Insider Trading: Wiretapping by SEBI a potential investigation tool?

Author: Tanisha Mishra

3rd year student at National Law University and Judicial Academy Assam

I. Introduction

The right to privacy, as a significant derivation of the right to life, is protected under Article 21 of the Indian Constitution. Even before the judgement in KS Puttaswamy v. Union of India, (“Puttaswamy case”) courts have acknowledged the right to privacy, if not as a fundamental right. The Puttaswamy case laid down the ‘triple test’ upholding the invasion of privacy subject to fulfilment of certain conditions and provided that privacy cannot be absolute. As held in Maneka Gandhi v Union of India, the right to privacy can be restricted in exceptional cases and should be compromised according to the procedure established by law.

Wiretapping conversations as evidence in trial cases is not a new idea. Section 69 of the Information Technology Act, 2002 allows interception of calls for the investigation of any offence. The power to do so is bestowed upon the Centre or the State Government. Further, Telegraph Act, 1885 allows interception of calls by the government in the interest of the state and to prevent crimes, under Section 5(2).

The Securities Exchange Board of India (“SEBI”) is a statutory and regulatory body of India that monitors the securities exchange market. For the prohibition of the offence of insider trading, the SEBI (Prohibition of Insider Trading) Regulations came into force in the year 1992. In the fiscal year 2019-20, SEBI took up 161 cases out of which 49 cases were concerned with insider trading. Due to a large number of cases of insider trading in India, it is believed that if SEBI is conferred with the power to intercept calls, it would improve the investigation process further. This article argues that even though everyone has the right to privacy, wiretapping as a tool to investigate insider trading cases must be adopted by the SEBI to expedite the whole process.

II. International Jurisprudence regarding wiretapping for insider trading cases

Insider trading is a serious offence as it not only affects the parties concerned but also people at large. Connected persons being benefitted due to their distinctive position and insider information is undoubtedly unfair to everyone who is a part of the share market.

In the first wiretapping case of insider trading offence, Securities Exchange Commission v Rajat Gupta, the Securities and Exchange Commission (“SEC”) alleged that Rajat Gupta obtained confidential, unpublished information as a result of being one of the directors of Goldman Sachs. He tipped this information to his business associate, Raj Rajaratnam who was the founder and managing partner at Galleon Management. The information was about Berkshire Hathaway Inc. investing $5 billion in Goldman Sachs. Raj Rajaratnam used this information to invest in Galleon Hedge funds. The SEC intercepted their phone calls to obtain evidence and eventually convicted both of them. Judge Howell held that the interception of a phone call is permissible under “other offences” of Title III, which authorises intercepting of calls under special circumstances. Raj Rajaratnam was sentenced to 11 years of imprisonment, which is quite a long time for insider trading offenders. In the case, it was also argued that the offence was victimless. However, Judge Howell and the jury decided against it citing a number of violations of statutes, emphasising that this case was very important to dismiss and far more important was the intercepted evidence.

Additionally, in a recent French case of insider trading, the Court of Cassation, the highest court of the French judicial system, said that the investigators at Autorité des Marchés Financiers didn’t obtain authorisation before intercepting phone calls. This led to an issue concerning privacy. The Court of Cassation referred the case to the Court of Justice of the European Union despite rejecting the evidence at the first instance, yet again implying that the wiretapped conversations, although obtained illegally, help the State protect its economic interests and that of its people.

III. Right to privacy in India

The Indian perspective has also given more importance to public interest over the privacy of the guilty. In the case of Govind v State of MP, it was laid down that the right to privacy can be restricted if any important countervailing interest supersedes the person’s privacy. It further held that there must be compelling state interest and the law must be narrowly tailored. The Narrow Tailoring test, a USA borrowing, holds that the law must be specifically designed to meet the State’s objective and place as few restrictions as possible. And any law in pursuance of the State's goals must not be over-inclusive, where the limitations imposed on citizens should not go beyond the requirement of the State's objective. In R. Rajagopal v UOI, it was held that the right to privacy may not be available to individuals who have voluntarily gotten themselves into a controversy. Moreover, the Triple Test prescribed in the Puttaswamy case, allows incursion of privacy by adhering to i) legality, which elaborates the existence of law ii) need in terms of legitimate state aim, and iii) proportionality, which ensures a rational nexus between the objects and the means adopted to achieve them.

