Poor disgorgement could mar Sebi's reward scheme to curb insider trading

Under the scheme, the monetary reward will be 10% of the amount disgorged by the wrongdoer or Rs 1 crore, whichever is lower

The Securities and Exchange Board of India (Sebi) has devised a scheme to nab those involved in insider trading, by announcing  a reward of up to Rs 1 crore to informants. 

However, the regulator’s poor disgorgement track record could be an impediment for the so-called informant mechanism. Under the scheme, the monetary reward will be 10 per cent of the amount disgorged by the wrongdoer or Rs 1 crore, whichever is lower.

While Sebi has passed disgorgement orders worth thousands of crores, the actual amount collected remains miniscule. Moreover, a lot of cases continue to remain stuck in the judicial process. 

 

Consider this: the total amount collected by Sebi in FY19 by way of disgorgement was just Rs 92 lakh, data provided in the annual report shows. However, the total settlement charges collected stood at Rs 46 crore. Exact data on disgorgement amount for previous financial years is unavailable. However, experts say the amount is much lower, like the settlement charges collected. 

“The hope of a full reward, in all likelihood, will remain a pipe dream for informants, considering Sebi’s history of delays,” says Tomu Francis, partner at Khaitan & Co. 

“The proposed informant mechanism, albeit being a bonafide attempt at detecting and prosecuting insider trading-related offences, suffers from the fallacy that it is linked to Sebi’s ability to recover amounts to be disgorged, pursuant to an order of disgorgement.” The new scheme is Sebi’s latest attempt to crackdown on insider trading cases, which are among the trickiest to establish.

“Insider trading is mainly carried out in a clandestine manner. The wrongdoers usually indulge in insider trading through a proxy, to whom the relevant information is communicated and direct evidence of such communication is seldom available across various jurisdictions. Therefore, detection and prosecution of insider trading remains a challenge. Like other securities market regulators across the world, Sebi too faces this challenge of timely and expeditiously prosecuting insider trading violations, primarily on account of the insufficiency of evidence of commission of the violation,” the regulator has said in an agenda paper.

Sebi hopes the new scheme will help establish flow of information and identify connections between insiders and proxy entities. 

“This is a good initiative by Sebi to motivate individuals such as directors, and also the corporates themselves, to report details of insider trading that otherwise is hard to collate in suspected insider trading cases,” said Raj Bhalla, Partner, MV Kini & Co.

“Even though the amount designated is dependent on conditions such as it being the same to have been disgorged, and also keeping in mind that it may not have been substantial until now, it will increase the chances of proving such cases of insider trading manifold if this reporting mechanism becomes successful.”