Tag Archives: SEBI


It is raining ex parte orders again in the Indian securities market.  Essentially, orders that are passed without hearing the person against whom it is passed, the practice is justified in the eyes of the law if the circumstances demonstrate grave urgency and warrant action.

Yet, when an ex parte action is taken, the authority taking the action is expected to do its homework to demonstrate the urgency and get its facts right to defend the action when challenged.  Take the case of the 331 listed companies, which the capital market regulator was told — by none less than the Ministry of Company Affairs — were “shell companies”.

A shell company is one that is merely a shell — without substance in its operations and functions.  The Securities and Exchange Board of India appears to have blindly taken the list it received and declared all these companies to be shell companies.  Media reports suggest that some noteworthy names have been declared in one sweep to be “shells”. Declaring them to be shell companies, suggesting forensic audit of their existence and giving them pariah status on the stock market, where trades in them would be permitted only once a month, would cause serious injury to every holder of securities in these companies.

Some investors would have pledged their shares to lenders, who would determine such an event to be one of default. The underlying asset over which they had security would suddenly become illiquid. Others would have taken trading positions in these securities with a certain assessment of facts in; if they were suddenly told that regardless of facts, these companies deserved to be shunted to the periphery of the stock market, it would cause them serious losses.

Such a drastic action would, therefore, warrant giving notice to the parties concerned, giving them a chance to explain themselves. At the least, one would expect basic due diligence to be carried out before action were taken so that the (well-intentioned) objective of investor protection, far from being met, is not undermined. If a basic internet check would have shown that some of these are well-functioning, profit-making, loan-taking operating companies, the embarrassment of terming them “shells” could have been avoided.

The history of financial markets is replete with examples of such decisions. Ex parte orders purporting to be interim measures get passed and routinely become permanent measures. They are often known to continue for as long as five years.

Examples of every kind of sudden shock and surprise are now easily available. We have had securities being introduced into the derivatives segment in the middle of a month. We have had securities removed from derivatives in the middle of a month. Issuers of securities with derivatives riding on them, declaring record dates in the middle of a derivatives trading cycle, too have been seen.

Abnormal or extraordinary decisions invariably also point to the need to check if there was any abnormal pattern of trading just before they were announced. Often, that leads to probes and allegations of insider trading. In fact, a recent ex parte order froze every bank account of every individual named in it overnight, rendering them penniless. The suspicion in that order was that publicly known regulatory proceedings against a company had been the motive for every sale in listed securities of affiliates of that company.

Another type of development is in the risk of being repeated so often that it would become a trend. Relying on private “forensic reports” (often conducted by accounting and audit firms with little training in the rigours of investigative discipline), regulators take ex parte actions. Typically, these reports are riddled with disclaimers that render them poor evidence in law. However, in the post-truth world, by the time it can be demonstrated that there is no real legal evidence, the damage is done, and destruction of individuals and institutions is complete.

Is there a better way to handle this?  Surely, if one asks oneself multiple times if the use of emergency powers to pass ex parte orders is warranted, the reckless usage of such a blunt weapon would get tempered. The value one attaches to the concept of the “rule of law” is best tested when the most provocative circumstances present themselves.


It is easy to adhere to the rule of law if one’s patience is not being tested to the brink. If one loses all vestiges of being circumspect and stops checking and regulating oneself, the rule of law would be replaced by the rule of men, risking the very credibility and majesty of law enforcement.

(This was published as a column titled Without Contempt in the Business Standard editions dated August 10, 2017.  Disclosure: The author represents (after publication) for some companies affected by it.)

A tighrope walk for Sebi

If news reports are right, the Securities and Exchange Board of India (Sebi) is coming full circle with (CIS) and is seeking to “relinquish” the statutory mandate to regulate such schemes.


It was only in 1995 that the term found its way into the Act through an amendment to the list of intermediaries that ought to be registered with to be able to carry on business in India. Then, too, had been a reluctant regulator. Schemes promising returns on the basis of plantations, animal farming, chain-marketing and the like mushroomed in the 1990s. The term “collective investment scheme” was not even defined in the Act. Therefore, despite the amendment to the Act, did not want to hold the baby.


