Regulations
SEBI Ensures No PMS Loophole for Insider Trading
A quarter century ago, when the capital market watchdog had just come into existence but there were no insider trading regulations, we used to joke that 90% of all trading in the stock market is based only on inside information. Even the last guy getting a hot tip on a long train commute to the Bombay Stock Exchange (BSE) thought he knew something that others didn’t. Even after the Securities & Exchange Board of India (SEBI) got its statutory teeth, I used to hear about this secretive group of chief financial officers (CFOs) of companies who met regularly at a Mumbai five-star hotel to exchange inside information.  
 
In the past two decades, the rich and powerful have occasionally been nailed for insider trading; but, more often than not, they get away. During the many excesses of the United Progressive Alliance (UPA), a political columnist wrote a snippet about a Cabinet minister texting key government decisions to a television journalist even while the meeting was going on. 
 
The Intelligence Bureau (IB) reported the matter to government when it noticed that the channel was breaking news on decisions even before the Cabinet meeting had ended. According to the column, the minister was so powerful that nobody dared to confront him; instead, it was decided to install jammers outside the Cabinet meeting rooms to prevent information leaking out. I later learnt that the minister’s cohorts tracked the channel in the knowledge that reports from that particular journalist were authentic and probably traded on the information. 
 
In more recent times, Dilip Pendse, managing director of Tata Finance, was found guilty of insider trading in 2014, after a long legal battle. The company secretary of Jagran Prakashan and his wife were found guilty of profiting to the tune of Rs10.4 crore from inside information, in 2009. Even the venerable HDFC Mutual Fund was ordered to pay crores of rupees as fine, in two cases of front-running.
 
That insider trading remains rampant in India is also evident from stock price charts before and after many major corporate announcements. Moneylife has frequently reported this; but there is rarely any action, when the violation is so widespread. Here are just a few links to our reports on NR Narayana Murthy’s comeback to Infosys, Insider trading in Astrazeneca Pharma, ING Vysya, Ranbaxy, Geometric Software, Tata Motors, among the many we have reported. 
 
These anecdotes come to mind in the context a recent query by HDFC Bank to SEBI. The Bank wanted to know whether its employees, who are in possession of unpublished price sensitive information (UPSI) of the Bank or its clients and, hence, restricted from trading in the securities of these entities, could invest their money in the stock market through discretionary portfolio management schemes (PMS) where the client does not dictate the fund manager’s investment decisions. 
 
Essentially, the Bank wanted to know whether its executives could avoid allegations of violative insider trading, if the portfolio manager bought or sold securities of companies where they had UPSI at a time when the trading window was closed for insiders. These executives, it said, would furnish declarations that they have no influence on the stock selection of the portfolio manager. 
 
SEBI’s informal guidance was an unambiguously negative. It, correctly, quoted SEBI’s insider trading regulation (4)(1) to say that bankers could not escape the application of insider trading regulations even if they were clients of a portfolio management scheme. SEBI should be congratulated for such an unambiguous guidance and probably seeing through the nice big loophole that would open up in the difficult-to-prove insider trading regulations. 
 
It must be noted that a SEBI committee, set up to update the insider trading regulations, had managed to insert precisely such an exception to exclude discretionary portfolio managers’ decisions, if they were made without reference to the client (unless circumstantial evidence proved a nexus between the portfolio manager and investor). SEBI seems to have shown rare wisdom by dropping this exception even while announcing the new insider trading rules. Hence, HDFC Bank’s subsequent request for clarity. 
 
Now, consider what would happen if SEBI had accepted the draft regulations or offered a different guidance to HDFC Bank’s query. Insider trading is already extremely difficult to prove anywhere in the world, including countries where regulators can deploy money and technology and have the power to conduct wiretaps and to offer plea-bargains that allow them to let off the small fish to go after the big insider traders. Moreover, all the examples cited above, and scores of other cases investigated by SEBI, show that those in powerful and privileged positions, who have access to UPSI, are not above misusing it for some illegal profiteering. 
 
Had SEBI allowed discretionary portfolio management to remain out of the purview of insider trading rules, it would inflict a nearly impossible burden on itself of proving insider trading through circumstantial evidence alone. Even if it were to cobble together a reasonable case, everyone accused of insider trading would quote SEBI’s informal guidance, to ensure that the watchdog is held to extremely strict proof that the accused had influenced the portfolio manager’s investment decision. 
 
