Capital market regulator Securities and Exchange Board of India (SEBI) on Monday released a discussion paper for informant mechanism related to insider trading, wherein whistleblowers could get monetary reward of up to Rs 1 crore.
The regulator proposed a monetary reward in case the information provided by the informant comply with the informant policy and monies are disgorged as a result of any action taken on the basis of credible and original information, and leads to a disgorgement of at least Rs 5 crore.
According to the SEBI, the proposed amendments to the SEBI (Prohibition of Insider Trading) Regulations, 2015 will provide "near absolute confidentiality along with appropriate safeguards", and would also help in strengthening the mechanism for early detection of insider trading and better enforceability.
The mechanism will include a dedicated reporting window, voluntary information disclosure form, wherein the informant would submit details of credible, complete and original information relating to an act of insider trading, including communication of unpublished price sensitive information or trading in violation of the code of conduct.
Quantum of reward
The total amount of monetary reward will be 10 per cent of the monies collected but will not exceed Rs 1 crore or such higher amount as may be specified. "An interim reward not exceeding Rs 10 lakh 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 at least twice the final reward," it added.
What is insider trading?
Insider trading is the trading of a company's stock or other securities (such as bonds or stock options) by individuals with possession of unpublished price sensitive information (UPSI). Insiders usually indulge in insider trading through a proxy to whom the relevant information is communicated.
Why SEBI needs reward policy for insider trading cases?
Direct evidence of insider trading is not easily available, but criminal law requires proof to be established beyond reasonable doubt to successfully prosecute such cases. While investigating cases pertaining to insider trading, the regulator faces various challenges, such as establishing transmission of UPSI and Identification of connection between insiders and those who traded. These challenges could result in the investigation in insider trading cases taking a longer time for completion as opposed to cases pertaining to other kinds of market manipulation.
As a step further towards strengthening the mechanism for early detection of insider trading and better enforceability, it is desirable and prudent that SEBI must consider 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 incentivize timely reporting of information relating to insider trading to SEBI at the first available opportunity.