Devil within – Insider Trading

Insider trading is truly the devil inside for any listed corporation. This devil has reared its ugly head, now and then, running firms, those around it and in most cases the devil himself, to the ground. The recent high profile case of Raj Rajaratnam and Rajat Gupta, white collared hi-flyers of the financial world in the US and now charged of insider trading is still fresh in the mind.

While other countries have tried to put in place checks and balances to keep a tab on any untoward movement of stocks, India seems to be lacking behind. Most investors and analysts assume that if any particular stock witnesses extreme movements on the upside or downside it’s due to information not yet in the public domain.

India introduced insider-trading rules and regulations in 1992. The Securities and Exchange Board of India (SEBI) has been making genuine efforts in detecting, investigating and bringing to book guilty parties involved in insider trading. But there is a lot more that needs to be done. SEBI has recently been allowed to go through phone records of investors it is investigating, giving the regulator a bit more teeth in probing insider trading. The government started allowing SEBI to access the phone-company records of calls made. SEBI is still not allowed to use wire taps which are used by governments of other countries to expose insider trading.

SEBI has also been using technological software to aggregate trades connected to related companies, individuals and mailing addresses. The regulator also uses Personal Account Numbers to track trades. But insider traders have managed to hoodwink the regulator by operating through bogus firms or using PAN numbers of friends, relatives or colleagues.

Though insider trading is difficult to prove SEBI has been making efforts to crack down on the practice. Investors, a large chunk of trading community, who are not privy to information either, lose money or the opportunity to make money due to insider trading. SEBI has done a laudable job in unearthing insider traders and has been a good law enforcer. While nobody has been jailed for insider trading till date, the market regulator has taken many cases to court. In India, insider trading is an economic offence, not a criminal one. Judicial process in the country can take a long time but SEBI has the authority to suspend accused from the market and to impose penalties upto Rs.25 crore or three times the gain made from insider trades.

There is still a lot more desired from policy makers, bureaucrats and regulators that needs and can be done to ensure interests of the minority investor are safe guarded and this evil of insider trading rooted out. It’s a collective effort and the law has to deal strictly with offenders creating fear amongst those who might think of indulging in such unethical practices in the future.