Informant Mechanism: A long haul

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Author, Date of the post, WMO Conflict Insight, Title of the post,  ISSN: 2628-6998, 

The Securities and Exchange Board of India (“SEBI”) on 17 September 2019, notified a number of amendments to the existing insider trading regime the SEBI (Prohibition of Insider Trading) (Third Amendment) Regulations, 2019 (the “Amendment”)1 which shall come into force on December 26, 2019.

The entire purpose of bringing in this amendment is to put up more hurdles for insider trading in India. It has emphasised on enabling, encouraging and allowing individuals come forward and inform SEBI about any violations, encroachments and infringements to insider trading laws that have happened in past, that may happen in future, and that are happening at present. SEBI plays a massive role in curbing the violation of insider trading laws in India. It not only lays down definitive punitive measures for people already involved in insider trading, but the new notifications also extend the responsibility to assist with the curbing of such illegal acts to general public. This is how the SEBI decides to involve general public in contributing to clean trade. In addition to that, anyone who provides SEBI with factual and effective information regarding insider trading laws violation will be rewarded for their contribution.

Key Takeaways

In its working paper, published on June 10 2019, SEBI unveiled a new horizon of insider trading informant mechanism, where it has been notified to safeguard and shield the informants, and in addition to that, reward them with monetary sums if the information found is effective and credible, which soars up to Rs.1 cr.

In addition to that, in its recent amendments of September 2019, SEBI brought into light new definitions, such as that of an informant, who is primarily an individual who voluntary submits a Voluntary Information Disclosure Form to the Board, in a manner that is laid down by the regulations. This includes details about incidents that have already occurred, are about to occur and are occurring in real time.

To ensure maximum safety of the informant, one could allow a legal representative, who in turn can file in the aforementioned application on behalf of the informant. In addition to that, under Regulation 11 of the SEBI (Settlement Proceedings) Regulations, 2018, allowed for the constitution of a High Powered Advisory Committee called Informant Incentive Committee as specified under the regulations.

The silver lining of the regulations of 2019 are the parts that variedly uphold the informants’ privacy. There are various provisions which dictate that the information about the informant shouldn’t be let out. This expresses the confidentiality aspect. The informant is duly protected against threats, harassments, termination and discrimination. Moreover, there is safeguard against any informant providing false information to the Board. In such case, the board can rightly take action against the informant.

A long awaited amendment

Drawing its heaviest inspirations from the Market Regulations in the USA, it was time and again hinted to the Indian legislators that stringent barricades had to be put up in order to curb insider trading from its roots. However, one may feel that the regulations remain silent on the details of punitive actions to be taken against fraudulent complainants. Although the existing laws already address the measures to be taken up against the companies engaging in insider trading, the regulations and limited to only defining fraudulent and irrelevant information on insider trading laws violation. The regulations should be more specific on what measures should be taken up if there have been false complaints.

The most farsighted and impressive part of the said regulations are the parts that have dealt with confidentiality. In the present generation of rising crimes against individuals and incessant encroachment over one’s right to privacy, it was duly necessary to address and uphold one’s right to privacy. This just proves that the idea and principle of an individual’s privacy did not end with the Aadhar judgment. In addition to this, the informant’s privacy is protected against the Right to Information Act as well, which plugs a major loophole that could have been misused with convenience.

SEBI notified for new bodies to be set up in order to realize these regulations. In addition to that, the informant will be duly rewarded with monetary appreciation. This is a very novel approach to Indian Capital Market Regulations as monetary rewards weren’t customary in prior times. This will not only allow for more and more people to come up and report insider trading incidents, but will also inspire more companies to be cautious of how they function, since so many stringent barricades are being put up every day with new regulations.

Whether these regulations will work as expected or not, only time can tell. In addition to that, these regulations have been put up as a contribution to fair and clean trading in the capital market. Only time and experience can bring out more hidden loopholes in these regulations. The present informant mechanism was a much needed regulation.

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