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What if all Insiders were Outsiders?

Would it actually make sense to abandon the whole concept of insider trading?

With former McKinsey boss Rajat Gupta getting sentenced to two years in prison for insider trading, it’s an opportunity to pay some attention to insider trading. In recent weeks, SEBI has made some moves that show a renewed focus on insider trading. For one, the regulator has said that insiders in listed companies need to be identified up front, creating some pressure on them. In an interview with ValueResearchOnline, Sinha said that knowing that you are listed as an insider would create some amount of moral pressure. SEBI is also said to have upgraded its surveillance mechanism for detecting insider trading.

How large a problem is insider trading in India? The real problem in India is insider trading coupled with insider manipulation. Especially in mid to small cap and smaller stocks, managing ones stock price and profiting from is said to be a completely normal part of the Indian promoters activities. On this topic, there is a huge gap between what the investment community will say in private and what the public posture is. Unless the private conversations are complete exaggerations, SEBI has a big task cut out for it.

Perhaps it is better to take the contrarian view on insider trading. There has always been a reasonable view that insider trading should not be a crime. The idea is that no matter what regulators do, they can no more than scratch the surface. All that happens is information flow resulting from insider trading is driven underground—it would be better for ordinary investors if it were done openly. Visualise this scenario: In the Rajat Gupta affair, what would have happened if instead of just Gupta, every single member of the Goldman Sachs board had called various hedge fund managers and had told them the news? Wouldn’t that have been better for the markets? The answer is clearly yes.