Historically, regulating insider trading has been the exclusive domain of the Securities Exchange Board of India ("SEBI"). This is in line with the regulatory approach witnessed in most jurisdictions around the world. In consonance with the modern regulatory approach, SEBI not only acts as a watchdog, but it is also empowered to constantly fine tune the rules and guidance in relation to insider dealing.
However, with the adoption of the Companies Act, 2013, the Parliament has passed a law outside the purview of SEBI to regulate insider trading. The Companies Act had attempted to incorporate some of the provisions the SEBI (Prohibition of Insider Trading) Regulations, 1992, but SEBI has notified the SEBI (Prohibition of Insider Trading) Regulations, 2015, which changes the law on insider trading considerably. Therefore, there now exist two different regimes that regulate the offence of insider trading.
Section 195 of the Companies Act seems to bring private companies, public companies and listed companies under its purview. While a view has been taken in the legal community that the provision is applicable only to marketable securities, there is no clarification from the Ministry in this regard and we may have to wait and see whether the clarification comes in the form of a notification or a court judgment. For the purposes of this article, we intend to keep our discussion on insider trading limited to its applicability to listed companies.
The inconsistencies between Section 195 and the 2015 SEBI Regulations are many. One of the most striking conflicts is in relation to the defences for the offence. The 2015 SEBI Regulations provide a multitude of defences to an insider. These include communication of Unpublished Price Sensitive Information ("UPSI") in furtherance of a legitimate purpose, any off-market transactions between promoters who are in the possession of the same UPSI, any trades undertaken pursuant to a trading plan, and Chinese walls in case of non-individuals, among others. These defences provide scope for communication of UPSI without such communication amounting to insider trading. Many of these defences have been added in the 2015 SEBI Regulations on the basis of the recommendations of the Sodhi Committee.
On the other hand, Section 195 provides for only one defence – "communication required under the ordinary course of business or profession". This defence has been incorporated on the basis of 1992 SEBI Regulations. While the scope of the defences under the 2015 SEBI Regulations has been expanded significantly, these defences find no correlation to Section 195. Further, the defence of actions undertaken in ordinary course of business is generic in nature and it is difficult to bring the defences under the 2015 SEBI Regulations under its scope.
Section 458 of the Companies Act gives SEBI the power to enforce Section 195 in relation to listed companies. This brings forward an interesting dilemma for SEBI- it has the power and the obligation to enforce two sets of laws, one that it has self-notified and has the power to amend, and the other that has been passed by the Parliament. Further, the two laws have major conflicts in relation to the defences for the same offence. This brings forth the question whether SEBI can convict someone for the offence of insider trading under the Companies Act while they are let off under the 2015 SEBI Regulations.
Generally, the rules of interpretation of statutes demand that a harmonised reading of two conflicting statutes is done. Further, the Courts usually pay heed to a stricter law over a more lenient law, and a special legislation over a more generic one. In the present scenario, while SEBI has the responsibility to govern listed companies, the offence under Section 195 appears to be stricter. Moreover, the Companies Act has delegated the power to enforce provisions for listed companies to SEBI. It must be noted that SEBI only has the power to enforce these provisions under the Companies Act and not regulate them. Besides, it is possible that a Court may argue that as the offence stems from two different regimes of law, an accused must satisfy the defences under both the regimes to be completely acquitted.
Due to above mentioned conflicts, an insider in a listed company will have to take a call on whether it can communicate UPSI even if such communication is an exception under the 2015 SEBI Regulations. It remains to be seen how SEBI undertakes the enforcement of the two diverse insider trading regimes over time. SEBI has more flexibility to alter its regulations and will probably continue to revise the insider trading regulations over the years. On the other hand, amending the Companies Act requires passing a law in the Parliament – a much more difficult and laborious process. From the economic perspective, one cannot forget that regulation is not a 'free good'. The SEBI Act, 1992 and the regulations made by SEBI thereunder, provide an array of punitive tools for SEBI to apply with varying degrees in order to achieve a balance between its duty towards investors and the market as a whole. As such, reducing the market regulator to the role of an investigating officer would go some distance in diluting its mandate and may open the door to more such 'legislative activism'.
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