Despite all that capital market regulator, the Securities and Exchange Board of India (Sebi) has done over the years to increase transparency, the one troubling matter which it has not been able to successfully address is insider trading. Few can deny that insider trading is rampant in India.
The fact that Sebi had to inquire into some of the large corporates after their results were found being circulated on WhatsApp groups is a pointer to the extent to which insider trading has permeated the capital market. It is no secret that millions can be made on a crucial bit of insider information but this is perhaps expected as India’s capital market experience is relatively new. However, the Sebi action prompts a question — because insider trading happens, should that mean SEBI should seek the authority to tap phones, as a high-level panel has recommended. The answer is ‘no’. As of now, Sebi can ask for call records of individuals it is investigating and that should be enough to prove that insider trading has taken place — assuming that the regulator and panel member believe that insider trading is done using phones.
First, phone-tapping is unlikely to yield much in identifying the network of people indulging in it. Insider trading can happen with the trailing of money which that trade generates. In these cases, the privileged information is passed on and trade takes place a few days before the event. In a large number of cases, shares are sold when the event takes place and profit is either kept by the entity who had made the trade or, in some cases, the financial gains are routed to the person who had given information but had avoided trading in his name. It is not tough to establish whether a person has the ability to take the trade. His past track record of doing trades in that company or in other stocks can be easily assessed to conclude whether the trade was a case of information arbitrage. Further, whether the money was given to another entity can also be easily established. It would be a deterrent to those indulging in insider trading if the financial gains made from such trade are taken away and heavy penalty imposed on the whole chain of people involved in the illegality. That would mean action against the front entity, whether a firm or an individual, broker, and company official who leaked privileged information. Also Sebi should make sure that it files a watertight case every time so that insider trading is punished. Correspondingly, there should be better coordination between Sebi and the IT department. In this connection it needs to be remembered that in the past, in order to prevent stock price manipulation to take advantage of long-term capital tax exemption, the capital market regulator had informed the revenue department and action was taken against offenders.
Second, the possibility of misuse of phone-tapping itself is high. There are millions of investors and given the way the Indian market functions, almost every trade could come under the ambit of insider trading. There are some areas that Sebi needs to work on so that information dissemination improves. That would help weed out cases that do not come under the ambit of insider trading. For instance, if some officials of a company have a conference call, the transcripts of the call are sometimes posted on the website while the presentation made to analysts is sent to the exchange. However, hardly any retail investor is able to log into a conference call. The regulator should ask exchanges to make it mandatory for a company to provide the link to such conference calls to the exchange so that even retail investors can listen in to what a company management is saying live rather than reading that later on the exchange website after the event is over — and the advantage of price action has been taken by a select few.