The Sebi regulation seeks to curb insider trading to protect the interest of investors at large and defines 'insider trading' as trading of securities while in possession of unpublished price-sensitive information.
The insider trading is mainly carried out in a clandestine manner and the wrongdoers typically use proxies for communicating the relevant information and for executing the trades.
As any direct evidence of such communication is seldom available easily, the detection and prosecution of insider trading remains a challenge.
Officials said it is imperative for Sebi to employ all legitimate means to detect insider trading and initiate action at the earliest to instill confidence among investors and ensure integrity of the market.
But, Sebi faces several challenges in establishing links and procuring proof while probing insider trading cases, due to which investigation into such cases takes much longer time than in other cases of market manipulation.
To strengthen its investigation and enforcement mechanism, the new mechanism will incentivise people having personal knowledge of insider trading cases and report the same to the watchdog.
The new mechanism has been prepared after taking into account the feedback Sebi received on a public discussion paper floated in June.
Under the proposed amendment to Sebi's PIT Regulations, an informant would need to submit a Voluntary Information Disclosure Form (VIDF) detailing credible, complete and original information related to an act of insider trading, including communication of unpublished price-sensitive information or trading in violation of rules that has occurred, is occurring or is about to occur.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.
Sebi would establish an Office of Informant Protection (OIP), which would be independent from the investigation and inspection wings or any other operational departments. It 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, besides acting as a medium of exchange between the informant (directly or through a legal representative) and Sebi. It will maintain a hotline to help informants submit the details.
While the informant would need to disclose his or her identity to OIP, the identity details would be excised from the information forwarded further.
Those willing to submit any information anonymously would need to appoint a practising advocate as a legal representative.
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.
The informant would be given a reward if Sebi is able to disgorge at least Rs 1 crore of ill-gotten gains from insider trading on the basis of the information. The reward would be 10 per cent of the money collected, subject to a maximum amount of Rs 1 crore.
While an interim reward of up to Rs 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.
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) framework.
Also, any entity associated with the securities markets, including listed firms and intermediaries, would face Sebi action if it subjects any employee to direct or indirect harassment, including by way of demotion, suspension or termination, for breaching any terms and conditions of employment or confidentiality agreements.
At the same time, Sebi would also act against those submitting frivolous or vexatious information under this mechanism.
Under the amnesty clause, Sebi would take into account the cooperation rendered by an informant in deciding any enforcement action or settlement application filed by him or her.
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.
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