THE BLIND SPOTS OF INDIAN CORPORATE LAW: SHADOW TRADING, FRONT, RUNNING, AND INFORMATIONAL ASYMMETRY

Indian securities law structures its prohibition of trading abuses around a single conceptual trigger: unpublished price sensitive information relating to a listed company and its securities. That framework works tolerably well for the classic case of an insider trading in his own company’shares. It works poorly and, to the point, not at all for the insider who trades not in his own company’s securities, but those of an economically connected third party. This paper sets out to show why. That trading practice, known these days as shadow trading, poses problems to Indian law that cannot be explained away as a drafting oversight to be corrected by lengthening an enumerated list by one item. Rather, the trouble flows from the architecture of the prohibition itself. Indian law places trading abuses inside regulatory compartments defined by references to the securities traded on; it polices boundaries that shadow trading does not cross. But that is because it has identified the wrong boundary. The wrong in shadow trading is the disloyal use of an informational advantage acquired in corporate office. And that wrong is fiduciary. Read together with the market abuse regime, India’s statutory codification of the directors’ fiduciary duties at section 166 of the Companies Act 2013 already condemns the shadow trader. United States and United Kingdom law approach the same problem from the same place, through fiduciary duty. So going forward, rather than continually redrafting the list of prohibited information, Indian regulators would do better to expand slightly the category of securities thereby tainted. Fixing shadow trading requires not a longer list of banned information but a doctrinally modest expansion of fiduciary principle.”