In a Discussion Paper dated 10 June 2019, Securities and Exchange Board of India (SEBI) has proposed an Informant Mechanism and a need for an Informant Reward policy be incorporated in the SEBI (Prohibition of Insider Trading Regulations) 2015 (PIT Regulations) to overcome several challenges in dealing with violations of insider trading. Some of these are, proof of the flow of information, absence of details of generation of information, identification of connection between insiders and those who traded unpublished price sensitive information (UPSI) and establishing that trading took place while in possession of UPSI. A formal mechanism that specifies a reporting procedure and provides incentives and protection for the informants will, in SEBI’s view, instil confidence in the market and encourage informants to report such issues without any fear of victimisation or loss of employment.
The key features of the Informant Mechanism are as follows:
The proposed amendments will be made effective from the 100th day of their notification so as to enable market participants to become conversant with the requirements and enable them to create necessary systems for implementation.
Subsequently, in its Board Meeting held on 21 August 2019, SEBI approved the abovementioned amendments to the PIT Regulations.
SEBI in its board meeting held in August 2019 has approved the amendments to the PIT Regulations dealing with the introduction of the informant mechanism. It needs to be seen how approachable this mechanism will turn out to be. One must bear in mind the possible compromise with respect to confidentiality of the identity of the informant, which may be considered by SEBI at the time of leading evidence during the relevant proceedings. SEBI seems to have overlooked the hardship that an informant may practically face in being able to provide evidence to it. It is possible that subjectivity may be involved in determination of the veracity of complaints due to the lack of any basis/ guidance in such regard. As a result, the whole mechanism may lead to wrongful classification of genuine complaints as frivolous (because of unavailability of sufficient evidence), for which SEBI may initiate action against such informants. This may prove to be counterproductive to the objective of the proposed mechanism. Having said that, SEBI has taken a step in the right direction, but has only laid down broad guidelines for the same. The devil will be in the details which have been skipped.
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