Knowing how hard that will be, any exception to SEBI’s insider trading regulations, or any guidance other than the one it gave HDFC Bank, would open the doors for misuse of PMS by all unscrupulous insiders. This is not an imaginary situation. One of the most famous insider trading cases is that of Robert Moffat, a former IBM executive who admitted to providing inside information to Danielle Chiesi, a consultant of Newcastle Funds with whom he reportedly had an intimate relationship. That is the case which also implicated Raj Rajarathnam of Galleon Funds, who is serving out a long prison sentence. 
 
SEBI’s own investigations have also shown that some foreign ‘institutional’ investors are individual portfolios for the super-rich brought in disguised as an institution. What would stop a group of executives from ensuring that a discretionary PMS is actually limited to a buddy-group? The possibilities of misuse are endless and SEBI hardly has the capability, or the manpower, to track it. 
 
Let us also not forget that the PMS business in India is run by bankers, brokers or mutual funds, who operate in a fairly incestuous set-up. They have constant dealings with one another (socially and professionally), making it even more difficult to prove any charge of insider trading, unless there is a sting operation of sorts. 
 
SEBI’s guidance has put the burden of following the letter and spirit of its regulations squarely on corporate insiders. This is how it should be. Yes, it is possible that senior corporate executives and top bankers will not be able to avail the services of a discretionary portfolio manager; but so what? These are financially savvy individuals (minimum investment in a PMS is Rs25 lakh) who are more than capable of managing their own portfolio. Most of them are people who earn eight-figure salaries and, probably, have stock options whose value runs into nine and ten digits. They are smarter than the average portfolio manager and the small restriction on their investment options is not something that should make our hearts bleed in sympathy, given the enormous scope of misuse. 
 
At a time when retail investors are slowly regaining confidence in the capital market mainly by routing investments through mutual funds, SEBI needs to ensure that it provides a fair and level playing field to investors, not one which allows powerful corporate insiders to get a near carte blanche by routing trades through a portfolio manager.

User

COMMENTS

Anil Kumar

3 months ago

I had earlier written in one of the comments to an article of another type of abuse. About the - sharp rise / or fall in scrips - just a couple of hours before the quarterly result declaration. I had mentioned recent Store One result. The result was declared at around 4 (after market hours), but the scrip tanked the maximum (10%) at around 2 pm. Possible leakage from people in the stock exchange department who get the result first. Request Moneylife investigate this systemic loop hole.

Suketu Shah

3 months ago

HDFC Bank by even suggesting/requesting this seems to think SEBI is in their backpocket!Openly legalise insider trading!How fast this bank is falling.....

Sunil Rebello

3 months ago

Ethics should be a special subject for all MBA, MBBS, CAs and all major Management courses, with compulsory attendance and passing with set marks.
Today we live on a earth, where making money by killing others is an acceptable norm to fatten your bank balance.
Please let us correct ourselves before we make our Mother Earth inhabitable due to our money grabbing ways.
Lets us handover our Earth to our children where they can live in Peace and Harmony. Looking how to serve - rather than being served.

SRINIVAS SHENOY

3 months ago

What do you think?... Write your comments. A nice article for retail investors who are now investing for the purposes of safety of their capital through the mutual funds route. SEBI as the watchdog should ensure safety of the investment, particularly those of the small investors, who generally are the worst sufferers in a downturn.

Suketu Shah

3 months ago

Wonderful insightful article.

Kumar Swamy

3 months ago

SEBI should carefully monitor portfolio holdings in PMS schemes, twitter messages from PMS managers and their mostly bogus claim on PMS annual returns in their presentations to potential clients.

Why 1.1 mn HIV+ve Indians don't get drugs they need
Each of an estimated 2.1 million Indians infected with the human immunodeficiency virus (HIV) should be getting a cocktail of drugs to prolong their lives and reduce infections, but no more than 44 per cent do, the Minister of Health told the Lok Sabha in April 2016.
 
In India, the drug cocktail is given to patients with a count of less than 350 CD4 cells per mm3 of blood -- CD4 cells are white blood cells, a count of which indicates the health of a person's immune system.
 
The Health Ministry said 940,000 (70 per cent) of 1.3 million HIV-infected patients with a CD4 count less than 350 are on anti-retroviral therapy (ART). The situation is worse among children, with no more than 36 per cent getting ART.
 
ART are drugs that -- when taken in combination -- can stop the HIV virus from growing, slowing the disease. They do not kill or cure the virus.
 
A World Health Organisation (WHO) guideline says everyone with HIV should get ART drugs, regardless of their clinical stage and a white-blood-cell tally that India uses to determine who will be treated. An early start to ART is associated with reduced mortality, morbidity and HIV transmission outcomes, according to the WHO.
 
