Insider trading refers to the purchase or sale of securities based on substantial, non-public information. Legal insider trading happens when employees purchase or sell company stock with correct disclosures. Illegal insider trading damages both market integrity and investor confidence. This article examines insider trading legislation in India and the United States, concentrating on their evolution, enforcement, and problems.
Historical Background
The United States pioneered insider trading restrictions, evolving its framework via various milestones: (Cox, 2019)
Key Provisions
| Year | Event | Impact |
| 1934 | Enactment of the Securities Exchange Act | Foundation for regulating securities markets and insider trading. |
| 1980 | High profile case (Ivan Boesky) (van Boesky and Insider Trading. (1986, 1986) | Led to heightened scrutiny and stricter laws. |
| 2002 | Sarbanesoxley Act | Enhanced corporate governance and penalties. |
| 2010 | Dodd-Frank Act | Introduced whistleblower rewards and expanded enforcement |
Key Provisions
- Section 10(b) of the Securities Exchange Act of 1934, together with Rule 10b-5, prohibits manipulative practices. The Insider Trading and Securities Fraud Enforcement Act of 1988 provided for civil penalties and incentivized reporting.
- The Dodd-Frank Act of 2010 incentivized whistleblowers by providing monetary incentives and legal protections. (Dodd-Frank Wall Street Reform and Consumer Protection Act, 2010)
Enforcement Mechanisms The USA has a two-pronged approach:
Landmark Cases
- United States v. O’Hagan (1997) established the “misappropriation theory,” which expanded the scope of insider trading liability.
- SEC v. Rajaratnam (2011): Showed the usefulness of wiretaps, resulting in a record $92.8 million penalty.
Insider Trading Laws in India Historical Development
Insider trading law in India has emerged over the years, significantly with developments after 1992:
Key Features SEBI (Prohibition of Insider Trading) Regulations of 1992:
- Initial definitions and punishments. SEBI (Prohibition of Insider Trading) Regulations, 2015: Definitions extended to related persons and unpublished price-sensitive information (UPSI).
- The essentials of the 2015 regulations: Trading Plans: Allow for pre-approved plans of the insiders for trading. Disclosure Requirements: Mandatory disclosure for significant trades. (https://www.sebi.gov.in, 2015)
- Enforcement Mechanisms Landmark Cases Hindustan Lever Ltd. (1998): Handled related-party transactions.
- The Rakesh Agarwal case (2004) defines insider knowledge and SEBI’s authority.
Comparative Analysis
Challenges in Regulation in United States
- Technological Complexity: High-frequency trading and powerful algorithms disguise insider trade patterns, making detection harder.
- Cross-border trade: Globalization and rising foreign participation complicate enforcement in insider trading charges involving many jurisdictions.
- Ambiguity in Law: Cases like Salman v. United States (2016) highlight some gaps in legal interpretation, such as evaluating the “personal benefit” of tipping secret knowledge.
- Market infrastructure: While the United States has established infrastructure, detecting insider trading remains tough in algorithm-driven situations.
- Judicial and Enforcement Delays: While litigation is frequently delayed due to procedural complexities and high costs of proof, the United States has greater resources to address these difficulties.
- Awareness among stakeholders: Despite high awareness levels, new Market entrants and smaller businesses must get continual education on insider trading restrictions.
Challenges in Regulation in India
- Market infrastructure: SEBI is not able to monitor and report suspicious trading operations effectively due to a lack of real-time detection capabilities.
- Cross-border trade: The problem is that there are not enough international agreements to coordinate the enforcement across borders. (SEBI v. Hindustan Lever Ltd.)
- Ambiguity in Law: The ambiguous definition of “connected persons” and “unpublished price-sensitive information (UPSI)” is one of the enforcement issues.
- Judicial Delays: Long drawn litigation undermines enforcement as well as the deterrent effect of insider trading rules.
- Stakeholder Awareness : Most retail investors and business bodies are not aware of all the regulations regarding insider trading and hence commit unintentional violations.
Key Takeaways from the USA for India
- Enhance whistleblower programs: India could adapt a structure for the whistleblower program in the USA’s Dodd-Frank Act by paying whistleblowers a portion of the amount collected from penalties. In the SEC v. Rajaratnam case, the tips from whistleblowers helped the fraud come to light. SEBI can further their innovation by creating an identity-anonymous blockchain-based site where whistleblowers can, in a safe and assured manner, report infractions without the risk of reprisal or loss of confidential status.
- Strengthen Penalties. Increasing the punishment for insider trading, such as imposing harsh fines and long-term imprisonments, can be deterring. For instance, Rajaratnam was fined $92.8 million in the United States. SEBI could also consider establishing public-facing “penalty dashboards” that publicly display notable enforcement actions to deter potential violators.
- Leverage Advanced Technology: The United States uses artificial intelligence and advanced analytics to monitor trading activity for suspicious tendencies. SEBI can collaborate with digital entrepreneurs to develop real-time monitoring solutions that leverage machine learning to identify anomalies. For instance, SEBI could use Natural Language Processing (NLP) to identify insider trading risks based on news, social media, and trading data.
- International cooperation: The United States collaborates with global regulatory bodies to enforce cross-border regulation, including the International Organization of Securities Commissions (IOSCO). India can develop its collaborations with countries that experience regular insider trading cases. A new approach may be establishing a “Global Insider Trading Taskforce” that coordinates with leading international markets to exchange live data and harmonize actions.
- Clarify legal semantics: “Connected persons” and “unpublished price-sensitive information” can be clarified to remove ambiguity. The United States, for instance, clearly defines the culpability of the misuse of confidential information through the concept of “misappropriation theory.” India could design an interactive website with case studies, regulatory interpretations, and frequently asked questions for stakeholders.
- Market awareness: United States publicizes to its investors with campaigns and business education plans. SEBI can play this card by developing a game-type mobile application that allows its users to experience simulation in trading scenarios, creating user awareness about the threat of insider trading and complying. For instance, users get into scenarios where they notice likely cases of insider trading, win prizes, and, as such, make the education fun and easy to absorb.
References
- Cox, J. D., Hillman, R. W., & Langevoort, D. C. (2019). Securities regulation: Cases and materials (9th ed.). Wolters Kluwer Law & Business.
- Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010).
- Ivan Boesky and Insider Trading. (1986, November 23). The New York Times. Retrieved from https://www.nytimes.com
- Salman v. United States, 580 U.S. ___ (2016).
- Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745 (2002).
- Securities and Exchange Board of India. (2015). SEBI (Prohibition of Insider Trading) Regulations. Retrieved from https://www.sebi.gov.in
- Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq.
- Securities and Exchange Commission v. Rajaratnam, 622 F.3d 159 (2d Cir. 2011).
- SEBI v. Hindustan Lever Ltd., AIR 1998 SC 1625.
- United States v. O’Hagan, 521 U.S. 642 (1997).
Author: Aniket Shivaji Shinde, an LL.M. student at Symbiosis International Deemed University.
