Sebi suggests new informant mechanism with rewards to curb insider trading

Sebi head office in Mumbai

Sebi Monday proposed an informant mechanism to blow the whistle on insider trading cases, wherein genuine whistleblowers could get monetary reward of Rs 1 crore as well as amnesty from regulatory action.

Proposing a mechanism that provides "near absolute confidentiality along with appropriate safeguards", Sebi said it would help strengthen the mechanism for early detection of insider trading cases.

It is desirable that Sebi considers instituting a process that enables timely reporting of instances of insider trading violations and also provide for grant of reward with adequate checks and balances that could incentivise timely reporting of information, according to a consultation paper.

Insider trading refers to trading of securities while in possession of Unpublished Price Sensitive Information (UPSI) about the particular securities.

Monetary reward would be considered for an informant subject to certain conditions. This would be in the case where monies disgorged is at least Rs 5 crore.

"The total amount of monetary reward shall be 10 per cent of the monies collected but shall not exceed Rs one (1) crore or such higher amount as may be specified.

"An interim reward not exceeding Rs 10 lakhs may be given at the stage of issuance of the final order by the Sebi against the person directed to disgorge.

"The final reward, after adjusting the interim reward, shall be issued after collection or recovery of the monies disgorged equal atleast twice the final reward," Sebi said.

The reward would be paid from the Investor Protection and Education Fund (IPEF).

With respect to an informant, Sebi could consider cooperation rendered in determining any enforcement action or settlement application.

"An informant who is culpable but voluntarily co-operates and assists Sebi may be eligible for reward under this scheme and shall also be eligible for settlement with confidentiality in the proceedings that may be initiated against him. This shall however not prohibit initiation of action for any misconduct," the consultation paper said.

The informant would be required to fill a Voluntary Information Disclosure Form (VIDF) containing credible, complete and original information related to insider trading including those pertaining to UPSI.

While directly submitting the VIDF, the informant would need to disclose the identity. In case, an informant wishes to submit anonymously, the VIDF should be submitted through an representative who is a practising advocate.

It would be mandatory for the informant to disclose the source of original information besides providing an undertaking that the information has not been sourced from any person related to Sebi, it said.

The regulator has also mooted setting up of an Office of Informant Protection (OIP) that would device the policy relating to receipt and registration of VIDF, deciding upon the issue of grant of reward to the informant upon completion of enforcement action and other related matters.

The OIP would serve as a medium of exchange between the informant/ legal representative and the board.

"A hotline shall be maintained by the OIP to guide persons to file information as per the regulations but not to register any complaint or information.

"The hotline would thus serve as a process to facilitate submission of information by the informant," the consultation paper said.

The proposed policy would be implemented by amending Sebi (Prohibition of Insider Trading) Regulations, 2015.

The deadline for submission of public comments on the consultation paper is July 1.

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