I.

A comparison between the legal systems in India and the United States

The United States' regulatory framework has matured considerably over the last eight
decades, whereas India's regulatory framework is just two decades old, and this fact must be
kept in mind while comparing the two countries' approaches. First, in India, the Securities
and Exchange Board of India (SEBI) oversees the regulatory framework for preventing
insider trading. The Securities and Exchange Commission ['SEC'] in the United States serves
as SEBI's American equivalent. The procedures of both legal systems are subject to oversight
and regulation by the SEBI and the SEC, respectively. While the SEBI (Prohibition of Insider
Trading) Regulations, 19921 and certain provisions of the SEBI Act, 1992 govern insider
trading in India, the Securities and Exchange Commission (SEC) of the United States of
America is responsible for enforcing the law regarding insider trading, with the Securities
Exchange Act of 1934 providing the substantive provisions with the violation of which would
give rise to a penalty in the United States of America.

When comparing the two jurisdictions, it is also vital to look at whether or not a violation of
fiduciary responsibility is required for insider trading liability to emerge. The United States of
America has seen a slow but steady erosion of fiduciary standards when it comes to
determining criminal responsibility for insider trading. The most influential case highlighting
the importance of a fiduciary breach was Chiarella v. the United States2, in which the
Supreme Court of the United States ruled that a general duty to disclose material, non-public
information or refrain from trading did not exist because of a policy of equal access to
information underlying the securities laws. In the Chiarella Case, the Supreme Court
established what is now known as the "classical theory" of insider trading. Similar shifts
away from the violation of fiduciary duty need to attach culpability have been seen in the
Indian framework, particularly after the amendment of 2008. In the matter of Rakesh
Agrawal v. SEBI3, the SAT made some insightful remarks with regard to the fiduciary
responsibility obligation before the 2008 modification in Regulation 2(e).4

The responsibility of a person who has traded based on stolen information is the next critical
component of both regimes that has to be evaluated. It is now generally agreed in the United
States that a violation of Section 10(b) and Rule 10b-5 occurs when an individual

1
SEBI (Prohibition of Insider Trading) Regulations, 1992.
2
Chiarella v. United States 445 U.S. 222 (1980).
3
Rakesh Agrawal v. SEBI [2004] 49 SCL 351 (SAT).
4
SEBI (Prohibition of Insider Trading) Regulations 1992, Regulation 2(e).

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misappropriates important non-public information for the purpose of trading in breach of a
duty of confidence or loyalty.

After the modifications in 2008, it seems that the SEBI in India has gone farther than the
insider trading theories established in the United States of America. The SEBI has made
anybody in possession of non-public price-sensitive information liable under Regulation 35
by adding Regulation 2(e)(ii).6 Thus, it would seem that in India, anybody who has 'received'
unpublished price-sensitive information may be accountable, not only the individual who is
said to have stolen information in breach of any duty or confidence, commercial or personal.

In light of Rule 2(e) and the rest of Regulations (ii), Regulation 3, and Regulation 4, it would
appear that any person in receipt of unpublished price-sensitive information who deals in
securities would be liable for insider trading, even though he may not have breached any duty
either to the company or to any person who was the source of the information. Another
contentious area in both the Indian and American legal systems concerns the question of
whether or not insider trading liability can be imposed simply because trade occurred while
the insider was in possession of the relevant information, or whether or not it is necessary to
prove that the relevant information was actually used in the trade. The United States Supreme
Court ruled that it is not essential to show a causal connection between the theft of
confidential information and the subsequent trading in securities. The term "dealing in
securities on the basis of" has been construed to include “dealing while knowing" of
important non-public information.

Regulation 3 of the Indian regime uses the "possession" criteria to prevent insider trading
"when in possession of" non-public, price-sensitive information. It's unclear exactly what the
situation is inside the Indian administration.

Both nations have comparable criminal culpability provisions in their liability regimes.
However, American law has some laws about culpability that can't be found in Indian law.
The maximum civil penalty for insider trading in India is 25 crore rupees or three times the
amount of illegal gains. This provision is found in Section 15G of the SEBI Regulations.
Section 24(1)7 contemplates criminal prosecution for insider trading and allows for a possible
sentence of 10 years in jail, or a maximum fine of 25 crores, or both. If the defendant does to

5
SEBI (Prohibition of Insider Trading) Regulations 1992, Regulation 3.
6
SEBI (Prohibition of Insider Trading) Regulations 1992, Regulation 2(e)(ii).
7
The Securities and Exchange Board of India Act 1992, s 24(1).

