The consultative paper sets out the objective of the proposed regulation:
“Such a Regulation will check insiders, who have greater access to price sensitive company information, from taking advantage of information for the purpose of making short-term profits (short swing profits). It is assumed that insiders have a long term investment in the company and are not expected to make rapid buy/sell transactions, which are assumedly based on at least some level of superior access to information, whether material or not. Additionally, as mentioned above, it will align the long term objectives of company insiders with the company shareholders.”An important aspect of the proposed regulation is that the mere facts of a person being an insider and that of conducting the buy and sell trades within a six-month window are sufficient to invoke the surrender requirement. Mens rea or the element of state of mind is not a pre-requisite. The consultative paper elaborates:
“Liability will be imposed without any necessity for guilt or wrongfulness and conversely a direction to surrender profits made in a short swing transaction shall not necessarily imply any form of guilt. The surrender of profits made in such short swing transactions shall be automatically imposed as a part of good corporate governance requirement. The short swing rule will get automatically attracted as soon as two things are established. First is the fact of being an insider or a “designated insider” (which is elaborated below). And second, the fact that the same securities were bought and sold within six months of each other. In such a regulation, the intent of the person shall be immaterial. Merely the fact of the trade will be sufficient to take action i.e. direction to make over such profits to the company.”It, however, remains to be seen whether judicial authorities will follow the letter of the law, or impute the requirement of mental element while interpreting the provisions of the law. For example, while interpreting the provisions of the SEBI (Insider Trading) Regulations, 1992, the Securities Appellate Tribunal has in the past held that if a person who had indulged in insider trading had no intention of gaining any unfair advantage, then the charge of insider trading cannot be sustained (Rakesh Agrawal v. Securities and Exchange Board of India, [2004] 49 SCL 351).
Under the present proposal, certain transactions would be exempt from this stipulation: transactions approved by a regulatory authority, employment benefit plans, bona fide gifts and inheritances, mergers and acquisitions, etc.
The consultative paper is open for comment until January 21, 2008.