The Need to Legalize and Regulate Insider Trading - An Analysis

  • Anuradha Ghosh 1*The West Bengal National University of Juridical Sciences; Kolkata, India
Keywords: Privacy Laws, Kotak Committee, Fiduciary Duty, Capital Markets, SEBI (Prohibition of Insider Trading) Regulations 2015

Abstract

Insider trading is perceived as a problem across capital mar-kets. The Securities Exchange Board of India (SEBI) created the SEBI (Prohibition of Insider Trading) Regulations, 2015, which criminalizes insider trading. However, insider trading laws have faced several problems at the implementation and enforcement stage. This article considers these problems from the viewpoint of the economic rationale that insider trading should be permitted in capital markets and thus le-galized. These economic arguments have largely been ig-nored by regulators who have continued to come down hard upon insider trading, despite limited success. Moreover, due to concerns related to privacy, insider trading investigations may face greater hurdles in the future. This article takes these factors and economic arguments into consideration and balances them against the regulators' concerns to suggest that insider trading be not only prima facie legalized, but also regulated when there is a breach of fiduciary duties or when there is a dissemination of positive information.

References

2 Eugene F. Fama, Efficient Capital Markets: A Review of Theory and Empirical Work, 25 (2) JOURNAL OF FINANCE 383, 383 (1970).3 See Daniel R. Fischel& Dennis W. Carlton, The Regulation of Insider Trad-ing, 35 STAN. L. REV. 857 (1982). 4 See HENRY G. MANNE, INSIDER TRADING AND THE STOCK MARKET (The Free Press, 1966). 5Henry G. Manne, Insider Trading: Hayek, Virtual Markets, and the Dog That Did Not Bark, 31 J. CORP. L. 167, 170 (2005). 6STEPHEN J. SPURR, ECONOMIC FOUNDATIONS OF LAW, 234 (Routledge, 2010).7 Fischel& Carlton, supra note 3, at 857-868 8 Roy A. Schotland, Unsafe at Any Price: A Reply to Manne, Insider Trading and the Stock Market, 53 (7) VA.L.R. 1425,1433 (1967). 9 Fischel& Carlton, supra note 3, at 868. 10 Id at 868.
11 Carol Roth, It's time to legalize insider trading, CNBC, (Jun. 17, 2014), https://www.cnbc.com/2014/06/17/its-time-to-legalize-insider-tradingwall-streetcommentary.html.12 Doug Bandow, Its Time to Legalize Insider Trading, FORBES, (Jan 20, 2011), https://www.cato.org/publications/commentary/its-time-legalize-insider-trading. 13 ANDREW M. CHISHOLM, AN INTRODUCTION TO INTERNATIONAL CAPITAL MARKETS: PRODUCTS, STRATEGIES, PARTICIPANTS, 134 (John Wiley&Sons, 2009). 14 JONATHAN R. MACEY. INSIDER TRADING: ECONOMICS, POLITICS, AND POL-ICY, 4 (Aei Press, 1991) 15 Fischel& Carlton, supra note 6, at 863; See Ronald Coase, The Problem of Social Cost, 3 J. L. and ECON 1 (1960).16 Id. at 870-871. 17 Spurr, supra note 6, at 234. 18 Fischel& Carlton, supra note 6, at 871-872. 19 Harold Demsetz, Corporate Control, Insider Trading and Rates of Return, 76 (2) THE AMERICAN ECONOMIC REVIEW: Papers and Proceedings of the Ninety-Eighth Annual Meeting of the American Economic Asso-ciation 313, 315 (1986). 20 Manne, supra note 4, at 169.21 Bandow, supra note 12. 22 Id. 23 See Schotland, supra note 8, at 1443. 24 See Frank H. Easterbrook, Insider Trading, Secret Agents, Evidentiary Pri-vileges, and the Production of Information, 1981 SUP. CT. REV. 309 (1981).25 Jonathan R. Macey, Beyond the Personal Benefit Test, YALE LAW & ECO-NOMICS RESEARCH PAPER NO. 565, 10 (2017). 26 Sandeep Parekh, Overhauling Insider Trading Laws, FINANCIAL EXPRESS (Dec. 19, 2013), www.financialexpress.com/archive/column-overhauling-insider-trading-laws/1209226/. 27 Schotland, supra note 7, at 1438. 28 Id. at 1477.29 George W. Dent, Why Legalised Insider Trading would be a Disaster, 38 DEL J CORP LAW 247 (2013). 30 Fischel& Carlton, supra note 6, at 881. 31 Parekh, supra note 26.32 The Companies (Amendment) Act, 2017, No. 1 of 2018, s. 65. 33 SEBI (Prohibition of Insider Trading) Regulations 2015, r. 2(1)(g); SEBI (Prohibition of Insider Trading) Regulations 2015, r. 2(1)(n) 34 SEBI (Prohibition of Insider Trading) Regulations 2015, r. 2(1)(g).35 Id. 36 SEBI (Prohibition of Insider Trading) Regulations 2015, r. 3(1) 37 SEBI (Prohibition of Insider Trading) Regulations 2015, r. 4(1) 38 SEBI (Prohibition of Insider Trading) Regulations 2015, r. 3(2). 39 UmakanthVarottil, Due Diligence in Share Acquisitions: Navigating the In-sider Trading Regime, JOURNAL OF BUSINESS LAW (2017).40 SEBI (Prohibition of Insider Trading) Regulations 2015, r. 4(2). 41 Id. at r. 10.
