Regulator should hasten insider trading cases

Rajat Gupta, former global head of Mckinsey’s case has brought the focus back on insider trading. Rajaratnam, who benefited from Gupta's information, had already been sentenced to 11 years in prison.

In Gupta's case, the details of telephone conversations and e-mails were used to establish links between the two people.

Insider trading is rampant even in India and perhaps, more than just information flow. People like lawyer of a company, a printer, a merchant banker, an auditor, a supplier, a news channel or maybe even a PR/IR agency. However, the market regulator is yet to set a stern example for offenders.

Cases need to be investigated and taken to lawful conclusion by bringing the culprits to book. This must be irrespective of the stature of the person being investigated. Once exemplary punishment is awarded, it would act as a deterrent to others.

Gupta was a man of great stature and the US's Securities and Exchange Commission (SEC) needs to be complimented for bringing an important case to a stage of completion in less than eight months.

In India, we have a case involving India's largest private sector company over the merger of two of its companies where insider trading was allegedly done. This occurred in November 2007 and is hanging fire four-and-a-half years later. Time and again one hears of the case being settled, but to no avail. Justice delayed is justice denied and this seems to be the norm in the country.

There is another example in which a company involved in the business of ship building announced on November 22, 2011, they would be inducting a strategic investor on board. The investor was to buy 81.9 million shares of the company at Rs 110 each against the current price of Rs 58 on that day. It’s about seven months since and no such placement has happened and one has not heard any further from the company. Is it fair to allow company promoters and management to get away with fooling investors and other stakeholders by simply making a statement without any accountability? The one thing that was achieved was that, post this announcement the share price began to rise and is currently at Rs 83.

Let us take the more recent and well-known case. A large oil marketing company’s shares were bought an insurance major all through the December-March quarter of 2011-12. The famous offer for sale happened at a price range of Rs 290-305. The rise in share price was helped by the insurer’s purchase at Rs 245-303. If this would have happened in a private company, the promoters and associates would be charged with insider trading. Would the same apply to these two government-controlled companies?

While there is no answer to whether these companies will every face the regulator’s wrath or not, everyone in the business of stock market or even investors understand insider trading in some form or the other is taking place. Since the consent order mechanism, which has been used to settle insider trading cases in the past, is likely not to be used in the future, the regulator needs to look at other mechanisms to resolve insider trading cases.

The fact is, ultimately no retail or institutional investor, will feel comfortable in a situation where share prices can be manipulated due to insider information or trading. After all, it is their money at stake as well.

The writer is founder, Kejriwal Research and Investment Services