To uncover insider trading cases, regulator SEBI on Wednesday announced a new mechanism to reward informants with up to Rs 1 crore cash for any credible inside information through a specially created hotline. A proposal for possible amnesty or settlement for minor wrongdoings in return for cooperation in the probe, was also made.

The benefits of the new 'Informant Mechanism' under its Prohibition of Insider Trading (PIT) Regulations will only be available to individuals and corporates, and professionals like auditors will not be able to use this route as they are duty-bound to report any wrongdoing.

'Insider trading' is as trading of securities while in possession of unpublished price-sensitive information.

It is usually carried out in a clandestine manner and the wrongdoers typically use proxies for communicating the relevant information and for executing the trades.

As any direct evidence of such communication is seldom available easily, the detection and prosecution of insider trading remains a challenge.

SEBI said that while it is imperative for the regulator to employ all legitimate means to detect insider trading, the new initiative will strengthen its investigation and enforcement mechanism.

An informant would need to submit a Voluntary Information Disclosure Form (VIDF) detailing credible, complete and original information related to an act of insider trading, including communication of unpublished price-sensitive information or trading in violation of rules that has occurred, is occurring or is about to occur.

It would be mandatory to disclose the source of information and attach an undertaking that it has not been sourced from a person employed with SEBI or any related regulator.

Sebi would establish an Office of Informant Protection (OIP), which would be independent from the investigation and inspection wings or any other operational departments. It would be responsible for receipt, registration and processing of VIDF and also for ascertaining its veracity and authenticity.

The OIP would also decide reward for the informant, besides acting as a medium of exchange between the informant (directly or through a legal representative) and Sebi. It will maintain a hotline to help informants submit the details.

While the informant would need to disclose his or her identity to OIP, the identity details would be excised from the information forwarded further.

Those willing to submit any information anonymously would need to appoint a practising advocate as a legal representative.

The identity of the informant would need to be revealed only if Sebi finds him or her in non-compliance to its regulations, or when a disclosure is required in relation to court proceedings, or if the regulator needs to verify identity for granting the reward.

The informant would be given a reward if Sebi is able to disgorge at least Rs 1 crore of ill-gotten gains from insider trading on the basis of the information. The reward would be 10 percent of the money collected, subject to a maximum amount of Rs 1 crore.

While an interim reward of up to Rs 10 lakh can be given at the time of SEBI's final disgorgement order, the rest would be given after the regulator has disgorged at least twice the amount of the final reward.

Inputs From PTI