The core of securities regulations is The core of securities regulations is the implementation of the purpose the implementation of the purpose that all investors should have equal that all investors should have equal

access to the rewards of participation access to the rewards of participation in securities transactions. in securities transactions.

Sandeep Parekh

Advocate, P.H. Parekh & Co.

Visiting Faculty, IIM - Ahmedabad

Insider Trading – Insider Trading – Making the market a Making the market a

regulatorregulator

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Favouritism and GreedFavouritism and Greed

• 2020thth Century US Century US– 1929 to 19331929 to 1933– Ivan BoeskyIvan Boesky

• 2121stst Century India Century India– DisillusionmentDisillusionment

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Investor disillusionmentInvestor disillusionment

• 49% of the share owners had entered the market for the first time before the end of 1990

• 44% entered during 1991-94

• 6.3% during 1995-96

• 0.8% since 1997

Source: Society for Capital Market Research and Development survey.

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Prohibition in IndiaProhibition in India

• No insider shall –No insider shall –

– Deal or CommunicateDeal or Communicate

– While in possession of any material While in possession of any material unpublished price sensitive unpublished price sensitive informationinformation

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US ProhibitionUS Prohibition

• Species of Fraud.Species of Fraud.– Rule 10b-5Rule 10b-5

• Three theories of insider Three theories of insider tradingtrading– ClassicalClassical– MisappropriationMisappropriation– PossessionPossession

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Difference between US and Difference between US and Indian lawIndian law

• USUS– Insider trading is not definedInsider trading is not defined– Predicated on fraudPredicated on fraud

• IndiaIndia

–Statutory definitionStatutory definition

–Very widely wordedVery widely worded

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Control of Insider Control of Insider TradingTrading

• Statutory prohibitionsStatutory prohibitions– Enforcement by regulatorEnforcement by regulator– Enforcement by SROsEnforcement by SROs

• Encouragement of corporate Encouragement of corporate governancegovernance

• Private remediesPrivate remedies

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Enforcement by Enforcement by regulatorregulator

• SEC investigated 590 cases in 2001-SEC investigated 590 cases in 2001-20022002– Of which 59 were for insider tradingOf which 59 were for insider trading

• SEBI conducted 111 enforcement SEBI conducted 111 enforcement actionsactions– Of which 16 were for insider tradingOf which 16 were for insider trading– 6 cases were completed6 cases were completed– 2 were referred for prosecution2 were referred for prosecution

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Investigations by SEBIInvestigations by SEBI

Source: SEBI Annual Report

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Limitations of SEBI actionsLimitations of SEBI actions• Has limited resourcesHas limited resources

• Cannot investigate all wrongdoingsCannot investigate all wrongdoings

• Has limited informationHas limited information

• As part of government must follow As part of government must follow due processdue process

What is the answer What is the answer to the problem of to the problem of

limited limited enforcement?enforcement?

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Importance of self Importance of self regulationregulation

• Need to introduce prophylactic Need to introduce prophylactic measures.measures.

• Company signals to the market Company signals to the market that effective self regulation is in that effective self regulation is in placeplace

• Means of creating shareholder Means of creating shareholder valuevalue

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Bounties systemBounties system

• S. 21A of the Securities Exchange S. 21A of the Securities Exchange Act.Act.

• Make it profitable to disclose Make it profitable to disclose wrongdoingwrongdoing

• Protect whistle-blowers rightsProtect whistle-blowers rights

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Short swing ruleShort swing rule

• Restrain short swing profitsRestrain short swing profits– Absolute liabilityAbsolute liability

– Designated persons incl 10% Designated persons incl 10% holdersholders

– Round trip trade within 6 Round trip trade within 6 monthsmonths

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Ousted InfoSpace Founder Ordered To Ousted InfoSpace Founder Ordered To Repay $247M To InfoSpaceRepay $247M To InfoSpace

• SEATTLE (AP)--InfoSpace (INSP) founder SEATTLE (AP)--InfoSpace (INSP) founder Naveen Jain was ordered Friday to repay $247 Naveen Jain was ordered Friday to repay $247 million to the Bellevue-based Internet company million to the Bellevue-based Internet company for violating securities laws on insider trading.for violating securities laws on insider trading.

• The award is believed to be one of the largest The award is believed to be one of the largest ever ordered under the Securities and ever ordered under the Securities and Exchange Act's rule against so-called "short-Exchange Act's rule against so-called "short-swing" trading, in which company insiders swing" trading, in which company insiders trade shares within a six-month period of trade shares within a six-month period of buying or selling them.buying or selling them.

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Private litigationPrivate litigation

• Amend law to diffuse the power to Amend law to diffuse the power to shareholdersshareholders

• Allow specified damagesAllow specified damages

• Allow other remedies expresslyAllow other remedies expressly– E.g. disenfranchisement of voting rightsE.g. disenfranchisement of voting rights

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ConclusionConclusion

• Inequities should not be shrugged off as Inequities should not be shrugged off as inevitable.inevitable.

• More power should be delegatedMore power should be delegated

• SEBI can encourage bySEBI can encourage by– Taking part in shareholder litigationTaking part in shareholder litigation– Help amend the law to give more powers Help amend the law to give more powers

to shareholdersto shareholders

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ConclusionConclusion

• Encourage self governanceEncourage self governance

• Introduce Bounties systemIntroduce Bounties system

• Short swing ruleShort swing rule

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P. H. Parekh & P. H. Parekh & Co.Co.

• Working paper of IIM-AhmedabadWorking paper of IIM-Ahmedabad– Insider Trading and Corporate Insider Trading and Corporate

GovernanceGovernance

• Newsletter on Securities RegulationsNewsletter on Securities Regulations

• Comments:Comments:

sandeep.parekh@phparekh.comsandeep.parekh@phparekh.com