42 See Ankit Handa and Arunima Vijay, Harmonization of Insider Trading Norms and the Companies Act, INDIACORPLAW BLOG, ( Jan. 31, 2018),https://indiacorplaw.in/2018/01/harmonization-insider-trading-norms-companies-act.html.
43 Handbook of Statistics on the Securities Market 2017, SEBI, https://www.sebi.gov.in/sebiweb/home/HomeAction.do?doListing=yes&sid=4&ssid=32&smid=0.44Data collected from World Federation of Exchanges, https: //www.world-exchanges.org/focus/index.php/in-every-issue/statistics/market-statistics?limitstart=0. 45 SEBI revokes insider trading orders against ex-MCX officials, LIVE MINT, (Jan. 2018) https:// www.livemint.com/ Money/ 1h3S7CyUKp3v Vw4IWNGn8L/Sebi-revokes-insider-trading-orders-against-exMCX-officials.html.46 John C. Coffee, Jr., Law and the Market: The Impact of Enforcement, 156 (2) U. PA. L. REV. 229, 266 (2007). 47 See Patrick Augustin, Menachem Brenner, and Marti G. Subrahma-nyam, Informed Options Trading prior to M&A Announcements: Insider Trading? Working Paper, Stern School of Business NYU and McGill University (2014). 48 Id. 49 Ben Chapman, FCA: City watchdog secures just 12 insider trading convic-tions in five years, INDEPENDENT (Jan. 19 2018) https:// www. indepen-dent.co.uk/news/business/news/fca-city-london-insider-trading-convictions-five-years-financial-conduct-authority-a8167486.html.50 SEBI, Report of the Committee on Corporate Governance (2011) https://www.sebi.gov.in/reports/reports/oct-2017/report-of-the-committee-on-corporate-governance_36177.html.
51 SEBI got new powers in 2013 to fight Sahara, Saradha and other scams, FIRST POST (Dec. 21, 2014) http://www.firstpost.com/economy/sebi-got-new-powers-in-2013-to-fight-sahara-saradha-and-other-scams-1315993.html. 52 Rafael Nam, Exclusive: Prescient messages about Indian companies circulate in WhatsApp groups, REUTERS (Nov. 16, 2017) https:// in.reuters.com/article/india-whatsapp/exclusive-prescient-messages-about-indian-companies-circulate-in-whatsapp-groups-idINKBN1DG0IQ.53 Id.
54 Pavan Burugula, WhatsApp refuses to share user-specific data with SEBI, BUSINESS STANDARD (Mar. 1 2018), http://www.business-standard.com/article/technology/whatsapp-refuses-to-share-user-specific-data-with-sebi-118030100069_1.html. 55 Justice K S Puttaswamy (Retd.) and anr. v Union of India and ors (2017) 10 SCC 1.
56Sebi scans Facebook 'likes'; finds evidence in insider trading case, ECONOMIC TIMES (Apr. 19 2018) http://economictimes.indiatimes.com/ article-show/ 63830095.cms?utm_source= contentofinterest&utm_medium = text&utm_campaign=cppst.57 Bandow, supra note 12. 58 Id.59 David D. Haddock, Insider Trading, The Concise Encyclopedia of Econom-ics,https://www.econlib.org/library/Enc1/InsiderTrading.html. 60 Id. 61 See Michael C. Jensen and William H. Meckling, Theory of the Firm: Ma-nagerial Behavior, Agency Costs and Ownership Structure, 3 (4) JFE 305 (1976). 62 SEBI, Report of the Committee on Corporate Governance, 50 (2017).63 SEBI, View on the Recommendations of Kotak Committee on Corporate Go-vernance, 10 (2017) https://www.sebi.gov.in/ sebi_data/ meetingfiles/ apr-2018/1524031522572_1.pdf. 64 Parekh, supra note 25. 65 Bandow, supra note 11. 66 See Stephen M. Bainbridge, The Law, and Economics of Insider Trading: A Comprehensive Primer, (2001) http://papers.ssrn.com/ paper.taf? ab-stract_id=261277.67 Kristoffel Grechenig, Positive and Negative Information - Insider Trading Rethought, University of St. Gallen Law School Law and Economics Re-search Paper Series Working Paper No. 2007-28, 4. 68 Idat 11.
Published
2020-01-01