IV. Existing procedure for wiretapping

The current procedure to intercept calls is set out under Rule 419A of the Indian Telegraph Rules, 1951. It mandates that the directions for interception of calls shall be issued by an order made by the i) Secretary to the Government of India in the Ministry of Home Affairs in the case of Government of India, and ii) by the Secretary to the State Government in charge of the Home Department in case of State Government. Further, the order issued shall specify reasons for such direction, making sure there were not any other alternatives to obtain such information by reasonable means. Then, a copy of such order shall be forwarded to the Review Committee within seven days. The directions shall specify the name and designation of the officer or the authority to whom the intercepted information is to be disclosed and shall specify the usage of such information which shall be subject to the provisions of Section 5(2) of the Indian Telegraph Act, 1885. The order shall then be conveyed to the designated officers of the license holders of service providers, and finally, the designated nodal officers for communicating and receiving such requests shall issue an acknowledgement letter to the concerned Law Enforcement Agency within two hours on the receipt of intimation for interception.

The entire process, however, including several approvals and mandates at multiple levels makes the whole exercise very time-consuming. This results in the delay in obtaining the relevant evidence, ultimately hampering the investigation process. Therefore, with the narrow tailoring test, PUCL guidelines on wiretapping, and criteria mentioned in Triple Test, a robust mechanism for intercepting calls of insider trading suspects can be framed.

V. SEBI's power to authorise wiretapping

In District Registration and Collector, Hyderabad and another v Canara Bank and another (2004), it was held that an infringement of privacy may be by (i) legislative provisions, (ii) administrative/ executive orders, (iii) judicial orders. SEBI is an independent body that has many powers and functions to perform. SEBI has the authority to pronounce judgments concerning the securities market, making it a Quasi-Judicial body. It also frames rules and policies to govern the market, as a Quasi-Legislative body. And it reserves the power to implement regulations and inspect books, thus is a Quasi-Executive body as well.

There are nearly eighteen agencies with wiretapping powers in India. Although most of them are concerned with the sovereignty and security of the nation, this group also includes the Central Board of Direct Tax (CBDT), which shares similar interests with SEBI and both the organisations are the results of statutory acts. In 2018, a SEBI committee headed by Dr. T.K Viswanathan recommended that SEBI should have direct powers to intercept calls. The committee articulated that it would help them to keep track of repetitive offenders. However, it also suggested ensuring proper checks and balances. Unfortunately, the recent 2019 amendment did not throw any light on wiretapping as a critical tool in effectively monitoring the investigations undertaken.

VI. Conclusion

In the world of digital and technological advancement, SEBI has also improvised its ways of investigation. SEBI now looks into Facebook and matrimonial sites for clues. In a recent case, it looked into matrimonial posts to establish a nexus between the two parties. When new ways are being adopted, it’s high time to adopt the old way of intercepting calls with necessary precautions, which has been successful in many countries such as the US and France. As Insider trading is a serious offence, under no circumstances, the offenders should be allowed to thrive disregarding all the statutory provisions under the pretext of ‘right to privacy’. By following the guidelines issued by the Supreme Court in the case of People’s Union for Civil Liberties v UOI, a robust mechanism for intercepting calls can be formed. At the end of the day, the primary objective of the SEBI is to protect the investors in the securities market, encouraging people to take part more in the fair playground of dealing with securities and keeping the disruptors like “insider trading” at bay. Because as rightly said by Jacob Frenkel “A defendant’s own words are the most powerful tool for the government”.

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