In assuming a social, political and economic dimension that is unparalleled in modern history, the dreaded Covid-19 has also spun many cautionary tales in its journey across the world, making pitstops at economic power players such as China, UK, USA and India.
One of its obvious impacts has been on global securities markets. Whether it is the Dow or the S&P 500, or closer home, the NIFTY and SENSEX, indices and markets across the world have taken a massive beating.
In India particularly, the impact of trade-wars, crude oil prices, liquidity problems, bank frauds and weakening rupee all imploded into the stock markets with the arrival of Covid-19, sending our stocks in a volatile frenzy.
Both NIFTY and Sensex, after a record run in 2019, saw precipitous falls as well as trading halts at both of India's largest exchanges, on account of lower circuit triggers.
However, like clouds and their silver linings, such turbulent times also pose a lucrative opportunity for traders, especially those with insights into the impact of the prevailing state of affairs on listed companies.
Information about key performance metrics, such as financial projections, business disruptions, material contracts, governance responses, etc., allow a party to foresee underperformances, anticipate unexpected benefits and hence plan their trading and make allocation decisions more efficiently.
But when such information is not generally available to the market at large, the asymmetry allows for profiteering (or avoidance of loss) that can be penalised under the law in the form of "insider trading".
Insider trading is a species of fraud and traditionally has been viewed as a crime of "misappropriation", where fiduciaries of the company such as directors, CFOs and other persons in key management roles breach the duty of trust owed to the company's shareholders and profit from non-public information.
However, in such unprecedented times, insider trades may not be limited to traditional company insiders alone. For instance, the US, arguably the jurisprudential fount of insider trading laws as we know them today, has been rattled by recent news about senators trading in stocks on inside information about the Covid-19 pandemic.
It has been alleged (and extensively reported) that members of the US Senate sold a significant portion of their holdings in advance of the market crash, as well as purchased shares, based on non-public information, gleaned from confidential congressional briefings about a growing public health crisis.
It is important to mention here that, unique to the USA, members of its Congress are governed by a special legislation, the Stop Trading on Congressional Knowledge Act, 2012, which prohibits elected officials from using information received in their public roles, for private profit.
On March 25, 2020, the Securities and Exchange Commission (SEC) issued a resounding and comprehensive guidance note, reminding companies to make prompt disclosures of information as well as for persons to refrain from trading prior to the dissemination of any such material information.
This was timely and served dual purposes - an advisory to disclose as well as a note of caution, reminding market participants of continued surveillance and vigilance by the US regulator.
In India, insider trading is a strict liability offence and regulated in terms of the SEBI (Prohibition of Insider Trading) Regulations 2015.
Very stringently worded, these regulations prohibit selective communication of any unpublished price sensitive information and also penalise trading whilst in possession of the same.
The law is agnostic to the relationship of the individual with the company; as long as the person trading has, or is reasonably expected to have, access to such data, he can be penalised.
SEBI also requires listed companies to formulate a code of conduct, put in place blackout periods, pre-clearance mechanisms and maintain processes that protect the integrity of their financial and other sensitive information.
In recent years, SEBI has also stepped up enforcement and investigations, using technology to enhance surveillance of what is often a difficult transgression to clamp down on.
However, Covid-19 will undoubtedly pose unique challenges to our regulator on this front. Although listed companies are required to make disclosures of material events, it will be a practical challenge to quantify or meaningfully articulate the potential impact of such a dynamic crisis on shareholders.
Since the pandemic itself and governmental responses to it are evolving rapidly, cogency of investor communication will naturally be impaired.
Consequently, the assessment of whether any information has actually assumed a certain "price sensitivity" or not, can never be a scientific one.
This poses somewhat of a Hobson' choice to promoters, directors and other key actors within a corporate, when it comes to their personal trades in the company's stock.
This problem is further compounded by the fact that submission of financial results has been extended to June 30th by SEBI, to assist with compliance burdens during Covid-19, which means that trading window closures will be automatically extended for the next two months, unless specifically exempted by the regulator or case-by-case exceptions from the compliance officer itself.
Lastly, without key tools of the trade, such as phone tapping powers, SEBI will find it arduous to secure convincing evidentiary data, at a time when governmental lockdowns have enforced work from home protocols sine die, compromising on the conventional methods used by listed companies to protect their information.
Incidents of "accidental" tipping are bound to arise, since the work from home environment will naturally create headroom for information leakage and questionable employee conduct.
As corporate India tries to find its feet within the new normal that is emerging, it is clear that our securities markets will continue to battle old problems, now clothed in new garb.
It is therefore critical for both companies and regulators to formulate new solutions to address these unique concerns. And for SEBI to also consider issuing proactive, detailed advisories that set the tone for expected market conduct.
(The author is Partner, Cyril Amarchand Mangaldas. The views expressed are of the Author, and don't necessarily reflect the position of Cyril Amarchand Mangaldas.)
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