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pay the civil penalty issued by the adjudicating authority, he faces up to ten years in jail (but
no less than one month) and up to twenty-five crores in fines (or both) under Section 24(2).8

The relevant provision of U.S. law is Section 32(a) of the Securities Exchange Act of 1934 9,
which establishes criminal responsibility. It is important to note that if the defendant is not a
natural person; a punishment of up to $25,000,000 may be imposed instead, as in the case of
Raj Rajaratnam, a New York hedge fund manager who was found guilty of a "wilful" breach
and sentenced to up to 20 years in jail. Fourteen charges of securities fraud and conspiracy
were filed against him by the Justice Department in October 2009. On May 11, 2011, a court
convicted Rajaratnam guilty on all fourteen charges. He was said to have built a network of
Intel, McKinsey, IBM, and Goldman Sachs executives.10

II. Analysis of the whistle-blower program in the USA

The PIT Regulations, 201911, which instituted the Informant Mechanism, are not unique;
other jurisdictions have implemented similar measures. Compared to the United States
decade-old whistle-blower structure, India's new mechanism is very comparable. As far as I
can tell, both the Discussion Paper and the PIT Regulations, 2019 are heavily influenced by
the whistle-blower protection policy enacted under the Dodd-Frank Wall Street Reform and
Consumer Protection Act ("Dodd-Frank Act"), which is founded on the three pillars of
anonymity, bounty, and job security. These three pillars ensure that more employees will take
part in organizations since they can now disclose insider trading crimes to authorities in
confidence and without fear of retaliation, in exchange for fair rewards.

Individuals who provide "original information" to the SEC or the CFTC about a violation of
federal securities laws that leads to a successful enforcement action recovering more than $1
million are entitled to receive between 10% and 30% of the recovered amount, as stated in
the Dodd-Frank whistle-blower provisions. Information that is "original" is defined under
Section 78u-6(a)(3) of Title 15 of the United States Code.12 The recent addition of a $5
million incentive maximum to the Whistle-blower Rules has been met with scepticism from

8
The Securities and Exchange Board of India Act 1992, s 24(2).
9
The Securities Exchange Act 1934, s 32(a).
10
Arun Kumar Singh, “INSIDER TRADING: COMPARATIVE ANALYSIS OF INDIA AND USA” (SSRN, 2014)
< https://www.readcube.com/articles/10.2139%2Fssrn.2552418> accessed 30 September 2022.
11
SEBI (Prohibition of Insider Trading) Regulations 2019.
12
United States Code, s 78u-6(a)(3) of Title 15.

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academics. To be eligible for a reward, a whistle-blower must meet all three of the following
conditions. To begin, he must "voluntarily" disclose the material to SEC, meaning he must
contact the agency of his own and not in response to a formal request. Second, it has to be
"unique," and third, it needs to have "led to" an SEC enforcement action that resulted in fines
of $1 million or more.

The Whistle-blower Program is managed by the SEC's Office of Whistle-blower ("OWB"). It

does this with the use of a website that has both information about the program and links to
the paperwork that whistle-blowers need to fill out in order to submit their claims. All forms
submitted to the OWB are transmitted to the SEC's Tips, Complaints, and Referrals System
in a timely manner. The documents filled out by the informants are then reviewed by the
Office of Market Intelligence of the Enforcement Division, which decides how best to go on
with the inquiry after assigning the tips to the relevant individuals. Note that the new
Amendment to the Whistle-blower Rules broadens the definition of "whistle-blower" to
include anyone who submits the initial information to SEC "in writing" and must have done
so before suffering any claimed retribution. A similar procedure for reporting infractions can
be seen in the PIT Regulations, 2019, with informants being obliged to submit the Voluntary
Information Disclosure Form to the Office of Informant Protection in the manner specified by
the regulation.13

III. Recommendation for enhancing the efficiency in India after referring to

USA’s framework

This section offers suggestions on how the Informant Mechanism in India should be

improved. While the current state of insider trading legislation is encouraging, the Securities
and Exchange Board of India (SEBI) might benefit from studying the United States'
regulatory structure for ideas on how to improve its own.

