The Securities and Exchange Board of India (Sebi) recently cleared a number of decisions in its board meeting. One major step was to change insider- trading regulations, which prohibit the communication of unpublished price-sensitive information by insiders, those legitimately in the know, for personal gain. The current regulations were framed in 1992 and the new rules have tightened restrictions in keeping with global best practices. Another important change is the introduction of regulations for the settlement of certain administrative and civil proceedings even before the issuance of a show-cause notice. Currently, settlement can occur only after a formal show-cause notice is issued. As the regulator of a rapidly evolving and globally interconnected securities market, Sebi’s steps to revamp its regulatory framework are welcome. However, some changes may lead to unwelcome consequences and need further consideration.
Insider trading is widely believed to be a regular phenomenon in the Indian securities market. One reason for this is the lack of adequate enforcement machinery. Therefore, while changes to insider trading regulations were required, Sebi must now make commensurate additions to its supervisory and enforcement capacity. The Justice N.K. Sodhi report, on which the new regulations are based, had also recommended that public servants with access to unpublished price-sensitive information be brought within the definition of insiders. But Sebi does not indicate if that’s been incorporated.
Sebi’s regulations for the settlement of proceedings may require greater consideration. The regulations have apparently been introduced in order to allow persons to settle proceedings in cases of minor violation and avoid delays and administrative costs. The issuance of a show-cause notice is, however, critical to the principle of rule of law. A show-cause notice compels the enforcement authority to provide detailed reasons for the proposed action. The draft Indian Financial Code proposed by the Financial Sector Legislative Reforms Commission strengthens this process rather than substituting or bypassing it. The presence of such a pre-show-cause notice mechanism also creates incentives for rent-seeking. Therefore, while Sebi’s moves to undertake regulatory reform are welcome, it must consider some of its proposals in greater detail.