Time and again you must have heard of securities frauds such as price rigging , front running, circular trading and insider trading. And this is the last thing a genuine investor would like to see happening in the stock markets. But securities frauds do happen. And it becomes a herculean task for the Indian securities market regulator, the Securities And Exchange Board Of India (SEBI) to curb when it comes to insider trading. Why so?
Let us first understand what exactly is insider trading. Insider trading is the trading of equity shares or other securities such as bonds or stock options by individuals with potential access to non-public information about the company. And insider trading is not limited to insiders only. This is very much conducted by the outsiders and that too, in more organized way. These outsiders glean non-public and price sensitive information with the help of insiders and trade on the same.
All this is very well known. Then, where is the system lacking to curb this illegal trading? It is not like India does not have regulation. Enforcement of prohibitions on insider trading has introduced long back in 1992 in India. The problem lies in proper prosecution. According to SEBI's annual report for 2010-11, the equity market regulator took up investigations in 28 insider trading cases and completed 15 during the year. In the case of insider trading, it is difficult to prosecute the guilty because the India regulator has not given enough teeth. Unlike USA, here Indian regulator does not have access to call records among other things. They cannot do wiretapping which is very crucial to make a case against guilty. Had Mr Rajat Gupta committed the crime of insider trading in India, he may have gone scot-free. In the US, prosecutors used details of telephone conversations and emails to convince jurors that Gupta had leaked boardroom secrets to his former friend, hedge fund manager Mr Raj Rajaratnam.
There are many steps that needs to be taken to curb insider trading. First, law need to recognize insider trading as a criminal activity. Civil prosecution only leads to monetary penalties. Again here, Mr Rajat Gupta could have escaped of 25 years jail sentence even after proper prosecution. Hence, right policies with strong prosecution system are need of the hour. This would create deterrent for all involved in insider trading. On the part of company's management, they should publish all price sensitive data as earliest possible. They should not give preferential access to more data such as analyst's presentation to analysts or other such people before publishing it in public domain.
A concerted effort from policy makers, regulators as well as company's management can only curb insider trading in India. Hope, India would take one lesson or two from the famous case of Mr Rajat Gupta.