Emerging Trends in White-collar Crime in Capital Markets

INTRODUCTION

One noteworthy development of our time is the capital markets. The capital market has turned into an inexorably prevailing wealth creation platform whereupon the majority present day economies mostly depend. It is a financial market in which long-term debt or equity-backed securities are bought and sold. The capital markets in India have developed significantly in the course of recent decades. The Securities and Exchange Board of India (SEBI) has managed backing and foundation to support their development, and for this market there is no sky.

However, are capital markets in India losing the trust of the investors? An intriguing question, but what does it mean and how it can be logically reviewed? This essay will explore the emerging trends in the white collar crimes in capital markets in India and how regulatory bodies are taking rigid steps to crack down rampant insider trading.  The prevalence of insider trading has become a point of concern for the India’s market regulators. These crimes have penetrated our society in such a way so as to cause economical imbalances. They cause more harm to public health and build general apathy towards law and enforcement machinery of the state.

This essay will first proceed by mapping the meaning of white collar crimes; its presence in the market and then the methods adopted by securities regulators like SEBI to curb it. Crimes that fall under the definition of white collar crimes vary from fraud and bribery to insider trading and embezzlement. And in recent years, advance technology has aided in commission of white collar crimes. Cybercrimes such as credit card and online bank frauds, cold-calling forgeries etc have appeared as some of the most sophisticated white-collar crimes in the world. Fraudsters of the capital market now personate themselves as fund managers who aim passive stock investors that are not interested in mixing it up with speculators in the highly unpredictable stock market.

IMPACT OF TECHNOLOGY ADVANCEMENT

The initiative of Digital India has lead to the digitalization of capital markets as well. The developing reliance of security exchanges on internet-based (IP) platforms has prompted higher repute, market and operational threats. Technological innovations have influenced everything from programming to system engineering. Some of these advancements are the use of extensible mark-up language (XML) as the industry IP language, straight through processing of data, all-encompassing or diffuse computing and grid computing, as well as the better utilization of the internet and wireless technology. However, on one hand digitalization of capital markets has eased its functioning but on the other hand has paved path for white collar crimes.

An estimated Rs 4,000 crore of trading is carried out on the BSE using fake or duplicate PAN cards. And, online fraud is on the rise in Maharashtra. India’s share in black money concealed across global tax havens is estimated to be $181 billion and the situation is grim.

These days “black markets” are quite common wherein novice or experimental hackers also known as neophytes, disseminate significant and confidential data that they possess to their clients and make a living out of it. However, these hackers are not independent rather attack together in a community. Cyber terrorism is a risk that regularly threatens the entire firm. These cyber attacks affect not only affects the country internally but also has unfavourable consequences or impact on its relations with other nations as well. This occurs because all capital markets have links and networks extended beyond borders. For personal and political gains, several bureaucrats and hackers try to manipulate the capital market firms and organisations. They influence capital market operations by spreading fake news and false information to which innocent investors get attracted and as a result of which suffer huge losses. Such cyber crimes paralyze the business and financial system of the country and might even trigger cyber wars at national and international levels. The financial losses due to cyber crimes are estimated to be as high as one trillion USD which means they have a huge impact on the real-world economy.

PRINCIPLE OF PUMP AND DUMP

In the present day capital market, information is of vital importance. Some investors rely on the information provided by the company and others on that provided by the market makers or the online publishing platforms. Several con-artists take the advantage of the ignorant investors by spreading the fake information among them. This practice is notoriously known as “pump and dump” in stock market investing.

The infamous scam committed by Harshad Mehta was based on the practice of “Pump and Dump”. The scam operators used to purchase the shares of a company in bulk and try to attract the investors towards that particular stock by manipulating and spreading false information. As a result of which these investors purchase the said stock. The demand of these stocks ascends and due to which its prices also rise. Then the scam operators start selling or dump their shares when the prices reach its maximum and earn a huge profit. After which the prices crash down and investors suffer a huge loss. It is well documented that the practice of “pump and dump” in the stock market is a popular white-collar crime that regularly goes unpunished.

INSIDER TRADING

Insider trading is one of the most familiar white collar crimes existing in Indian capital markets. Trading by an insider of a company in the shares of a company is not as such a violation of law. What is prohibited is the trading by an insider in breach of a duty of trust or confidence in the stock of a company on the basis of non public information to the exclusion of others.

Insider trading denotes dealing in company’s securities on the basis of confidential information relating to the company which is not published or known to the public used to make profit or loss. It is fairly breach of fiduciary duties of officers of a company or connected person towards the shareholders.