India has fewer HIV cases than only South Africa and Nigeria. In South Africa, 48 per cent of HIV patients get ART, in Nigeria 24 per cent, according to 2016 data from UNAIDS, a United Nations programme on HIV/AIDS.
 
The evidence also suggests that "untreated HIV infection may be associated with the development of several non-AIDS defining conditions (including cardiovascular disease, kidney disease, liver disease, several types of cancer and neurocognitive disorders) and that initiating ART earlier reduces such events and improves survivals", according to the WHO.
 
Chances of getting these diseases fell 57 per cent among HIV-positive patients treated early, according to a study called the Strategic Timing of Antiretroviral Treatment, conducted among more than 4,500 people across 35 different countries, between 2011 and 2016, by the International Network for Strategic Initiatives in Global HIV Trials, a US-government-funded research organisation.
 
Ahmed, 5, and Saba, 6 -- names changed to protect identities -- have been HIV-positive since they were born. Their mother transmitted the virus to them; 3 per cent of HIV infections are passed on by mothers to foetuses or infants before, during or after birth, according to government data.
 
There are more than 138,000 children (age less than 15 years old) with HIV in India, 6.5 per cent of the AIDS population. Only 36 per cent of them (50,000) are on ART drugs, a smaller proportion than the overall Indian population on ART (44 per cent).
 
"Infants and young children living with HIV have an exceptionally high risk of poor outcomes, with up to 52 per cent of children born and living with HIV dying before the age of two years in the absence of any intervention," said the WHO. "By five years of age, the risk of mortality and disease progression in the absence of treatment falls to rates similar to those of young adult."
 
Ahmed and Saba are among 33 children living at the Desire Society in Mumbai, a shelter for children with HIV, set up 11 years ago by Babu Ravi. The organisation has now spread to five Indian cities and houses more than 300 HIV-positive children. All follow a strict protein-based diet to strengthen their weakened bodies, and they all receive ART drugs.
 
Chandigarh has 146 per cent of HIV-AIDS patients on ART -- many of whom likely to be from the adjoining Haryana, the state with the lowest ratio of HIV population to ART centres, thus explaining the 146 per cent figure -- followed by Meghalaya with 82 per cent and Mizoram with 73 per cent, according to 2016 government data.
 
At the bottom is Tripura with 2 per cent, preceded by Sikkim and Arunachal Pradesh with 14 per cent.
 
There are 455 ART centres nationwide, according to the same government data. Maharashtra leads with 68 centres, followed by Karnataka with 63, Andhra Pradesh with 55 and Tamil Nadu with 51.
 
Each ART centre in Arunachal Pradesh and Sikkim caters to less than 1,000 HIV-positive patients; Haryana has a centre for every 22,500 patients. There is an ART centre for every 4,552 HIV-positive patients in India.
 
More than 37 million live with AIDS -- the syndrome due to HIV virus -- across the world, a 10 per cent increase from 2010. Globally, access to ART has increased 126 per cent over five years to 2015: 17 million more people are on ART compared to 2010.
 
"The world has committed to ending the HIV epidemic by 2050," said a 2015 UNAIDS statement. "Expanding ART to all people living with HIV would avert 21 million AIDS-related deaths and 28 million new infections by 2030."
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.

User

COMMENTS

Ann India

3 months ago

Thank you SEBI. You are truly worthy of our trust.

Nitin Karani

3 months ago

The question posed in the headline remains unanswered.

REPLY

Anil Kumar

In Reply to Nitin Karani 3 months ago

Quite an observation!

SC asks Karnataka to release 12,000 cusecs per day to TN
The Supreme Court on Monday directed the Karnataka government to release 12,000 cusecs of Cauvery river water to Tamil Nadu everyday till September 20, modifying its earlier order of 15,000 cusecs water.
 
The apex court bench of Justice Dipak Misra and Justice Uday Umesh Lalit gave the direction while modifying its September 5 order by which it had asked Karnataka to release 15,000 cusecs of water for the next ten days. 
 
The court rejected Karnataka's plea to keep the September 5 order in abeyance.
 
Taking exception to Karnataka, citing law and order situation as a ground for keeping suspension of the September 5 order, the court said it was the obligation of Karnataka government and people to ensure compliance of the top court's order.
 
The court also asked the Karnataka and Tamil Nadu governments to ensure that observance of law and order situation by people in both states.
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.

User

COMMENTS

SRINIVAS SHENOY

3 months ago

What do you think?... Write your comments. Water should be available to all Indians. Like our armed forces, we should set aside our petty thoughts like regionalism etc. so that our country progresses and also in the interest of unity of all our states in the Union.

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