Public interest litigation, a plethora of complaints and a lot of angst later, the term got defined for the first time through an amendment in the Act in 1999. also made regulations in 1999, which, if reduced to one sentence, would have read: “No one shall operate a collective investment scheme”. The terms on which one could legitimately register and operate a was akin to Christian states in the US stipulating norms for abortion agencies — keep the standards so rigid and tough that they pose an entry barrier and cannot be complied with. Not surprisingly, right since 1999, there has been only one reported registered in the history of


The problem with such an approach to regulation is fundamental — pretending that making it illegal to carry out an activity would put an end to it. The activity continued, the monies raised grew even faster, some of which are even feared to be from non-existent investors — read: money laundering schemes. An even more bizarre amendment sailed into the Act in 2013. The 1999 amendment had set out four ingredients to be met for any scheme or arrangement of affairs to be regarded as a — essentially, schemes entailing a contribution of funds for earning of profits, management of the funds pooled by someone on behalf of the contributors and the contributors not having day-to-day control over managing the pool. Now, in 2013, the law was amended to say that even if these ingredients were absent, if the corpus of any arrangement of affairs was of Rs 100 crore or more, it would be “deemed to be” a


This set the cat among the pigeons. Any and every pooling of funds that would have a corpus value of Rs 100 crore would be a CIS, which meant that a registration with would be necessary for the activity to be legitimate. A pooling of resources by neighbours owning apartments in an expensive city like Mumbai to rebuild and redevelop their building would arguably be a The provision of holiday schemes where the contribution by guests would give them the right to use a property from the pool of properties built or rented with the contributions would arguably be a Provision of valuables such as gold coins with contributions in instalments would arguably be a


None of these would involve issuing securities and therefore, none of these can ever comply with the regulations governing that had made in 1999. Therefore, all of it would be illegal. Those who cared for the law, shut down such activity or moulded them. Those who did not care, kept at it — eroding the majesty of the law even further by reason of formulation of law not properly thought through.
Meanwhile, with public furore over some that failed led to some judicial comments about sleeping on its job, which got reported in the media and then led to crack down by ordering that monies collected be refunded within a few weeks or months. Now, this would spur asset-liability mismatches further and lead to either a run on the schemes that could not be met, or worse, led to operators starting newer schemes underground to fund repayment of schemes ordered to be closed. In a nutshell, a royal mess is on the regulator’s hands.
It is in this context that reports of wanting to relinquish this statutory role is interesting. Around the time piloted legislative amendments to treat any corpus of Rs 100 crore or more as a CIS, it had a muscular tone about how anyone speaking about the need for a predictable framework for running a compliant could only have been aligned with the bad guys. Now, it seems, is conscious that pushing an entire industry underground is actually counterproductive and brings about worse outcomes. Whether it would at all be politically possible to amend the Act yet again to remove of this kind from Sebi’s ambit is doubtful. But one must assume that it the mind is set on an outcome, the government will find ways to get that done — whether through a Presidential Ordinance, a or blanket provisions in the Finance Act.
If pulls off this one, the would have come full circle back to the 1990s. Who then, would bell the cat?
This column was first published as Without Contempt in all editions of Business Standard edition dated May 5, 2017

Immediate challenges for new Sebi chairman

Within Sebi, the chairman should hold an umbrella for both young and old employees