The first case where SEBI had instigated action against the defaulters of insider trading regulations was the Hindustan Lever Case. Over the years India’s financial system has been deceived by these inside traders who possess Unpublished Price Sensitive Information. The stock market was striving to recover itself from the upsetting effect of Harshad Mehta share market scam, when within a span of ten years it was once again pushed into the financial distress by another corrupt inside trader- Ketan Parekh. Corporations have been plundered by the insider traders, branching out internal price sensitive confidential information to an external source in lieu of cash. These sophisticated and complicated white collar crimes are committed mainly by the high ranking officers of the corporations.

One of land mark cases relating to insider trading was:  Securities Exchange Commission v. Rajat Gupta. The Securities Exchange Commission’s (SEC) complaint alleged that Rajat. K. Gupta tipped his business associate Rajaratnam who was the Founder and Managing Partner of Galleon Management certain confidential (insider) information worth billions. Rajaratnam used the information he learned from Rajat to trade profitably in Galleon hedge funds. On October 24, 2012 Gupta was sentenced to two years in prison and one year of supervised release, and ordered to pay a fine of 5 million US Dollars.⁵

Another recent case of insider trading reported in India was that of Indiabulls. In this case Pia Johnson of Indiabulls Ventures Ltd (IVL) and her husband Mehul Johnson traded in the scrip of IVL when in possession of unpublished price sensitive information (UPSI) and as a result of which SEBI impounds Rs 87.21 lakh from them.⁶

LEGAL DEVELOPMENTS

The Indian capital markets are regulated, managed and scrutinized chiefly by the:

• Securities and Exchange Board of India (SEBI).
• Ministry of Corporate Affairs.
• Department of Economic Affairs (Ministry of Finance).
• Reserve Bank of India.

These regulators draft legislation, and issue circulars, notifications and guidelines, to regulate the securities market in India, and have powers of oversight on various market participants. The stock exchanges also frame their own rules, regulations and bye-laws to regulate the markets.

The key statutes and regulations governing the equity securities markets in India are:

• Companies Act, 2013, and the rules prescribed under it.
• Securities and Exchange Board of India Act, 1992.
• SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009.
• Securities Contracts Regulation Act, 1956, and the rules prescribed under it.
• SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.
• SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.
• SEBI (Prohibition of Insider Trading) Regulations, 2015.
• Depositories Act, 1996.

Other statutes such as the Prevention of Corruption Act 1988 (PCA) and the Prevention of Money Laundering Act 2002 (PMLA) also contain provisions dealing with corporate and business fraud.

Ministry of Corporate Affairs (MCA) initiates amendments from time to time in the Companies Act, 2013 to ensure solid corporate governance and also to strengthen the scope of legislation governing the companies in India. The recent amendment was the Companies Amendment Act, 2017 and Companies Amendment Ordinance, 2018. One of the important amendments was to include the term “Fugitive Economic Offender” as defined under the Fugitive Economic Offender Act, 2018. The necessity aroused to confiscate properties and assets of economic offenders like Vijay Mallya and Nirav Modi, who escape prosecution by remaining outside the jurisdiction of Indian courts.

Some of the amendments bought under the Prevention of Corruption (Amendment) Act, 2018 are as follows:

• Bribe giving is now an offence
• Commercial Organizations now liable for Prosecution
• Prior Permission to be sought before Initiating Investigations
• Attachment of Tainted Property
• Time Limit for Trial: The Act now requires trial of offences to be held on a day to day basis and endeavor to conclude it within two years.

SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Markets) Regulations, were enacted in 1995 which empowers SEBI to investigate and scrutinize into contraventions committed by any person including an investor, issuer or an intermediary related with the securities markets.

Rapidly advancing Indian Securities market needed a more comprehensive legislation to regulate the practice of Insider Trading, thus resulting in the formulation of the SEBI (Insider Trading) Regulations in the year 1992, which were amended in the year 2002 after the discrepancies observed in the 1992 regulations in the cases like Hindustan Levers Ltd. vs. SEBI, Rakesh Agarwal vs. SEBI, etc. to remove the lacunae existing in the Regulations of 1992. The amendment in 2002 came to be known as the SEBI (Prohibition of Insider Trading) Regulations, 1992.⁷

SEBI issued and notified the SEBI (Prohibition of Insider Trading) Regulations, 2015 on 15th January, 2015 based on recommendations of Sodhi committee and became effective from 15th May, 2015, by repealing SEBI (Prohibition of Insider Trading) Regulations 1992.⁸

