Analyzing SEBI’s paper on rewarding whistleblowers

The Securities and Exchange Board of India (SEBI) faces numerous challenges in investigating and determining insider trading violations. Lack of direct or conclusive evidence of violations is a key challenge in most cases. On 10 June 2019, SEBI issued a discussion paper on a proposed informant mechanism under which whistleblowers will be rewarded for reporting instances of insider trading.

The mechanism described in the discussion paper appears to be inspired by the whistleblower framework under the US Dodd-Frank Wall Street Reform and Consumer Protection Act, which authorizes the US Securities and Exchange Commission to provide monetary rewards to individuals who voluntarily provide original information that leads to successful enforcement action. Under SEBI’s proposed informant mechanism:

• An informant will be able to provide information on insider trading to SEBI by submitting a voluntary information disclosure form (VIDF), personally or anonymously (through a legal representative). The informant will need to provide an undertaking that the information provided has not been sourced from an employee of a regulator (including SEBI) and provide an indemnity to this effect.
• SEBI will set up an Office of Informant Protection (OIP), which will be independent of the investigation and inspection wings, as a medium of exchange between the informant and SEBI.

• Subject to certain exceptions, the identity of the informant and the information provided will be maintained with near absolute confidentiality with appropriate safeguards.
• Listed companies will be required to revise their internal code of conduct to ensure that employees are not terminated, demoted, suspended, threatened, harassed, or discriminated against, directly or indirectly, because they submitted a VIDF.
• If the information is provided in compliance with the informant policy and at least ₹50 million (US$706,775) is disgorged as a result of action taken on the basis of credible, complete and original information, the informant may receive a reward equal to 10% of the monies collected, but not exceeding ₹10 million, or a higher amount as may be specified.
• If the OIP determines that the information submitted is frivolous or vexatious, SEBI may initiate appropriate action against the informant under the applicable law; and
• SEBI may grant amnesty from regulatory action to certain informants.

The introduction of an informant mechanism is a step in the right direction. However, the success of this mechanism depends on several factors, including how it is implemented. Certain key areas which may need to be considered further are as follows:

Radhika Iyer is a partner and Meher Mehta is an associate at S&R Associates, a law firm with offices in New Delhi and Mumbai.