By Somasekhar Sundaresan

Very soon, will take charge at the Securities and Exchange Board of India (Sebi) as the new chairman. The task requires calm reflection on the problems on hand, and a mind open to fresh ideas and innovative thinking. The capital markets regulator is at a crossroads.  Never in the regulator’s history has this role been more complex than it is now. Here is a brief heads-up with pointers to what needs immediate attention.
First, is in crying need of a peacetime general. The very assumption of this office can make some incumbents believe that they are now at war with the big bad world of securities markets. As an institution, there is excessive focus on regulation of market conduct and lesser emphasis on prudential regulation. (The is diametrically opposite in approach. Both need adjustment).
Never have Sebi’s statutory enforcement powers been more extreme.  Contrary to popular belief, is armed with far greater power to inflict serious economic injury than counterparts in the and the UK. needs to convince no judge before imposing serious restraints on economic activity. Routinely, this is done based on suspicion, leaving it to those affected to shoulder the burden of disproving the suspicion — somewhat like preventive detention. The check and balance is appellate review after has drawn blood. The onus is then on the person challenging Sebi’s conduct to show that it was wrong in taking action.
Sebi’s legislative powers, too, are near absolute. The Act grants wide discretion to to make subordinate legislation. Prior consultation with the market, a reasonable articulation of the link between the proposed solution and a problem statement, and a system of review of regulations to see if they have met the articulated purpose are substantially missing. There is indeed some form of selective public consultation but neither a statement of what problems are being sought to be solved nor a timely review of whether the solutions have indeed worked is mandated either by law or by a policy approach.
As a result, the fear of the regulator is widespread. With serious powers at hand, it takes maturity to structure the role into one of maintaining peace rather than of being ever ready to declare war. This is an attitudinal change that is necessary. Hundreds of inputs about the market being full of crooks necessitating a crackdown and severe intervention would be received. It would be easy to get carried away. Headlines screaming about the absence of powers or being toothless despite having powers would further an urge to lash out without thought. Eschewing a carpet-bombing approach and sifting the grain from the chaff are what the job at the top entails.
Second, the primary market regulation needs deep review and research as to what can be done better. The size of funds that get raised can never be a barometer of success for how this segment of the market regulation is performing. Securities offering documents are extraordinarily bulky, barely tell a story in clear terms and have substantially been reduced to bulky formal compliance rather than resulting in substantive disclosures of high quality. Cleaning up the policy space in this area of the market is a critical immediate objective to which the new chairman must apply himself.
Third, a review is overdue in the M&A space. It has been nearly six years since the “new” takeover regulations came into effect. Today, India is a unique jurisdiction where one body of law (takeover regulations) forces an acquirer to potentially cross the maximum limit of substantial shareholding permitted in a listed company while another body of law (listing conditions) forces the shareholding back down to compliance and a third body of law (delisting regulations) would need to be complied with if the intent was always to maximise shareholding and delist the company. Transaction costs mount, transaction timelines prolong unreasonably, defeating the very objective of mandating an exit opportunity by making an open offer for public shareholders to tender their shares.
Finally, Tyagi must give special attention to human resources and matters within the organisation. Too many junior officers have been tempted to be indecisive or to take wrong but safe decisions thanks to vigilance probes and hounding of honest bona fide decisions.   is now well over 25 years old, and a full cadre of loyal employees is available at hand, despite the organisation having been the poaching ground for the private sector. Enthusing smart bright talent inside and leading them from the front to shield them from unfair targeting in criminal anti-corruption probes have to become a priority. Alignment and fitment of senior employees upon merger of the Forward Markets Commission into remains an open area of work. To begin with, Tyagi must ignore his own HR problem — his tenure was shrunk from five years to three even before he could take charge. As a seasoned bureaucrat, he would know that this the way of the government systems; there is nothing personal in it. But many in the organisation may not be seasoned in the ways of the government but would be highly talented in handling their regulatory work.  Holding an umbrella for them and bringing in respect for punctuality and professionalism and rewarding them for it would help him create a legacy during his tenure.
This was published as my column titled Without Contempt in the Business Standard edition dated February 23, 2017

Somasekhar Sundaresan: Lofty ideals don’t justify faux measures

Regulators often overstate the seriousness of the work they do to defend every measure adopted in regulations, however flawed

There was one subject other than the corporate governance fracas at that grabbed the attention of social media in the last fortnight — the Securities and Exchange Board of India’s (Sebi) consultative paper seeking to restrict free speech in the Indian capital market.


