SEBI has notified amendments to the SEBI (Prohibition of Insider Trading Regulations) 2015 (PIT Regulations) to incorporate an Informant Mechanism and an Informant Reward Policy by way of a new Chapter IIIA, effective from 26 December 2019. This Mechanism/Policy was proposed in a Discussion Paper dated 10 June 2019, approved in the Board Meeting of 21 August 2019, to overcome several challenges in dealing with violations of insider trading. The challenges are, 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absence of details of generation of information, identification of connection between insiders and those who traded unpublished price sensitive information (UPSI) and establishing that trading took place while in possession of UPSI.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:
It needs to be seen how approachable the informant 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 this 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.
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