Martoma conviction has no effect on trading houses in India
CHENNAI: The Indian stock market is unfazed by the insider trading charges and indictment of Mathew Martoma, and the earlier conviction of Rajat Gupta.
Insider trading in India is flourishing; there is no slow down or the fear of law taking its own course. The brokerages and investment community are not worried partly because the duo doesn’t have much role to play in Indian stocks, either directly or indirectly.
The number of hedge funds in India is quite less compared to the United States. The kind of volume witnessed in the US is also huge compared to India. The volume of trading is important for hedge funds to reap quick money. For instance, Microsoft alone generates volumes of over 50 million shares every day, whereas the total volume of shares traded in India is slightly above the 100 million mark.
While the captains of industry like Rahul Bajaj, Adi Godrej and Kiran Mazumdar Shaw have voiced their opinion about Gupta’s conviction, saying it was unfortunate, Bajaj Group’s chairman Rahul Bajaj wondered whether any big Indian fish has gone to jail after being convicted.
The lack of convictions in India on insider trading charges also allows traders not to unduly worry. The conviction of Martoma and others before him demonstrated the increasingly tough role being played by the US Securities and Exchange Commission (SEC), while the Indian counterpart lacks the tool to generate concrete evidence of insider trading, and lay down charges.
The number of cases that the Securities Exchange Board of India (SEBI) took up in the year 2011–2012 has witnessed nearly 50% jump to 154 from the last year’s 104. Significantly, 73 cases are related to market manipulation and price rigging, registering over 30% growth. However, cases of insider trading slipped to 24 from 28, a data from SEBI’s annual report indicates. SEBI was established in April 1992 through an act of Parliament and it has been vested with powers to regular the financial markets.
The total rise in the number of cases clearly suggests that the irregularities are unabated on Dalal Street. These misdeeds have much to do with stock trading, which
is also quite evident from SEBI data. No one, including the regulator, denies the widespread economic crime being committed by the securities market. There is also no denying the fact that insiders have learnt the knack of escaping from the clutches of the regulator. This is the precise reason why no big fish in India is caught on the wrong foot when it comes to insider trading.
If at all there were some big companies involved in the past, such cases got dragged on for years without victory for the regulators. This was evident in Hindustan Lever, which is now known as Hindustan Unilever, case. Its five directors purchased sizeable shares of Brooke Bond Lipton India Ltd. from Unit Trust of India or UTI before the announcement of the merger with the then Hindustan Lever. Interestingly, both Brooke Bond Lipton India and Hindustan Lever were the subsidiary of the Britain-based Unilver. This invited SEBI’s attention and it ordered Hindustan Lever to compensate UTI by paying Rs.30.4 million in March 1988. However, the finance ministry overruled in favor of Hindustan Lever when the consumer giant approached them for relief. SEBI had to appeal in the Mumbai High Court against the Finance Ministry order.
If Hindustan Lever case is famous for insider trading, Harshad Mehta was the architect of the largest securities scam in India. It dealt a big blow to genuine investors, as they lost heavily in the early 1990s after the scam broke out. For instance, Associate Cement Companies’ shares were just trading around Rs.200 in the early 1990s, but spiked to about Rs.9,000 representing a whopping growth of 4,400%.
However, the stock dropped after the scam came into open. The list of favorite stocks of Mehta was quite large and all the stocks witnessed hectic growth before the scam was brought to notice. He was convicted by both the Mumbai High Court and Supreme Court for his role in Rs.50 billion or $910 million scam. He died in late 2001 and faced trial until death for nine years.
The public sector banks and the Income Tax department could recover only a portion of their claims from the liquidated assets held by Mehta. Strangely, the conviction was for a check bounce case. A considerable amount of time was spent on trial, yet there was no result on the Mehta securities’ scam.
Ketan Parekh, formerly a stockbroker, is another individual who was involved and convicted in a similar scam involving technology stocks at the peak of 1999 – 2001 boom. He is now under a disqualification period to trade in Indian stock exchanges until 2017.
The Indian government has armed SEBI with laws to prosecute inside traders. However, the regulator is finding it tough to prove insider charges because of a lack of phone tapping, which is available to its counterpart in the US. Aside from this; it will also be hard for any regulator to make it incriminating the discussions of two persons meeting in a closed-door room.
Interestingly, prosecutors in the Rajat Gupta trial used email and wiretaps as evidence to fix him. This has made SEBI to lobby for tapping of phones of suspected persons involving insider trading or any securities frauds. Though the government has not agreed to the regulator’s request, the government will eventually give the powers to SEBI as technology play a crucial role in most of the securities frauds.
The need of the hour in India, to curb rampant insider trading, is to not only allow regulator with access to more technologies, but also set a time frame to dispose of the cases. The former SEBI chairman M Damodaran has rightly put it, “Unless enforcement action is timely, effective and exemplary, at least in cases that have systemic implications, there will be no element of deterrence.”
The ball is in the government’s court to come up with additional tools to allow the market regulators a greater role to prevent a major securities fraud. This is absolutely necessary as it is turning towards globalization. India cannot withstand the likes of a financial turmoil that the US faced in 2008. It’s time to wake up to the reality before a big fraud forces the establishment to plug the loopholes.