Insiders do more than trade in India’s bull market


In India, you don’t really exist till you’re on the right WhatsApp groups. It’s on those private chat rooms that political campaigns are sharpest; where India’s sprawling extended families quarrel and make decisions; and, according to a recent Reuters investigation, where company quarterly results are predicted with surprising prescience. There’s no proof of insider trading yet, but officials from the Securities and Exchange Board of India, or Sebi—India’s market regulator—told the Economic Times that they were looking into the reports.

This is just another reminder of the fact that, while nominally India’s financial markets are set up to protect ordinary investors and market participants, in actual fact they work to protect insiders. This isn’t generally understood, given that India’s laws against insider trading and protecting minority shareholders are strict on paper. In the World Bank’s ease of doing business indicators, for example, one of the few domains in which India has consistently done well is in the protection of minority shareholders.

But here, as elsewhere in India, there’s a vast difference between what the laws say and how they’re implemented. Indeed, India’s Supreme Court recently chastised regulators, saying that their rules on insider trading simply weren’t clear enough.

The WhatsApp story seems to confirm something of an open secret in Mumbai stock market circles: There are closed networks that tend to get information about companies well before the general public. Sebi struggles to get insider-trading prosecutions off the ground. Meanwhile, foreign investors operating in India are being forced to run investigations of their own local employees and contractors.

Even if Sebi’s regulations were up-to-date and detailed, enforcement would be hampered by staffing problems. The agency has only 780 employees, one for every six companies listed on an Indian stock exchange. (Fifteen times as many people work at the US Securities and Exchange Commission, one for every company listed on an American exchange.) Nor does the training or background of Sebi’s employees necessarily inspire confidence.

Add to that a culture that has long normalized trading on insider information. I remember sitting, a few years ago, with an acquaintance of mine from one of Mumbai’s old stock-broking families, a man then in his late 50s. We were talking of the prosecution in New York for insider trading of Raj Rajaratnam of Galleon Group LLC, and of Rajat Gupta, once a managing director at McKinsey & Co. Inc. After I carefully explained what Gupta and Rajaratnam had done, my acquaintance shook his head, bemused. How, he asked me, are traders expected to make money except by using their networks to unearth information nobody else has? It’s no surprise, perhaps, that many ordinary Indians don’t entirely trust the stock market, assuming it’s loaded against them in some way.

A similar insider-first entitlement has led to an even larger corporate governance problem. What in India are called “promoters”—those who control companies, frequently the firm’s founding family—have power far beyond what their actual ownership share warrants. They pay themselves exorbitant salaries, strip the publicly-held companies they control of assets, and have their decisions rubber-stamped by boards and sometimes even by shareholder meetings that don’t have all the information.

After a couple of corporate scandals recently, Sebi set up a committee led by the well-respected banker Uday Kotak to investigate how governance could be improved. Kotak explicitly said that he saw his job as ensuring “fairness for the entire body of shareholders” and not just a select subset. The committee’s report called for multiple changes to how companies were regulated and how boards were constituted.

But it isn’t that easy to make changes in India. At least one government minister said that the report was “completely off the mark.” And preventing insiders from taking control of companies would require Sebi to investigate the privately-held, or unlisted, subsidiaries of publicly-traded companies. Sebi doesn’t have that power and it isn’t certain that the Delhi ministry that does will give it up easily.

Kotak pointed out another open secret about the Indian private sector, too: Most activity at many publicly-traded companies was nominally carried out by unlisted subsidiaries—and so wasn’t audited, or transparent enough for the average shareholder to figure out. He could easily have added that some promoters tend to use unlisted subsidiaries to hide their control and to move money around in ways that shareholders or the government can’t see.

India’s government is hoping that more and more of its citizens will turn to the financial markets and shares as a vehicle for their savings, giving up on gold and on real estate. And, certainly, the markets’ bull run has been one of the few good news stories in the Indian economy at the moment. But to keep that run going, India has to work harder to protect outsiders—or, to put it another way, it will have to work harder to disempower insiders, by streamlining laws if necessary. Bureaucratic wrangling between regulators and the government shouldn’t stand in the way.