The author is a 4th year student of GNLU, Gandhinagar
India is seeing a rise in the number of insider trading cases. Even the top blue chip firms are struggling with the leak of such sensitive information by some or the other source. This includes companies like ICICI Bank, Axis Bank, Videocon, Sun Pharma, Tata Motors and many more. Securities Exchange Board of India (SEBI) was constituted in the wake of the Harshad Mehta Scam in 1992. The powers conferred to SEBI was a result of analysis of different Securities Market Watchdogs all over the world especially the US’s Security Exchange Commission (SEC). However, from the day of its inception, SEBI has been criticized for its failure to investigate and prosecute perpetrators of insider trading in India.
If we look at the number, the convictions pronounced in such cases of Insider Trading are very low. This is because of a number of limitations that SEBI is facing in bringing such perpetrators to book. It is known that the white collar crimes often need a solid string of evidences which can prove intention of the wrongdoer. The best way that this can be proved in the cases of insider trading is if the sensitive information being passed on is itself intercepted by the authorities. This tool is a long shot for SEBI as for a number of years, it has been deprived of a number of investigative privileges.
The malpractices of insider trading are not new to India, but still SEBI lacks basic powers like the power to call in for phone records. It took a USD 6 billion scam for legislators to realize this and bestow the power to SEBI. Hence, only after the aforementioned Saradha Scam of 2013, Parliament through an ordinance amended the Securities Laws (Amendment) Act, 2014[i]and this certainly was a welcome move in order to bring SEBI’s power at par with other regulators all over the globe.
As far as the concept of phone tapping is concerned, in India, as per the Indian Telegraphic Act, 1885, both the Central and State governments have the power to tap phones. When any authority of the governments seek to do so, Home Ministry’s or State Home Secretary’s prior approval is needed. This was challenged in the Apex Court of being violative of a number of fundamental rights, but the court still upheld the legislation citing nation’s security as one of the reasons why it cannot be scrapped off in entirety. Though the admissibility of such records in the courts is still unclear, the Courts have certainly asked the authorities to use the power as a last resort and sparingly.
There are a number of authorities such as Crime Bureau of Investigation, Intelligence Bureau, etc. which have such powers in place to collect evidences, but SEBI is yet to be conferred with the same. SEBI has been requesting government to allow it to wiretap in order to improve the conviction rates, but time and again it has been denied to do so. In 2012, the then SEBI Chairman U.K. Sinha requested the government to grant them such powers, but they were denied and informed that SEBI has investigative powers of a civil court and hence does not possess power to wiretap[ii]. More recently in 2018, a SEBI committee headed by Dr. T.K Viswanathan suggested want of sweeping reforms to the watchdog which included powers to intercept calls in order to aid investigations.[iii]The committee has suggested for direct call interception powers akin to the Central Board of Direct Taxes. This will also help SEBI collect strong evidence against repetitive offenders in cases of insider trading, front running or market manipulation. While the committee has realized and mentioned the possibility of misuse of such power, it still asserts that call interception would be an improvement over the present case. We need to draw our attention on the world’s most active securities market regulator in order to better understand the robust approach which should be applied and hence the same has been discussed hereunder.
The American Approach – Security Exchange Commission’s Powers
The concept of “wiretapping” was discussed by the US Congress for the first time in 1934. Pursuant to this, they enacted the “Communications Act of 1934”. The statute categorically made the activity of wiretapping a federal offence and also inadmissible evidence in the court. But, by the next half of the century, the prosecutors were struggling in proving several offences and hence in 1968, the Congress passed the “Omnibus Crime Control Act”. The Act deals with interception of communication and it states that for such an interception, an application shall be made in writing upon oath or affirmation to a judge of competent jurisdiction and shall state the applicant’s authority to make such application and it also lays down the specific information that must be included in the application.
Earlier, this statute was perceived to be covering certain blue collared crimes until the technology started taking over. As the use of non-interceptable phone calls, e-mails, etc. increased, the authorities concerning white collared crimes were also drawn towards the concept of “wiretapping”. The Securities Exchange Commission has made multiple insider trading crackdowns using this power which includes the high profile conviction of the Indian poster boy abroad- Rajat Gupta and one Rajaratnam. Here, Rajat Gupta was serving as a board member of corporations like Procter & Gamble and Goldman Sachs and he was accused to have passed sensitive information of these corporations to his business partner Rajaratnam who made illicit profits because of this. Though this method has received severe public flak, it still appears to be a necessary one since it aides in obtaining direct evidences in knowing the defendant’s intention to commit such act.
