By Shreenivas Kunte, CFA, Adjunct Faculty – Incharge Trade/Research Lab, S.P. Jain Institute of Management & Research
It has been a good time for market integrity watchers in India. Late last week, the Securities Exchange Board of India, barred the Chairman and Managing Director of a listed company from the securities market. Last month, the regulator restrained a Cayman Island based foreign institutional investor from the markets. The other widely covered case last month was the Securities Appellate Tribunal’s decision to uphold SEBI’s fine on an insider trading charge against a listed blue chip company. It is increasingly clear that the SEBI is following through on its reported comment earlier this year on making “Insider Trading” a focus area.
Insider trading crimes (12% of 2013 SEBI investigations) result from trading based on unpublished material information that corporate insiders have. These crimes maybe simpler to execute than the market manipulation (44%, SEBI annual report) related crimes that top SEBI’s investigative action. But the enormity and expanse of work in monitoring disclosures / trade foot prints of a large number of associated “insider” executives can make detection and prevention difficult. From the company’s management to secretaries, employees, company accountants, lawyers and their relatives – anybody in the know of “insider information” could become a potential perpetrator. Given this very broad detrimental impact to market integrity, deterring and penalising illegal insider trading becomes imperative and justifies the focus that regulators have on illegal insider trading activities.
But does the larger audience whose support is so very critical, understand all this? The aura or aspirational value that a hedge fund manager or an investment banking specialist could carry in the developed world (before Lehman exposed the greed and flaws that is) may have zero recognition in many parts of India. The data on India’s household savings suggests that India’s gross household savings rate at 33% is the third highest in the world after China (50%) and Saudi Arabia (46%). But investments in shares at less than 2% of the household savings basket confirms the minimal interest that retail participants have in capital market activities. Middle class perception for the stock market in India is still seen closer to a speculative endeavour such as a casino rather than a sophisticated market place that is designed to provide an equitable framework for capital exchange based on rules and a systematic body of financial knowledge.
In the past, the number of insider trading regulatory investigations in India have averaged at about 24 per year (SEBI 2012-13 annual report, enforcements could be lower) compared to more than 40 enforcement orders every year by the SEC in the US. Given the high trading volume that India (world’s top 3) has, there may be a lot more to clean-up.
Limitations to the regulatory response to illegal insider trading so far reflects the developing state of the markets in India as well as the legal (delays), technological (equipment), regulatory (caps) and cultural (indifference) aspects of the market place. Legislative, administrative and judicial thrust in democracies such as India is driven by popular support. And popular support against capital markets related white collared crimes is almost non-existent. Understandably, the wider public concern is centred on “survival” struggles rather than issues related to insider trading and or equities. Awareness campaigns on white collar crimes such as insider trading, media support – not just in the English dailies – but also to the larger (c90% readership) vernacular audience will be required to apprise the public on both the treasure chest which is the markets and the potential robbers and their methods.
Enhancing credibility and trust is critical for increasing overall participation, efficiency and recognition for the market place. To that end, awareness, investor education, legislative support, enhanced power for the regulator, sophisticated surveillance mechanisms, stronger legal framework and most of all fear of law are among the areas in which advocacy will need to increase efforts and facilitate support.