Sebi’s consultative paper proposes that “no person shall be allowed to provide trading tips, stock specific recommendations to the general public through short message services (SMS), email, telephonic calls, etc. unless such persons obtain registration as an investment adviser or are specifically exempted from obtaining registration”. Further, “no person shall be allowed to provide trading tips, stock specific recommendations to the general public through any other social networking media such as WhatsApp, ChatOn, WeChat, Twitter, Facebook, etc. unless such persons obtain registration as an Investment Adviser or are specifically exempted from obtaining registration” Regulations are proposed to be amended to provide that such expression of would constitute securities fraud.


The consultative paper has been out for public comment for a while. However, it caught the attention of critics only recently, and the critique has gone viral. Indeed, they are also those who support any measure from folks in authority on the ground that anything from authority should be assumed to be backed by divine wisdom. They speak in favour of proposals since investor protection as an objective is a lofty ideal. Therefore, one must examine if Sebi’s proposals would pass muster under the Indian Constitution.


The guarantees freedom of speech and expression. Such freedom is subject to “reasonable restrictions”. For Sebi’s interventions to be constitutionally valid, the restrictions sought to be imposed on making public comments on securities must stand the test of being reasonable.


Assume a commentator makes remarks on television news channels that the shares of a company that has taken an inexplicable, unexplained business decision would fall. Or for that matter, assume someone who believes that a business decision is right merely because it a decision taken by men of stature will lead to the securities price going up. Under Sebi’s proposed law, tweeting such a view, posting it on Facebook, or broadcasting it on or would be illegitimate, unless the person doing so is registered with as an investment adviser.


Now, everyone with a view may not be in the business of providing investment advice. But the law would require registration as an investment adviser to be able to legitimately express a point of view.This would mean that the commentator would need to subject herself to a regulatory requirement and get licensed to carry out a business that she in fact does not carry on — that of providing investment advice for a living. Worse, if one were to express an opinion, one would be committing a securities fraud regardless of the veracity and accuracy of the opinion. The liability would be civil monetary penalty of to Rs 25 crore, a term in jail of to 10 years, a criminal fine of to Rs 25 crore, or remedial directions in the form of a direction to shut unless registered with to provide investment advice. In other words, the law would have a “chilling effect” on the freedom of speech and expression — hardly a measure that could be considered reasonable.


Almost everyone on an Indian street has a view on the outcome of every possible election — whether it is the elections in the or in UP. Now, picture a law that would criminalise expressing an on whether it would be Mayawati who would become the next chief minister, or if a certain faction of the Yadav clan in the would gain power, unless registered as a psephologist, or for that matter, unless registered as an official member of a political party.


Those who defend curtailment of free speech in the securities market would jump to say that financial markets are different from electoral markets. In the former, people lose real money when they get influenced by the expression of opinion. In the latter they may at worst get bad governments if influenced by prejudiced opinions. First, getting a bad government could be worse than losing some money that can be recouped later from the same markets. Second, what is a fair and what is a motivated fraudulent false statement is always a question of fact. Registration with an authority would not change that. In election petitions, courts consider if political candidates have adopted corrupt electoral practices. Likewise, (and therefore the courts) consider if a person who made a statement about securities did so fraudulently, knowing it to be false.


Regulators often overstate the seriousness of the work they do to defend every measure adopted in regulations, however flawed. The lofty heights assigned to investor protection can indeed be assigned to every area of regulation — be it food, electricity, competition, drugs and cosmetics, financial data aggregation, or even plying of taxis. The objective of regulation can be lofty but the measures to meet the lofty objectives still need to be reasonable in order to be constitutionally valid. Misplaced and overstated concerns can kill the “good” in the name of working towards the “best”. It is not wise to burn a house down to protect it from the rats that infest it. It is not wise to inflict forceful nasbandi to achieve population control.


