Puritanical double standards on insider trading

Gautam Mukherjee | Mar 05, 2013

Puritanical double standards on insider trading

The West has been convulsed periodically with bouts of extreme morality. And though this is not an everyday occurrence, some of its public probity laws are moored in this puritanical ethic. An uncompromising stance determined to rain retribution on the wrongdoer. But this is at considerable variance with, and in contrast to, its own general behaviour and the beliefs that animate them.

In the US and the UK, countries we take a lot of our legal cues from; the public likes to hold public figures to a much tougher sexual regimen than it prescribes for itself. So, essentially promiscuous people, members of the general public, in a modern and permissive culture, will think nothing of pulling down a married aspirant to public office found to be straying from the path of fidelity.

Similarly, the US laws on insider trading are such that it makes you think the whole of Wall Street before contrition hit it in 2008, must surely be guilty of violating them. And yet, when someone is caught, he is not spared. This even if it is with the use of wiretaps in insider trading cases, not previously taken cognisance of in a US Court of Law.

And so Mr. Rajaratnam, the flamboyant billionaire ethnic Sri Lankan boss of the erstwhile Galleon Hedge Fund, was convicted and sent to jail for 11 years. And unless his Appeal gets him off, so will Indian Mr. Rajat Gupta of McKinsey & Co. fame, and various other parts, who stands both convicted and sentenced to jail too.

But it makes one feel sorry for both, and indeed other lesser associates who fell victim to the somewhat overdone Insider Trading laws, because they were certainly not the exception.

Because inside information is almost the very thing businessmen employ to make their financial bets all the time. They spend time and money and influence acquiring insights. It is the quality of their information, albeit covertly and discreetly arrived at, backed by their ability to take risk, that has the potential to both make their fortune or ruin them.

If this is so shocking, why do civilised nations have Intelligence operatives and covert operations experts at all? People who are specifically tasked with breaking the rules in pursuit of national objectives.

Almost every real estate acquisition, a repository of wealth, especially that of land, is based on knowledge of the future development plans for the area. The earlier one gets in on the act, the greater the pay off. Even those who come into the secondary market soon enough are benefited. And yet, at the centre of such transactions, there are a small number of people acting on privileged information. Is this really wrong?
India is heading the same way as the US and the UK, as SEBI, our stock market regulator, seeks to tighten both insider trading laws and corporate governance. The latter, by prescribing niceties such as Relationship Agreements between the promoters of corporations, even majority owners, in a public listed company, and their companies.

The idea, already implemented in the UK, attempts to restrict the influence of the owners in the day-to-day workings. It is a bizarre and prudish idea that has not helped the companies in the UK cover themselves in any special glory as a consequence. It also defies common sense.

The idea, of course, is to prevent owners from benefitting at the expense of diversified common shareholders. But Relationship Agreements of this sort ignore the blood and sweat that the entrepreneurs have put into developing their enterprises to public issue in the first place!

And if a majority owner is not to try and control his company, how can it be right for minority owners and independent directors and the like with no real stake in its survival to do so?

It is the stuff and nonsense of the puritanical ethic creeping into perfectly red-blooded enterprise, destined to put a spanner in the works. This sort of unnecessary oversight often introduces suspicion where it does not belong. For us in India, we think we are adopting a ‘global practice’, but may find we are buying nothing but trouble and strife. Besides, as to its efficacy, anywhere, including India, the jury is bound to be out.

Similarly, India is seeking to tighten its Insider Trading Laws, and again SEBI is undertaking an exercise to determine how best to do this, for the first time in five years.

Bottom line, it seems to some that we are complicating our lives, just because others in the UK and the US have already done so. And we truly ought to worry about aping the ways of a system that has failed.


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ABOUT AUTHOR

Gautam Mukherjee

Gautam Mukherjee is an entrepreneur and former corporate executive.