InsiderTrading Regime in India: Relevance of Mosaic Theory

This article is authored by Shubham Gupta, a 4th-year law student at Institute of Law, Nirma University, Ahmedabad


Insider trading is a serious white-collar crime in India. Insiders tend to manipulate the market movement by having the unpublished price sensitive information (UPSI) over the information available in the public domain. However, in India, certain aspects of USPI are still brusque and obscured in SEBI (PIT) 2015. In SEBI (PIT) 2015, the materiality of information is a key determinant factor that catalyzes insider trading. However, when the part of the non-material information is wiped out from an insider to an analyst which if collated with the generally available information would make the analyst in possession of Unpublished Price Sensitive Information,

Indian legislation loses its sheen over this conditional situation.Indian regime of Insider Trading is iced up on this issue and does not deliberate on this approach. In U.S. legislation, it has framed its approach regarding this issue of Insider Trading, namely Mosaic Theory of Materiality, but India is yet to begin its chapter. Tribunals and Courts have been unlettered on such issue, remarking a fundamental gap in determining the materiality of information. Many such cases are flowing in market and investor protection groups have failed to acknowledge the generous concern of Market effluence. This approach would not only soon find its space in India but will be lucidly deliberating on this approach to prevent insider trading. Rule of purposive interpretation would elucidate on this approach which deals with such significant ‘mosaic’ ovulated from a part of UPSI and a part of PSI.

SEBI Interface

In SEBI (PIT) Regulation, 2015, insider trading is an offense when there is a communication, counseling or procurement of UPSI from insider to non-insider, or when the trade has been done while in possession of UPSI. UPSI stipulated as any material information which is not generally available and which has a material effect on the price of securities listed or proposed to be listed. However, a part of UPSI is non-material in its sense but if collated with generally available information become material and create a significant mosaic of material information. This information which has been created through a matrix of information could be used by the analysts to do insider trading in the securities of a company and thus, regulations lose its efficiency. For e.g. if an analyst procured a part of UPSI through any means and collate it with the information already reeling in the market like media reports, press briefs, and public the announcement, but does brain-storming over the permutation and combination of the coming deal and trades while in the possession of this available information, would this act of trading amount to Insider Trading in India.

The fundamental issue revolves here is ‘Whether an analyst would be charged for the act of insider trading if he has edge over information due to his expertise skills and working on permutation and combinations of such half-received information’. This question has been marginally touched up by U.S. Court but failed to explain the cut and dried formula. In Elkind v. Liggett & Myers, Inc., U.S Court of Appeals in 2nd Circuit address that any skilled analyst who has edge over information due to any use of any part of the non-material information, such procurement would amount to Insider trading. However, the U.S. had shown deviance from such approach in further cases. In Re Dirks, that an analyst may use UPSI which may be immaterial itself in order to fill in ‘interstices of analysis’; this process is legitimate even though ‘tidbit’ of such information may assume heightened significance when woven by the skilled analyst in the matrix of knowledge obtained elsewhere.In Dirks v. SEC, the court acknowledged that the analyst must remain free to obtain information from the corporation to fill in the interstices in the analysis.  The rationale proof for this process is the skills and expertise employed by the analyst and essential for market efficiency. This information has not been merely gulped without the application of mind but due to his robust experience in the field. Therefore, this creates a serious doubt on the illegitimacy of such act. Thus, it would be a dilemma for Indian Courts to pope up according to the given jurisprudence in Securities Law because the SEBI Act and regulation thereof have been implemented with the purpose of market efficiency and investor protection.Other facets that determine that materiality of information is such a situation is whether the disclosure of such omitted fact would be seen by the reasonable investor as significantly altered the total mixture of information available.

[1] However, the debated jargon is ‘reasonable investor’. Whether the court must refer the ‘reasonable investor’ as in view of an ordinary investor or a sophisticated analyst having expertise in the market affluence. This aspect would pose a serious question ‘whether the skills and expertise employed by sophisticated analysts would rule over the interpretation of materiality in the evolving jurisprudence’.

The Courts or tribunals may view such a lurking question of the materiality of information, as the information obtained cannot be viewed in a vacuum and thus any kind of collation would amount to Insider Trading. However, the Rule of purposive interpretation avows that a liberal approach towards market efficiency because it reaffirms the established practice from which the benefit, relief, and remedy may flow. The striking outlook, here, is that the court or tribunals may resort to the purpose of enforcement of PIT regulations. That, so far as, the aspects of securities market concern, it is always a top-notch priority to protect investors from any kind of fraud. Therefore, the court should view such obtained information in the totality of the circumstances and whether the information is capable of changing the conclusive decision of the analysts in general. Not only, would this create a difference in a level of the approach adopted by an ordinary person and a skilled analyst, but significantly this would reform the existing modus operandi employed by other insiders including directors, promoters, KMP etc. by stimulating restrictive disclosure in the public or family events also.The balance of mixed information and a UPSI must be addressed through a circumstantial approach in terms of ordinary categories in which such obtained information will create an asymmetry in the market. Sparingly, even information which is not material in nature but tends to become material in the near future must attract the prohibition of insider trading regulation.

[1] Basic Inc. v Levinson

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