Insider track

Stricter insider trading norms are welcome. But Sebi may not have the enforcement capacity.

The US has long had an effective system for tracking insider trading. All transactions of corporate insiders and their friends and family are under scrutiny. Recently,in the US,there has been a move to enlarge the scope of this enforcement apparatus to cover individuals in the policy process who are also privy to market-moving information. A recent Sebi committee has suggested that a similar enlargement of the scope of the enforcement system should come about in India also. At a conceptual level,this is fair and appropriate. If a bureaucrat or a politician has inside knowledge about a policy change,he should not be trading on the market on the side in order to profit from it. Such trading induces three negative consequences. First,it brings about a loss of focus on the main work of the politician or bureaucrat,which is to make policy and not to profit from upcoming changes. Second,it generates an incentive to push in favour of more unexpected policy outcomes,which can induce bigger price movements. Third,it undermines the secrecy that is essential in the policy process: a large number of individuals in financial firms would be observing the trading decisions of politicians and bureaucrats and surmising what is going on.

While the thought is noble,however,there are valid concerns about implementation. Sebi requires a master database of all persons considered insiders,the identity of their immediate family members and collaborators,and the identity of firms for instance,a partnership or a trust that can be reasonably attributed to the person. Once this is done,it would be possible to constantly watch for transactions in the period before major announcements. An investigative ability is required that can marshal the evidence and prove guilt beyond all reasonable doubt as was done in the US in the Rajat Gupta case.

At present,this capability does not exist at Sebi for corporate insiders. There is no point in giving out new powers until the old powers are properly enforced. Until India has a solution for corporate trading by insiders,we should not enlarge the scope of the powers. The rule of law means that the law is consistently enforced on all. Spotty enforcement would mean selective enforcement,which generates corruption and cronyism.