access to UPSI’, ‘burden of proof’ etc further adds to this conundrum. `
The threshold used to assess guilt in an accused person is one example of a necessary regulatory adjustment. The existing standard for “preponderance of probability,” which is used by SEBI has to be clarified and discussed extensively, as this leaves a lot of scope for subjectivity and has been repeatedly contradicted and even misinterpreted. As a result, each name which appears in the alert-based system now in use automatically becomes subject to irrational limitations on its operations and means of subsistence and is engulfed in this broad definition of “preponderance of possibilities.” Furthermore, it is critical to highlight that the noticee’s thinking or motivation should also be a criterion upon which charges of insider trading may be levelled.
The apex court must issue clarity regarding what degree of Preponderance of Probablities must be applied when dealing with matters of insider trading. There must also be a realisation that insistence on terming insider trading as an extremely serious offence does the board more harm than good. As has been discussed earlier, changing the nature of the offence to one of civil nature as well will increase the rate of conviction as strict standards of culpability would not be required to be adhered to. Holding more people liable for an offence termed less serious would enhance the trust of the investors more than convicting a lesser number of people for an offence termed more serious.
One of the simplest solutions for SEBI to increase its efficiency is to increase its manpower. By adding more officers, SEBI would lessen the burden on its employees and would result in better regulatory oversight of the listed companies.
Powers of SEBI must be expanded, more regulatory tools must be incorporated and even changing the very nature of the offence of insider trading is not a far-fetched idea as this might actually give more teeth to the regulators to effectively implement the laws. We must look at our contemporaries across the globe and understand where we are lacking in the sphere of both, insider trading laws and procedural mechanisms required for effective implementation of those laws.
(This post has been authored by Aditya Singh and Shubhendra Mishra, third-year law students from Dr. RMLNLU, Lucknow)