It is wise of to have sought public comment on such a problematic proposal. One can only hope that the reactions received in the consultation process make one point clear to the regulator – there is no short cut to fighting real fraud in the market. That fight involves examining the statements and comments made, determination of whether it was motivated by fraud and scrutinising circumstances that would point to intent to cheat the market by making a false statement. Registration as an investment adviser can never reduce this burden.
This column was published Without Contempt in Business Standard on November 8, 2016 

Setting the cat among the pigeons

The securities market is running helter-skelter, regulator downwards. A short judgment of the interpreting the Securities and Exchange Board of India (Sebi) Act, 1992, has ruled that had no discretion at all in computing the quantum of for some violations between 2002 and 2014. Sebi is reported to have sought a review and a clarification from the court, and everyone in the market is waiting with bated breath.

The apex court’s order is an interpretation of carelessly drafted provisions in the that deal with imposition of monetary penalty for failure to furnish information. In 2002, the penalty for such failure (Section 15A) was changed from Rs 1.5 lakh for every failure to Rs 1 lakh per day of failure with a cap of Rs 1 crore. The language used was that a violator “shall be liable” to the stipulated penalty. In 2014, the same provision was amended to provide that the penalty “shall” be at least Rs 1 lakh but “may extend to” Rs 1 lakh per day of continuing non-compliance with a cap of Rs 1 crore.

The Supreme Court has ruled that between 2002 and 2014, there was no scope for Sebi to impose anything but Rs 1 lakh per day and where the violation continued for over a hundred days, the penalty would get capped at Rs 1 crore. Now, the process for imposing such penalties is through the initiation of “adjudication proceedings” under which an “adjudicating officer” adjudicates whether the violation alleged has indeed occurred, and whether the person accused of the violation has any valid defence. Once the occurrence of the violation is established, the officer proceeds to determine the penalty amount.

The Sebi Act provides for three objective criteria for determination of the penalty amount (Section 15J), namely, any unfair advantage or disproportionate gain made as a result of the default, the loss caused to any investor due to the default and the repetitive nature of the default. Disagreeing with Sebi’s plea that Section 15J shows legislative intent for discretion in assessing the quantum of penalty, the Supreme Court ruled that the provision had become redundant between 2002 and 2014, although it had not been repealed.

Now, let’s say the company secretary of a listed company who is in charge of filing a document under the listing requirements dies in an emergency and the company misses the deadline. The filing is forgotten and by the time the other officers get their act together, more than 100 days go by. If the adjudicating officer has no discretion at all, such a company would have to pay a penalty of Rs 1 crore without any gain being made, loss being caused, and even if the default were the first ever in its history. Another violator who deliberately disregards the filing obligation for the same period and complies only after coercive threats would be treated on a par with the former. According to the court’s judgment, all violations of this nature between 2002 and 2014 would enable no discretion at all to vary the penalty on the basis of the gravity of the facts. A person who deliberately defaulted would be treated on the same footing as a person who inadvertently defaulted.

There are numerous decisions of the Supreme Court that point to adopting a purposive interpretation of the law based on which the words “shall be liable” would mean “may be liable”. Indeed, the converse reading, too, would be possible by looking at the purpose of the legislation. Generally, no provision of law is lightly read as being redundant. All provisions are attempted to be read harmoniously to give the legislation its potentially intended meaning. This is how courts have read this provision for nearly 20 years, in a purposive manner, ruling that monetary penalties from Sebi would need to be fair, rational and equitable. They would test the quality of the discretion but not adopt the stance that discretion was absent.

The irony is that the observations of the court have come in a case where the court actually lowered the penalty originally imposed by Sebi. In the case before the court, there was a blatant violation in furnishing information sought by Sebi despite repeated reminders. Sebi imposed a penalty of Rs 1 crore against one person and Rs 75 lakh on five others. The had reduced the penalty to Rs 60,000 in one case and to Rs 15,000 each in five cases, taking into account the reality that the violators were near-bankrupt, had become dormant and were even left with no staff.

The court ruled that the tribunal could not have taken into account such factors. The court also ruled that the original date of the violation was prior to the 2002 amendments and that Sebi, too, was wrong in imposing a penalty of Rs 1 crore. The court reduced the penalties to Rs 1.5 lakh on each person, adopting the pre-2002 position of the law when the reference to non-disclosure being a continuing offence was absent.

