What exactly is insider trading? Defines the Patel Committee on stockmarkets: "Insider trading generally means trading in the shares of a company by persons, in the management or close to them, on the basis of undisclosed price-sensitive information on the working of the company, which they alone possess."
As the SEBI is entrusted under section 11(1)(g) of the SEBI Act to take necessary measures to prohibit insider trading, it came out with the Insider Trading Regulations, 1992. Anyone guilty of insider trading is "liable to pay a civil penalty not exceeding three times the profit gained or loss avoided as a result of the dealing from such violations subject to a minimum of Rs 5,00,000 or/and punishable with rigorous imprisonment for a term not exceeding two years."
Indian laws on insider trading more than match legislation abroad. In the US for instance, all that the Securities Exchange Commission can do is approach courts to force repayment of insider trading profits. And in the UK, very rarely are insider trading trials successful. Most defendants secure acquittals on technical grounds. In Japan, the maximum punishment is a penalty of $ 3,700 or six months imprisonment. And despite more stringent regulations in Hong Kong, the guilty are merely disqualified from directorship or management for five years. Besides surrendering profits and paying fines up to three times the profit made or loss avoided. But most Indian legal experts agree that it is extremely difficult to prove insider trading here, just as it is abroad.
If Reliance is held guilty of conniving with Rajul Vasa and issuing duplicate shares with the intent to defraud, it would be held guilty of violating Section 84 of the Companies Act. The maximum punishment is a six-month jail term and/or a fine extending up to Rs 10,000. But if Vasa, and not Reliance is convicted, she could be prosecuted under the IPC. And though switching of shares violates Section 108 of the Companies Act, the punishment is ambiguous.
Interestingly, laws in foreign countries are silent on this issue. Thanks to depositories and scripless trading—that is, a share transaction entails merely a book entry and not a physical delivery of share certificates—in these countries, share-switching is simply not possible. Nor can shares be lost by an investor and duplicate shares issued. The Reliance imbroglio, more than anything else, highlights how imperative it is that depositories are set up forthwith in India.