1. Higher Monetary Reward

According to the PIT Regulations, 2019, the maximum financial award is Rupees 1 crore
(10% of the recovered money). It may discourage the informants from reporting the breaches
to the Board, they may instead try to negotiate a larger quantity of money with the offenders
13
Preet Choksi, “Informant mechanism in India and whistle-blower in USA: A step towards curbing insider
trading” (NLUJ Law Review, March 19, 2021) < http://www.nlujlawreview.in/informant-mechanism-in-india-
and-whistleblower-in-usa-a-step-towards-curbing-insider-trading/> accessed 1 October 2022.

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 themselves. Since it is well knowledge that corruption exists in India's marketplaces, the
amount of the incentive is crucial to the system's success.

2. Amalgamation of Employer’s Internal Compliance and Informant Mechanism

The lack of an internal reporting obligation in the United States has been widely criticized in
recent years for luring informants to circumvent an institution's compliance system in pursuit
of incentives from the Securities and Exchange Commission (SEC). However, the question of
going above and beyond internal compliance has been neglected by whistle-blowers, despite
the fact that it is a decisive element in calculating the award. Therefore, it is recommended
that the mechanism adopted under the PIT Regulations, 2019, be paired with the internal
compliance of the employer for the Informant Mechanism to operate effectively. SEBI will
be aided in their investigation if the two systems can be integrated.

3. Guidelines to avoid falling prey to a situation leading to Prisoner’s Dilemma

The entire informant system is based on the cooperation of an individual, who is not the
enforcement team, with the market regulator to catch the individuals that try to hamper the
interests of the players in the market. In this process of catching the insider trading violators,
it is also essential to see that the informant himself does get away with his/her unlawful
actions. The term coined for this issue is ‘Prisoner’s Dilemma.’

The Prisoner’s Dilemma concept itself is well-established as a way to study the emergence of
cooperative behaviour. What this means is that both the parties to a transaction base their
actions to protect themselves at the expense of the other individual. For several years, the
SEC has used this to track down insider trading violations at the cost of exempting the
whistle-blower, who in fact is involved in insider trading, from his punishment.

Therefore, in order to deal with such a circumstance, the market regulator must design
suitable guidelines or norms to establish an impartial body that decides the destiny of the
informant. The SEBI can't handle this alone since a fair examination of the issue has to take
the whistle-blower’s perspective into account. On the basis of the informant's history of
misconduct and his assistance throughout the inquiry, this impartial committee might then
determine the severity of the penalty to be meted out to the informant.14

14
Roopanshi Sachar, “REGULATION OF INSIDER TRADING IN INDIA: DISSECTING THE DIFFICULTIES
AND SOLUTIONS AHEAD” (Journal On Contemporary Issues of Law (JCIL) Vol. 2 Issue 11) <
https://jcil.lsyndicate.com/wp-content/uploads/2017/01/Roopanshi-Dr.-Afzal.pdf> accessed 30 September 2022.

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 IV. Conclusion

With the 2002 amendment, the SEBI reinforced the anti-insider trading legislation. There are
several ways in which this change has made it easier to prevent and investigate insider
trading. Formerly excluded individuals have been included, and efforts made to establish
their responsibility in insider trading instances. In spite of the welcome developments
ushering in from the amendment, SEBI has not made the most of the situation. It has often
been unable to prove its claims because of insufficient evidence. The SEBI's insider trading
investigations should need a stronger and more effective investigative methodology.

The SEBI, in an effort to reduce this behaviour by instilling fear of exposure in the minds of
insiders, could also introduce the notion of giving away bounties or awards. Any individual
whose knowledge leads to the discovery of, or better yet, prohibition of, insider trading is
eligible to receive a prize, and it need not be 10% of the amount discovered. Insider trading
has been going on since the beginning of stock markets and probably will never go away
altogether. However, efforts may be taken at all societal levels, not only by the SEBI but also
by the persons aware of any form of insider trading techniques being involved in, to suppress
this behaviour. Although insider trading is impossible to totally eliminate, it may be mitigated
by regulatory efforts. The only way to prevent future criminals and others who may be
tempted to participate in such depravity is with the use of deterrents.

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