Insider trading: Rajat Gupta may have walked free in India

The sentencing of disgraced Wall Street bigwig Rajat Gupta to two years in a US prison for leaking confidential corporate information has again put the spotlight on the ineffectiveness of Indian rules in nailing those accused of insider trading.
The Indian capital market regulator, Sebi, has been attempting to crack down on insider trading for a while, but it has hardly met with any major success so far.The lack of stringent punishments for economic offences in India or the absence of adequate powers to combat these crimes has helped people accused of insider trading to either walk scot-free or get away by paying a small fine.
While the criminal proceeding can put an insider behind the bars, it requires proof beyond reasonable doubts, said Sandeep Parekh, founder, Finsec Law Advisors and former head of legal and enforcement wing at Sebi.
"Since it is difficult to gather this quality of evidence, the criminal conviction rate for insider trading is not high," he said. The biggest hindrance for Sebi in booking people involved in insider trading is the inaccessibility of superior technology to gather evidence.
For instance, the market regulator has been seeking powers to have access to call records and it has sought permission to tap phones to strengthen its insider trading investigations, according to reports. Records of phone conversations between Rajat Gupta and hedge fund manager Raj Rajaratnam proved to be vital in the case against Gupta.
But, Sebi is yet to get permission in this regard and the matter is embroiled in technical issues, said sources. "Leave aside phone tapping. Sebi is only asking for powers to seek call data records, which is yet not available," said Sebi's former executive director JN Gupta, who is a managing director of proxy advisory firm Stakeholders Empowerment Services.
Lawyers said though Sebi has been taking steps to curb insider trading, it leaves a lot to be desired especially when criminal justice system treats economic offences like insider trading very lightly. "In most cases, Sebi takes action by way of monetary penalty," said Parekh.
Former Sebi whole-time member and advocate MS Sahoo says Indian authorities have recourse to civil and criminal proceedings for any violation of securities laws.
"Civil proceeding requires preponderance of probabilities, which the authorities generally are able to gather during the investigation. But this does not put an insider behind the bars." India's legal system does not support prosecution for economic offences, said Gupta. "Law making is one thing, enforcement is another. Regulators have to pull up their socks and need to be a step ahead of white-collar criminals, if they want to catch them red-handed."
According to Sahoo, Sebi needs to widen the scope of investigation, layers of insiders ranging from people connected to the company and those deemed to be connected to the company need to be brought into the ambit.
"Exchanges should have a database of these insiders and should keep their trading activities under surveillance," he said. "Other people who have access to unpublished price sensitive information (UPSI) not available with company should also be brought under surveillance".
Lawyers admit regulators are unable to detect many of the insider-trading or front-running activities because of the innovative methods used by these people to profit from privileged information.