Sebi attempts to assert authority with new insider trading norms

Stock market regulator Securities and Exchange Board of India (Sebi) is making another effort to curb the menace of insider trading. On November 19, it unveiled new insider trading norms which inherently put the onus on the accused to prove that they are not in possession of unpublished price sensitive information. "Low rate of success in insider trading cases has seen Sebi coming out with stringent norms. In the past Sebi had all the information about the accused but failed to prove that the connected person had received information before trading," says Debanik Basu, analyst at Institutional Investors Advisory Services, an advisory firm dedicated to providing opinion, research and data on corporate governance issues.

Sebi has also debarred directors and senior management from trading in the derivative products of the company. "The new rules on insider trading aren't foolproof but the intention is clear - the watch dog is vigilant and one can't go unnoticed," says Basu.

The new rules may appear stringent but it is an attempt by Sebi to assert its authority. The earlier rules did not give it adequate powers. In contrast, the Securities and Exchange Commission (SEC) in the US has been effective in clamping down on insider trading. Even today, Sebi - unlike the SEC - does not have the power to tap the phone calls of suspected offenders which is a big handicap. For instance, the SEC was able to convict Raj Rajaratnam of the Galleon Group on insider trading charges on the basis of tapped phone calls.

A problem with the new rules on insider trading is that they could increase speculation in the market. Promoters and directors of a company will now have to disclose their future trading plans in advance and adhere to it. This is likely to enhance speculation as the market will know in advance the trading strategy of an insider. "Sebi is also learning from experience," says Rajesh Thakkar, Partner - Transaction Advisory Services at BDO India, an accounting, taxation and advisory firm.

The regulator has also widened the definition of an insider by including persons connected with a company on the basis of any contractual, fiduciary or employment relationship that allows them access to unpublished price-sensitive information. It is widely being seen as a step in the right direction.

Meanwhile, Sebi has reworked its delisting norms as well. Now, a company has to ensure that promoter shareholding must be at least 90 per cent after mopping up shares from the institutional shareholders and public with a caveat that at least 25 per cent of the public shareholders should submit their shares in the reverse book-building process. "The new delisting norms will result in a more efficient price-discovery mechanism," says Basu.