The United States Senate has passed the ‘Stop Trading on Congressional Knowledge Act (“Stock Act) earlier this month – a law that would explicitly prohibit employees of the federal government, and lawmakers from trading in securities while in possession of unpublished price sensitive information – popularly called “insider trading”.
Abstruse interpretation of the current legal framework in the US could lead to the conclusion that a US lawmaker, who is not an “insider” to any listed company, is not prohibited from dealing when in possession of unpublished price-sensitive information that could directly have a bearing on the price of listed securities. A section of the legal community in the US indeed believes that the law against market abuse is wide enough to act against lawmakers who trade in the market when in possession of unpublished price-sensitive information that could impact stock prices.
However, the reality is that there is no known enforcement action for such abuse. The very name of the law suggests that such trading indeed takes place and therefore legislative intervention is necessary to stop such abuse. While this draft legislation is yet to become binding law (the Congress is yet to pass it) historically, like the Indian attempts at new company law in India, the legislation has often been stymied by reference to law-making committees.
Interestingly, in India, the position is different. The definition of the term “insider” is not restricted only to persons who are connected or deemed to be connected with the listed company. It includes any person who has received or has had access to unpublished price sensitive information. The term “price sensitive information” is itself defined as any information which relates directly or indirectly to a company, and which if published, is likely to materially affect the price of securities of the company.
Therefore, for example, if a telecom minister, or a government employee, based on access to information about which telecom companies would get allocation of spectrum, acquires shares of the companies that would benefit from the spectrum allocation, such trading would constitute a breach of the law. So also, if the staff of the judge who wrote the order cancelling the auction of the 2G spectrum were to be aware of his views before he signed it, and sold shares of companies that would lose spectrum before the judgement became public, they would be in breach of the law. Such person would be “insiders” who are barred from trading while in possession of such information.
Yet, in India too, there has hardly been any action against, leave alone any investigation against, any government servant for such trading. In the 1990s, when the ban on ‘badla’ trading (Indian indigenous mode of postponing settlement of securities contracts) was being considered in a board meeting of the Securities and Exchange Board of India, widespread trading took place in the market, and it was clear that information about the ban had become known to market players and trading did appear to have taken place motivated by knowledge of the eventual outcome. This was a case of the regulator being suspected and yet no investigation was conducted.
The corridors of New Delhi are rife with regular reports about how certain politicians are excellent pickers of stocks. Yet, there is no known case of anyone being tracked. The skill sets are now said to be moving into currencies. The latest murmur is that the market price for the Indian Rupee was hammered to Rs 53 per dollar just before the state elections – political money held by private bankers abroad would thus fetch more Indian Rupees.
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Our media often roots for greater powers to Indian regulators – suggesting that the lack of powers is the primary cause for Indian societal conditions. Insider trading by politicians and public servants is an area where we have the law, which, expectedly, is under-enforced.
(The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own.) somasekhar@jsalaw.com