Early last week, the Supreme Court of India (SC) issued a judgement that is likely to have significant bearing on how India prosecutes cases of insider trading. insider trading. Insider Trading Defined as the trading of a company’s stock based on material, non-public information possessed by a company’s insiders—or those connected with them— insider trading gives an unfair advantage to infringers and violates the fiduciary duties they have towards the company.
The decision pertained to a four-year-old incident of alleged insider trading in the stock of jewellery firm PC Jeweller. The perpetrators, it was alleged, were close relatives of the promoters of the firm. While the Securities and Exchange Board of India (Sebi)—India’s market regulator—determined that five entities were guilty of insider trading in the case, the SC overturned Sebi’s decision.
Between the years ended March 2019 and March 2021, insider trading cases comprised more than 30% of all investigations taken up by Sebi, according to the regulator’s annual reports. In the early 2010s, the yearly average of insider trading cases taken up by Sebi was close to 15. Since then, Sebi has made investments to enhance its capacity to police insider trading. Having bolstered its data-based alert systems and
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, the regulator has been prosecuting upwards of 40 such cases annually in recent years.
Despite this, say industry experts and regulatory officials The Ken spoke with, insider trading remains an underdiagnosed malady on India’s bourses. And as the SC judgement proved, even those cases that appear on Sebi’s radar aren’t necessarily watertight.
The main bone of contention in the PC Jeweller case was that Sebi couldn’t prove whether price-sensitive information was actually passed between the accused. This is a common feature in cases of alleged insider trading. In this instance, Sebi maintained that the trading patterns of the accused indicated that they were in possession of inside information. As the defence pointed out, though, the regulatory body failed to furnish any proof that showed that such information was passed between the accused.
While ruling in favour of the accused, the SC noted that circumstantial evidence—such as trading patterns and supposed proximity between individuals—isn’t enough to prove insider trading. Authorities must also establish proof showing that price-sensitive information was shared between the accused.
On the surface, this seems logical. But given the spectrum of Sebi’s investigative powers and the very nature of insider trading, most cases that are prosecuted by the regulators are built on inferences as opposed to cold, hard proof.