Informant

Insider trading is unusually hard to detect from the outside. The trade looks ordinary; what makes it an offence is something that happened in a room, in a message, over a coffee. The people who know are colleagues.

Regulations 7A to 7K of the SEBI (Prohibition of Insider Trading) Regulations, 2015 build a channel for those colleagues. An informant is an individual who voluntarily submits to SEBI a Voluntary Information Disclosure Form relating to an alleged violation of insider trading laws that has occurred, is occurring, or which the individual reasonably believes is about to occur — and, importantly, a person is an informant regardless of whether they satisfy the requirements, procedures and conditions to qualify for a reward.

That last clause is doing real work. Protection is not conditional on being paid.

The chapter runs in sequence:

Regulation 7I — the anti-retaliation rule. Every person required to have a code of conduct under these regulations must ensure that the code provides suitable protection against discharge, termination, demotion, suspension, threats, harassment (directly or indirectly) or discrimination against any employee who files a Voluntary Information Disclosure Form — irrespective of whether SEBI considers or rejects the information, or whether the employee is eligible for a reward — by reason of filing the form, testifying or assisting SEBI in any investigation, inquiry, audit, examination or proceeding, or breaching a confidentiality agreement or employment term solely to cooperate with SEBI.

"Employee" here means any individual who during employment may become privy to information relating to a violation of insider trading laws and files the form, and is a director, partner, or regular or contractual employee — but does not include an advocate.

The employee need not prove anything about outcome. Nothing in the regulation requires the employee to establish that SEBI took enforcement action on the information, or that the information met the criteria of Original Information.

Regulation 7J — void agreements. Any term of an agreement, oral or written, or of a code of conduct, is void in so far as it purports to preclude any person — other than an advocate — from giving SEBI information about a violation of securities laws. No person may by threat or act impede an individual from communicating with SEBI, including by enforcing or threatening to enforce a confidentiality agreement.

Consequences for the employer. An employer who violates this chapter may be liable for penalty, debarment, suspension and/or criminal prosecution by SEBI. But SEBI is not required to direct reinstatement or compensation — the informant who wants their job back goes to a court or tribunal, and nothing in these regulations prohibits that, or diminishes their rights under any other law.

Ms Leela Menon is a dealer at a fund house. She sees a fund manager repeatedly take positions in a mid-cap stock the day before the research desk publishes on it, and files a Voluntary Information Disclosure Form with SEBI on 9 January.

Her employment contract has a clause: "The employee shall not disclose any internal information to any third party, including any regulator, without prior written approval of the Managing Director." Under Regulation 7J that clause is void to the extent it purports to stop her informing SEBI. It cannot be enforced against her, and threatening to enforce it is itself prohibited.

On 2 February she is moved off the dealing desk to a back-office role at the same salary, and told it is "a rotation". On 20 March she is put on a performance improvement plan. Both are capable of being demotion and discrimination by reason of filing the form, and the firm's code of conduct was required to protect her against exactly this.

On 11 April SEBI closes its examination without action, concluding the pattern was coincidental.

That changes nothing about her protection. She was an informant from the moment she filed, regardless of whether she qualifies for a reward, and Regulation 7I expressly applies irrespective of whether the information is considered or rejected and whether she is eligible for a reward. She is not required to establish that SEBI acted, or that her information was Original Information.

What SEBI can do to the firm is penalise, debar, suspend or prosecute. What SEBI cannot be required to do is order her reinstatement or compensation — for that she goes to the competent court or tribunal, which the regulations expressly preserve.

Chapter 7, under "Information to SEBI by Informants", is short and almost entirely definitional — which makes it a favourite for one-mark questions.

Expect: what is the form called (Voluntary Information Disclosure Form), must the violation already have occurred (no — occurred, occurring, or reasonably believed about to occur), who is excluded from the definition of employee (an advocate), which regulation deals with confidentiality (7H) and with retaliation (7I), and can an employment confidentiality clause stop an informant (no — Regulation 7J makes it void). The workbook does not state reward amounts, so do not carry a figure into the exam from elsewhere.

• You are an informant whether or not you get a reward. The definition says so expressly, and the protection in 7I applies even if SEBI rejects the information.
• An advocate is excluded both from the definition of "employee" for protection purposes and from the void-agreement provision — legal representation and communications under it are carved out.
• A future violation counts. A reasonable belief that a violation is about to occur is enough; the informant need not wait for the trade.
• SEBI cannot be required to order reinstatement or compensation. The regulations give protection and punish the employer; they do not give the informant a remedy in SEBI's hands. That is why the right to approach a court or tribunal is expressly preserved.
• Confidentiality (7H) and protection against retaliation (7I) are different regulations. Questions frequently swap the two numbers.
• The obligation to carry anti-retaliation protection sits in the code of conduct of every person required to have one — so it is a compliance officer's drafting job, not merely a right the informant asserts afterwards.