Should insider trading cases return to consent mechanism?

In May 2012, a month in which there was no board meeting, the Securities and Exchange Board of India (Sebi) issued a circular exempting offences under Insider Trading Regulations from the scope of its consent order mechanism. The wording of the circular and the commentary that followed suggested the market regulator wanted to deal with insider trading and such other serious offences with iron fists and, therefore, didn’t want to settle.

A subsequent note placed before the Sebi board at its meeting on June 26, 2012, showed the circular had followed a public interest suit by a Deepak Khosla, who had challenged the 2007 consent circular. He’d contended it defeated the scheme of deterrence set out in the Sebi Act and that the orders were so worded that important information about the matter so settled got prevented from wider dissemination.

About six months later, Sebi issued a list of 149 consent applications it had rejected after the May circular. Among these were application numbers 2466/2011, 2470/2011 and 2471/2011, on alleged violation of insider trading regulations in the shares of Indian Petrochemicals Corp (IPCL) in 2007.

Application number 2471 was from by Manoj H Modi and Smita M Modi. In an order in April 2013, Sebi said material made available showed trades by the Modis were not in violation of the insider trading regulations. In their replies to Sebi, the Modis had contended they were not in possession of any undisclosed price sensitive information and argued that the trades concerned were done “on the basis of charts, economic survey, worldwide demand and supply of petrochemicals” etc. Manoj Modi also argued that his professional relationship with Reliance Industries (RIL) chairman Mukesh Ambani did not come under the definition of ‘connected entities’ under the insider trading laws.

In October that year, the case against Alaska Mercantile, the applicant of 2470, was also dismissed. Alaska was seen to be connected to RIL by Sebi because Dharti Investments, its main funding source, was operating with the same address and common directors as the Mumbai SEZ, Navi Mumbai SEZ and Rewas Ports, all known RIL arms. However, it was argued that Dharti was a non-banking finance company and the funding was in the form of loans in the regular course of business.

Application number 2466 was by Reliance Petro Investments (RPIL), a step-down subsidiary of RIL, in the IPCL case. Unlike the previous two cases, RPIL was found guilty of insider trading by Sebi, based on evidence it had in May 2013. A penalty of Rs 11 crore was levied. But, this order was held to be based on ‘presumptions’ in December by the Securities Appellate Tribunal (SAT), which gave Sebi three months to pass new orders. In one of the first major orders it has passed since chairman U K Sinha got a one-year extension, Sebi has dismissed the case against RPIL. It is not clear if Sebi explored the possibility of challenging the SAT order at the Supreme court. In comparison, it has fiercely fought SAT orders in the DLF issue and other matters.

Khosla would be the best judge of whether the deterrence mechanism in the Sebi Act is better served in this way. This sequence of events gives rise to the question of whether Sebi was better off settling insider trading cases on consent. At least, the consolidated fund would have been richer by a few crores.

A set of 13 entities, including RIL, figured in that January 2013 list of rejected consent applications in the Reliance Petroleum ‘fraudulent and unfair practices’ case. Final orders are due. Sebi should disclose what was the consent offer made by these entities in their rejected applications while passing the final orders.

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