two things that stand out about SEBI's insider-trading case against
former Alliance Capital Chief Investment Officer Samir Arora are
its timing, and the regulator's hitherto unseen tough-guy approach.
The surfacing of the allegations against Arora soon after he quit
Alliance (he announced he was launching a fund with former Stanchart
CEO Rana Talwar's Sabre Capital) have leant credence to theories
that the whole thing is a frame up. And SEBI chairman G.N. Bajpai
seems to have woken up to the fact that the entire episode is a
great opportunity for him to send out a don't-mess-with-me message,
something evident in the media-chummy top regulator's efforts to
go after journalists believed to be involved in l'affaire Arora.
This piece isn't about the former star fund manager's fate (you'll
have to turn the page for that); it is all you'll every need to
know about insider trading in the Indian context. There's not much,
but what little is there is rendered incoherent by the static of
miscomprehension and misinterpretation.
What is insider trading?
In India, the term is often used in place of
'illegal insider trading'. Actually, not all trading in a company's
stock by insiders-directors, executives, employees-is illegal. Only
the transactions they conduct while in possession of material non-public
information about the company or the scrip are considered illegal.
However, trading by outsiders who are privy to such information-that
includes bankers who may know of a company's expansion plans before
they are announced, or a friend with whom the company's CFO has
been less than discreet-does fall under the defini-tion of illegal
What's the argument against insider trading?
A retail investor has access only to published
information about a company. Ergo, insider trading can undermine
his or her confidence in the fairness and integrity of the stockmarket.
How does the Securities and Exchange Board
of India deal with insider trading?
It restricts trading by insiders and asks companies
to decide when it can allow insiders to trade in the scrip. It directs
that no trading be allowed when the company is announcing its financial
results or declaring dividends, considering an expansion, acquisition,
or stock buy back, and several other instances. Insiders, the regulator
says, can trade only 24 hours after such information is made public
by writing to the stock exchanges, publishing it in the newspapers,
or putting it up on the company website.
SEBI also mandates that executives have to
report any trades of over Rs 500,000, 25,000 shares, or 1 per cent
of the company's stock (whichever is the lower of the three) to
the company within four days of the transaction. The company, in
turn, is required to report this to the exchange it is listed on
within five days.
Finally, the regulator has sought to restrict
the flow of price-sensitive information by barring companies from
sharing the same with stock market professionals.
Are SEBI's laws adequate to deal with illegal
On paper, India's laws on insider trading are
more stringent than international ones. From merely barring insiders
from trading on the basis of unpublished price-sensitive information,
the laws have moved on to prohibiting anyone in the possession of
such information from trading. And proof that the information was
not shared is no longer acceptable defence against charges of insider
trading; today, an accused needs to prove that such information
could have never been shared. ''This shifts the focus on to the
accused to prove that there has been no insider trading,'' explains
Somashekar Sundaresan, a specialist in securities law at law firm
Jyoti Sagar Associates.
How applicable and practical are SEBI's
insider trading laws?
Not very. Under existing laws, every corporate
and M&A transaction can be seen as the source of inside information.
The absence of a plea-bargain-an accused can settle the dispute
without admission of guilt-could lead to never-ending litigation.
And while America's Securities Exchange Commission makes it worth
their while for stool pigeons to inform on their errant colleagues-they
are eligible for 10 per cent of the value of the insider trading
transaction-SEBI doesn't think that quite necessary.
What's SEBI's track record at dealing with
incidents of insider trading?
India's first, and most high-profile case of
alleged insider trading involved Hindustan Lever Limited (HLL) and
five of its directors just ahead of the company's merger with Brooke
Bond Lipton India. SEBI asked HLL to pay Rs 3.04 crore as penalty,
but the Appellate Authority in the Finance Ministry set aside its
|An under-siege Arora: This pic >100
Samir Arora Guilty?
played a pivotal role in thwarting Alliance Capital's plans to sell
its stake in Alliance Capital Mutual Fund.
This was motivated by his desire to, along
with Henderson Global Investors, effect a Management Buy Out of
the fund. This contributed to a fall of approximately Rs 300 crore
in the assets under management of ACMF
Arora's defence: The Henderson angle
is unsubstantiated. And of the Rs 1300 crore worth of redemptions
that ACMF faced between November 2002 and January 2003, over Rs
1000 crore went out from its five debt funds. So, it wasn't as if
the announcement by Arora and two other analysts that they wouldn't
work for any of the other bidders turned off investors.
Charge: Arora traded in the shares of
Digital Globalsoft on the basis of unpublished price sensitive information
obtained due to his close nexus with company insiders.
Arora's defence: Alliance's equity funds
gained Rs 24 crore from their transactions on the Digital GlobalSoft's
counter. However, it will be hard to make charges of insider trading
Charge: Arora did not inform the companies
when Alliance's shareholding crossed the 5 per cent limit in Balaji
Telefilms, Mastek, Digital GlobalSoft, Hinduja tmt and United Phosphorous.