Both Sebi and market players are stumped. The outcome of the fight over one case has laid down an interpretation of the law for all alleged violations that took place over this 12-year period – typical of uncertain outcomes for an entire market from litigation involving one case of violation.

The author is a partner of JSA, Advocates & Solicitors. Views expressed are his own. Email:somasekhar@jsalaw.com
Published in the Business Standard edition dated February 9, 2016: https://mail.google.com/mail/u/0/#inbox/152c457681ef8f5a?compose=152c5986c12e8714

A material mistake by SEBI

The newly coded listing regulations remove materiality as a relevant factor for disclosure of acquisitions

The terms on which companies get listed on Indian stock exchanges just got codified into regulations. The Securities and Exchange Board of India (Sebi) has notified the Securities and Exchange Board of India (Listing obligations and disclosure requirements) Regulations, 2015, (Listing Regulations). They will take effect on December 1, 2015.

For far too long, the terms of listing have been governed by an unhelpful legal construct – the listing agreement, an agreement between the stock exchange and the listed company.

Typically, an agreement is “private law” and governs only the parties to the agreement. However, the listing agreement has been wrongly treated like an instrument of “public law” that would bind the world at large. One did not even need to sign it – it was modified at will by an agency that was not even a party to the agreement, viz Sebi.

Fortuitously, this legally infirm policy belief never came up for serious challenge except in the Mallya-Chhabria takeover dispute over Herbertsons (there, the issue was that the listing agreement had a provision that shareholders who buy more than five per cent shares should report it and the acquirer in that case argued that an agreement that he was not party to, could not bind him). That dispute got settled without the law truly getting tested.

Sebi has now reproduced the provisions of the listing agreement in the Listing Regulations – which would now legally govern the world at large – not just listed companies and stock exchanges, but also the regulator.

While a large part of the exercise has been to consolidate the provisions, there is one area of new policy which is retrograde and lays the ground for adverse regulatory outcomes, no matter how well-intentioned it may be. The Listing Regulations, now mandate that any and every acquisition including an agreement to acquire would need to be disclosed by a listed company without applying any test of materiality for the disclosure.

The term “acquisition” has been defined as acquisition of control or acquisition of five per cent of shares or voting rights by the listed company in any other company. Absence of materiality would mean that regardless of the scale and size of the listed company, acquisition of any tiny company would need to be disclosed. This is a new measure. So far, listing agreement has only required disclosure of price-sensitive information, which by definition, would be information that could have an impact on the price of the securities in the market.

For example, a company with a net worth of Rs 1,000 crores would need to report purchase of shares of 5 per cent or more in another company, or purchase of control over another company, even if the value of the other company were just Rs 10 crores. Often, residential apartments are bought by way of buying companies that own them. Now, if one were to buy the company that owns the apartment it would require a public disclosure under this new requirement, while if one were to buy just the apartment there may be no requirement to make a public disclosure.

This is because the absence of materiality is an element stipulated only for acquisition of companies and not for other assets. The special definition for the term “acquisition” to cover acquisition of companies and not other types of business organisations, is inexplicable. Therefore, if one were to buy a bunch of assets, or, if one were to acquire a stake in a limited liability partnership, one would need to make a disclosure to the public only if the deal were material. But once it is a company that is being bought, materiality would be given the go-by.

The removal of materiality as a relevant factor is a step backwards. Offer documents in the Indian securities markets are extraordinarily bulky and contain a lot of irrelevant information, primarily because in a number of areas, disclosures are not truly linked to materiality. In other words, our regulatory framework requires issuers of securities to err on the side of excessive disclosures, which drowns out what is really necessary (read material) for taking an informed decision.

All pointers to reform of the primary market have been pushing for making offer documents meaningful by cutting out unnecessary, irrelevant and noisy non-material content. Even in the regulations governing insider trading, typical types of price-sensitive information are listed to create only rebuttable presumptions of their being price-sensitive – the contrary may be established.

