The Securities and Exchange Board of India (Sebi)   in December 2019 had established the Office of Informant Protection (OIP) to process tipoffs on insider trading. However, the response was that informants provided just five tipoffs in the first six years of the programme — from 2019-20 (FY20) to FY25. 

This may point to the beginning of a rising role of whistleblowers in aiding stock-market policing amid the rapid expansion in capital markets in recent years. 

The stock exchanges have added over 180 million investors and hundreds of companies since FY19, the last year before the establishment of the whistleblower mechanism. 

The regulator added more than 300 employees since FY19 and invested in advanced technology to keep up with increased demands. 

“This could possibly be a sign of increasing confidence in the reporting mechanism by potential whistleblowers with substantive information in hand to report,” noted Rohitashwa Prasad, partner at law firm Dentons Link Legal. More can be done to encourage people to come forward, he said.

According to Prasad, mature markets such as the United States (US) have limited legal delays and avoid a cap on rewards, besides providing more protection against employer retaliation.  

The US Securities Exchange Commission (US SEC) announced a $279 million reward (or over ~2,000 crore, based on the prevailing exchange rate) for a tip in May 2023, shows SEC statement disclosures. 

Whistleblowers whose employment is affected because of reporting violations to the regulator have stronger safeguards against retaliation, Prasad said. 

“Under the Dodd Frank Act, an employee who has reported to the SEC can make a retaliation claim directly in a federal court,” he said. The SEC website tells whistleblowers facing retaliation that “you may be able to sue your employer in federal court and seek double back pay (with interest), reinstatement, reasonable attorneys’ fees, and reimbursement for certain costs in connection with the litigation”.

The Sebi regulation notes that informants facing retaliation from employers can approach competent courts or tribunals for relief. It also adds that employers found to be in violation may be liable for regulatory action, but adds that “nothing in these regulations will require the Board to direct reinstatement or compensation by an employer”. 

Sumit Agrawal, founder, Regstreet Law Advisors and former Sebi officer, noted that there was limited publicly available information on the outcomes of the OIP mechanism. It can be difficult to objectively evaluate the effectiveness of the initiative without granular information on the number of informants rewarded, the number of tipoffs that resulted in investigations or enforcement proceedings, and the eventual outcomes of such proceedings, Agrawal said.  

A request under the Right to Information (RTI) Act that Business Standard filed separately also did not result in additional information. 

The scope of violations covered by the informant mechanism can also be expanded, according to Agrawal. 

“They should consider a mechanism covering all serious security-market violations. The mechanism could include front-running, fraudulent or manipulative conduct, material disclosure violations, falsifying accounts and serious intermediary misconduct. There is no clear policy reason for an incentivised informant mechanism to remain restricted to insider trading,” Agrawal said. An email sent to the regulator did not receive a reply.