Arora's defence: It's the fault of Alliance
Capital's compliance department, not Arora's.
|Vajpayee's Vision: Or should we say Mitty's?
Give the man a forum and watch the policy-statements
seemed only apt that congress president Sonia Gandhi refer to Prime
Minister Vajpayee's grandiose vision as the local variant of Walter
Mitty's dreams-a vernacular idiom drawn from a popular Hindi serial
of the 1990s (Mungeri Lal was the name of the man, if you must know)
inspired by Thurber's masterpiece. After all, Sonia's speech in
parliament came just a few weeks after the Supreme Court had cleared
the way for Sahara Television to air a serial named Karishma, allegedly
based on a book by Barbara Taylor Bradford.
|THE ROAD AHEAD
Sending Chandrayan I, an Indian spacecraft,
to the moon by 2008
Kick-starting the river-linking project by end-year
Providing electricity to 10 million hitherto uncovered households
Creating the Tourism Infrastructure Development Fund to improve
roads, water supply, sewage, and other utilities in tourist
Privatising Delhi and Mumbai airports and starting work on the
long-overdue new airport for Bangalore
Doubling the number of mobile users to 30 million and launching
services in Jammu and Kashmir
Building five new Indian Institutes of Technology, two new Information
Technology ones, and six hospitals on the lines of the Delhi-based
All India Institute of Medical Sciences
Building new ports, upgrading existing ones and connecting all
big ones to the work-in-progress Golden Quadrilateral and the
N-S-E-W road network
Much of Mitty's, sorry, Vajpayee's vision was
articulated during a speech he delivered on India's 57th Independence
Day. These (See The Road Ahead) ranged from still-on-paper projects
such as the one to do with ports to unrealistic ones such as providing
electricity to 100,000 villages, to self-importance-driven dreams
such as sending a mission to the moon. Part of the vision is built
around the quintessential Indian notion that more is better. In
the case of the IITs this may not necessarily be true: the only
reason IIT engineers are thought highly of the world over is because
the demand-supply imbalance ensures that only the very best get
Still, not much need be made of Vajpayee's
musings. During his independence day speech in 2000 he promised
to connect all villages with a population higher than 1000 through
all-weather roads. And in 2001, he declared that public sector banks
would, over the following three years, lend 5 per cent of net bank
credit to women entrepreneurs. Neither has happened. As Saumitra
Chaudhury, the chief economist of credit rating agency ICRA puts
it, ''Grandiose plans, even if unimplementable, have no opposition.''
Then, Mr Vajpayee, we won't dwell on your speech.
A Year Of Jaswant Singh
Most significant achievement: Managing
to get the controversial Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest Bill, 2002 through parliament
Most significant volte-face: Rolling
back the hike he had proposed in fertiliser prices, citing political
Continuing I-inherited-it problem: The
fiscal deficit which continues to remain insustainably high
Biggest Failure: Inability to enforce
the value-added tax regime despite announcing that it would come
into effect from June 1, 2003
Happiest indicators in his year in office:
Single digit inflation; burgeoning forex reserves; business
confidence at six-year high.
of around $3 billion of India's total debt of $100 billion
Verdict: Could have been better. Still,
could have been worse
BT 50 INDEX
Have the Mumbai blasts nipped an emerging bull
run in the bud. We think not.
No one, not even hard-bitten
cynics like us, likes to see something cut short just when it seems
to be hitting its stride. Still, we think investors would do well
not to attach too much importance to how the stockmarket reacted
following the bomb blasts in Mumbai on August 25. The fact that
the BT 50 is still around 148 (and the BSE Sensex over 4000) is
enough reason for cheer. We have always maintained that being a
free float index, BT 50 is more responsive to the environment, and
a much more reliable (read: less volatile) measure of stockmarket
sentiment. In the two weeks since this magazine last came up, the
BT 50 has moved up by close to 3 per cent indicating that a revival
is truely on. For the benefit those who missed the last edition
of the index,a quick recap. Last fortnight, just around three months
after it was launched, we decided to change the composition and
the weightages of the BT 50. Reason: We are of the belief that indices
should reflect market reality and that as listings, delistings,
and mergers become commonplace, they should change frequently enough
to remain an accurate weathervane. Which is why we have included
Bharti Televentures in BT 50. It takes the place of Britannia Industries,
the company with the lowest free-float market capitalisation on
June 30, 2003. There's another reason why BT 50 has to change every
quarter. Companies reveal their latest free-float position of a
company's scrip every quarter. For instance, the free float in BSEs
has decreased from 55.89 per cent to 41.76 per cent in the last
quarter. BT 50 being a free-float index, a quarterly revision in
weights becomes necessary. These changes have been carried out and
are effective from August 1.