The 1968 Act expressly lists out the nature of offences for which wiretapping can be used. This includes mail fraud, wire fraud, kidnapping, money laundering[iv]and a few other offences introduced later by amendments. However, this does not include securities fraud and this question came before the court in the Rajaratnam case[v]. Here, the court noted that the government had taken due authorization and it had revealed the reason of wiretapping in the application as well. So, even though the offence of insider trading has not been expressly included in the predicated offence list for wiretapping, the court made it clear such evidences would be admissible in bona fide cases.
It has to be noted that the Statute implicates and recognizes that “wiretap must be conducted in such a way as to minimize the interception of communications not otherwise subject to interception”.[vi]This gives due recognition to a subject’s right to privacy. Amidst a number of complications attached to the use of wiretap in such offences of insider trading, one stand that is clear is that even though it is not completely barred, it should still be treated as a last resort used only when all other investigative powers are exhausted.
The paradox of right to privacy and the toothless authorities is here to stay. The suffering party in both these cases is the common citizen. Instead of being skeptical of the consequences if this power is conferred to SEBI, what should be done instead is to put an effective mechanism in place which strikes a right balance. The wiretapping power has been proved to be highly effective in other jurisdictions such as France as well and with increasing number of such cases in India, it appears to be the right time for SEBI to be empowered with the same.
One necessary procedure that needs to be reformed relates to the provisions of the Telegraphic Act which gives bureaucrats the power to give approval to the authorities to wiretap. This also involves certain overlap and conflict of powers, an ideal scenario would be one where a judicial authority with technical knowledge approves such questions. Also, the judgmentofPeople’s Union for Civil Liberties (PUCL) v Union of India has to be well balanced as it said that for the law enforcement agencies to intercept telephonic communications they must follow established legal procedure and must respect an individual’s right to privacy. Also one of the biggest limitations of SEBI continues to be shortage of employees as the ratio the number of employees to companies that it regulates needs an improvement.
All in all, as India jumps up a better ranking in the index of ease of doing business and as we witness more companies being listed, the power to wiretap will certainly send out chills to such wrongdoers. It would also strengthen the concept of free market trade of securities and will draw more investors by guaranteeing investor protection.
[i]”Why SEBI Is Failing at Regulating Insider Trading in India.” IndiaCorpLaw. February 20, 2018. Accessed January 09, 2019. https://indiacorplaw.in/2018/02/sebi-failing-regulating-insider-trading-india.html.
[ii]Pti. “No Powers given to SEBI for Call Records, Phone Tapping: Govt.” @businessline. March 12, 2018. Accessed January 09, 2019. https://www.thehindubusinessline.com/economy/no-powers-given-to-sebi-for-call-records-phone-tapping-govt/article23098017.ece.
[iii]PTI. “Sebi Panel Recommends Seeking Powers to Tap Phone Calls.” Https://www.livemint.com/. August 09, 2018. Accessed January 09, 2019. https://www.livemint.com/Money/nTUk7ZyiPMlsO4TXx3TerO/Sebi-panel-recommends-seeking-powers-to-tap-phones-calls.html.
[iv]Kaplan, Howard J., Joseph A. Matteo, and Richard Sillet. “The History and Law of Wiretapping.”. https://www.americanbar.org/content/dam/aba/administrative/litigation/materials/sac_2012/29-1_history_and_law_of_wiretapping.authcheckdam.pdf.
[v]Vachani, Nilita. “Rajat Gupta’s Role in the Galleon Insider Trading Case.” The Government and Media’s Cover-up after the Gorakhpur Tragedy | The Caravan. August 29, 2018. Accessed January 09, 2019. https://caravanmagazine.in/vantage/rajat-gupta-release-insider-trading.
[vi]Maglich, Jordan. “Once Reserved For Drug Crimes, Wiretapping Takes Center Stage in White Collar Prosecutions.” Forbes. May 21, 2013. Accessed January 09, 2019. https://www.forbes.com/sites/jordanmaglich/2013/05/21/once-reserved-for-drug-crimes-wiretapping-takes-center-stage-in-white-collar-prosecutions/#440f6f8b1969.