• Capital Market and Securities Law,700 (ICSI, 2017)
• Capital Market and Securities Law,700 (ICSI, 2017)

Some of the provisions of SEBI (Prohibition of Insider Trading) Regulations, 2015 are as follows:

1. SEBI may impose a penalty of not more than Rs. 25 Crore or three times the amount of profit made out of Insider Trading; whichever is higher.⁹
2. Regulation 3 provides that any person shall not: – communicate, provide, or allow access to any unpublished price sensitive information or – procure from or cause the communication by any insider of unpublished price sensitive information, relating to a company or securities listed or proposed to be listed or proposed to be listed except in furtherance of legitimate purposes, performance of duties or discharge of legal obligations.¹⁰
3. Regulation 4 prescribes that an insider shall not trade in securities, which are listed or proposed to be listed on stock exchange when in possession of unpublished price sensitive information.¹¹

According to the new insider trading regulations as implemented by SEBI, company insiders will have to disclose details of all people with whom they have significant financial relationships. These insiders are not just required to reveal their own sensitive personal data but are also required to find out the annual income of their relatives to make disclosures. 

To bring down white-collar crimes in India, providing powers to SEBI is necessary. Recently SEBI suggested Rupee one crore for whistle blower who expose insider trading. Insider Trading in India has been of great effect in the past few years and SEBI is dealing with it in a head on manner.

CONCLUSION AND SUGGESTIONS

Capital markets have proved to be a boon for the economy of India. It helps in channelizing the investor’s money and ensures good returns. However, white collar crimes continue to act as a hindrance in the smooth and secure functioning of capital markets. Culprits will endeavor to discover new and creative approaches to indulge in fraud, bribery, corruption, cybercrime, money laundering and other white-collar crimes like insider trading. In spite of a large number of measures taken by the Legislatures there is neither decrease in general volume of violations, nor decrease in the quantity of frauds and scams that are happening with ordinary recurrence in the nation.

 In fact, the hazard of white collar crimes has penetrated into our economy to a great extent and hence needs to be addressed with a comprehensive methodology. For a developing country like India, it becomes necessary to cut down such financial crimes in both government and private sector. Advancement of science and technology has paved path for newer forms of white-collar crimes. In order to control these crimes and to retain the integrity of market and confidence of investors Securities and Exchange Board  of India and other organisations introduce new regulations and laws from time to time or amend the existing ones.

Companies could install modern technologies for premature discovery as well as deterrence of such crimes. For instance, the use of forensic data analytics can tone down, detect, monitor or investigate potentially improper transactions, events or patterns of behavior related to misconduct, fraud and non-compliance issues. The utilization of artificial intelligence and prognostic analytics could appear as the outlook of anti-fraud controls. Tougher laws work better in reducing the incidence of illegal insider trading and delayed disclosure to the regulating bodies. The new regulations would also build up trust and confidence of the investors and reduce deceitful and fraudulent practices and white collar crimes.

• Ishan Bakshi, The changing dynamics of white collar crime in India, BUSINESS STANDARD (October 22, 2016 01:37 IST), https://www.business-standard.com/article/markets/the-changing-dynamics-of-white-collar-crimes-in-india-116102200032_1.html

• Cyber Crime – Threats to Capital Market Firms, IMARTICUS LEARNING (May 23, 2018), https://imarticus.org/cyber-crime-threats-to-capital-market-firms/

• Sandeep Parekh, India: Corporate Governance – Insider Trading, MONDAQ (29 november 2002), http://www.mondaq.com/india/x/19011/Corporate+Finance/Corporate+Governance+Insider+Trading

• Himanshu chahar and sumeer sodhi, Insider Trading in India,  INDIAN LEGAL SERVICES, http://www.legalserviceindia.com/article/l199-Insider-Trading.html

• Sahil Arora, Securities and Competiton Law,2 JUSIMPERATOR (2019)

• Indiabulla insider trading case, ECONOMIC TIMES MARKETS (May 24, 2019, 10.11 PM IST), https://economictimes.indiatimes.com/markets/stocks/news/indiabulls-insider-trading-case-SEBI-impounds-rs-87-21-lakh-from-former-director-spouse/articleshow/69487936.cms?from=mdr

This article is written by Aditi Jain.

Disclaimer:  This article is an original submission of the Author. Lex Insight does not hold any liability arising out of this article. Kindly refer to our Terms of use or write to us in case of any concerns. This article is a part of the 1st National Essay Competition, 2019.