In order to strengthen its investigation and enforcement mechanism, SEBI plans to set up a mechanism to incentivize people having personal knowledge of insider trading cases and report the same to the watchdog.
SEBI plans to reward of up to Rs 1 crore if any informant provides any information on insider trading in the stock market.
Proposed amendment to SEBI’s PIT Regulations
- A detailed set of rules for a new “Informant Mechanism” under its Prohibition of Insider Trading (PIT) Regulations has been prepared by SEBI, the capital markets regulator and it would be presented for its board’s approval later this month.
- An informant would need to submit a Voluntary Information Disclosure Form (VIDF) detailing credible, complete and original information relating to an act of insider trading, including communication of unpublished price sensitive information or trading in violation of rules that has occurred, is occurring or is about to occur.
- It would be mandatory to disclose the source of information and attach an undertaking that it has not been sourced from a person employed with SEBI or any related regulator.
- Those willing to submit any information anonymously would need to appoint a practicing advocate as a legal representative.
- However, SEBI would also act against those submitting frivolous or vexatious information under this mechanism.
- SEBI would establish an Office of Informant Protection (OIP), which would be independent from the investigation and inspection wings or any other operational departments.
- OIP will act as a medium of exchange between the informant (directly or through a legal representative) and SEBI.
- OIP would be responsible for receipt, registration and processing of VIDF and also for ascertaining its veracity and authenticity.
- The OIP would also decide reward for the informant. The reward would be 10 per cent of the money collected, subject to a maximum amount of ₹1 crore.
- While an interim reward of up to ₹10 lakh can be given at the time of SEBI’s final disgorgement order, the rest would be given after the regulator has disgorged at least twice the amount of the final reward.
- The identity of the informant would need to be revealed only if SEBI finds him or her in non-compliance to its regulations, or when a disclosure is required in relation to court proceedings, or if the regulator needs to verify identity for granting the reward.
- While maintaining confidentiality of the informant, SEBI can share the details with other regulators and law enforcement agencies in India or abroad. However, the information given by the informant would be exempt from the Right to Information (RTI).
- In cases where proceedings have already begun against a person who later becomes an informant, the reward can be given upon compliance to its directions, including for monetary sanction.
- An informant who is culpable but voluntarily cooperates and assists SEBI can also be eligible for the reward and for a settlement with confidentiality in proceedings against him or her. But, this would not prohibit initiation of action for any misconduct.
The aim of regulation is to curb insider trading to protect the interest of investors at large and it defines ‘insider trading’ as trading of securities while in possession of unpublished price sensitive information.
The insider trading is mainly carried out in a secret manner and the offenders typically use proxies for communicating the relevant information and for executing the trades.
An informant would also get a hotline for sharing details to ensure confidentiality and a possible amnesty or settlement for minor wrongdoings in return for cooperation in the probe.
However, auditors will not be able to allow to get this benefit as they are duty-bound to report any wrongdoing. Hence, these benefits would only be available to individuals and corporate.
As any direct evidence of such communication is rarely available easily, the detection and prosecution of insider trading remains a challenge as such type of cases rakes longer time to investigate, establishing links and procuring proof.
It is necessary for SEBI to built confidence among investors and ensure integrity of the market by employing all legal means to detect insider trading and initiate action at the earliest.
A detailed set of regulations has been, therefore, prepared after taking into account the feedback SEBI received on a public discussion paper floated in June.