There is another reason why Listing Regulations positively making materiality irrelevant is a step backwards. It would create fertile ground to mislead investors in the market with noisy, irrelevant and non-material disclosures. Investors would think that such non-material information is indeed material, since the law requires it to be published in the public domain. Such an approach would militate against another regulatory objective of Sebi, which has had occasion to chase listed companies for falsely talking up the share price by making disclosures of non-material acquisitions, leading the market to believe that things are positive.

Now, the defence would be to just point to the new law to say that the surfeit of irrelevant disclosures is in fact a regulatory mandate. At times, the quest to achieve the utopian “best” can easily turn out to be enemy of the “good”.

The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own.

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Insider trading regulations are all about prohibiting someone with asymmetrical access to inside information

The new insider trading regulations notified by the Securities and Exchange Board of India (Sebi) took effect last weekend. While the regulations are largely based on draft regulations made by the N K Sodhi Committee, they do deviate on some material issues. (Disclosure: the author was a part of the Sodhi Committee and any critique should be taken with a pinch of salt.) This column will not dwell on the deviations in what is covered by the regulations but would pick up one element of something that has been left out.

One of the recommendations in the draft regulations was to treat “any person who is a public servant or occupies a statutory position that allows such person access” to unpublished price sensitive information of companies (colloquially, “inside information”), as a “connected person”. This was an explicit definition that would have brought this category of persons within the ambit of “insiders”. This element has been dropped. It is argued by some that such language is unnecessary because the definition of the term “insider” covers apart from “connected persons”, any person who has access to inside information. Clearly, that would not be a complete answer.

Insider trading regulations are all about prohibiting someone with asymmetrical access to inside information of an issuer of securities from monetising the access ahead of the rest of the market. The access to the workings of the business and the financial position of the issuer would enable access to information that could impact price discovery of such securities but is not generally available. Therefore, it necessarily has to emanate from inside the issuer, which it is even necessary to define a connection as one to the insides of an issuer. For example, a chief financial officer of a company that is listed on the stock market is clearly privy to the draft financial statements way before the information becomes generally available.

On the other hand, take a judge who is writing a judgement on a material tax dispute. All the information presented to him is generally available – anyone sitting in the court room would see exactly what is being argued before him. Now, his decision on which way to rule in the dispute is price-sensitive information, will impact the price of securities of the company involved in the dispute, but would be known only to him because it is he who would take the decision and until he makes the decision public, no one would know which way the fortunes of the price of those securities is headed. The staff in his office, his fellow judges who may get wind of which way his decision is headed, and his relatives who may discern his views from his views on the dining table, would all be “outsiders” and not “insiders”. The information relating to the final decision in the judgment would emerge from outside the company and not from inside.

Such persons would be connected to the outsider judge and not to those inside the company who would be eagerly awaiting the outcome themselves. If they were to trade ahead of the market, there would be no legal basis for treating such “outsiders” to listed companies as “insiders”. Unless, of course, there is an explicit definitional coverage of such a person as a “connected person”, which is precisely what has been deleted. Replace the judge with a bureaucrat who determines government policy that can have an impact on price discovery for securities in the market, and the picture remains the same. Replace the bureaucrat with a lawmaker in Parliament who gets to decide on policy and the effect would be the same. Indeed one could argue that an income-tax official who gets to see advance tax data filed by various listed companies or an investigator, who conducts a search and seizure into a listed company and gets access to inside information, would be covered as a recipient of information from an insider. The information they would get, would not be information that they generate but information generated from the insides of the company they are assessing or raiding. Trades by them when being privy to such information could indeed be covered by the regulations since they were recipients of information from insiders.

Given the stakes involved – of whom the law would protect against rather than who would be protected – this is not an easy piece of reform to implement. Every piece of law protects someone from someone else. It is not surprising that this piece of reform did not come through.

(The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own.)
(This piece was published in the May 18, 2015 edition of Business Standard)