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Friday, February 14, 2025

Mapping insider trading laws: A database for SEBI’s Prevention of Insider Trading Regulations

by Natasha Aggarwal.

The Indian legal framework on insider trading is complex and has, over the years, been significantly updated and amended. The insider trading regulations were introduced in 1992 and amended four times between 2002 and 2011. This set of regulations was replaced by the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 (PIT Regulations), which has been amended 12 times between 2018 and 2024. Many of these amendments aimed to address regulatory gaps, such as those concerning the scope of terms like "connected persons" and "unpublished price sensitive information" (UPSI). However, frequent changes in the PIT Regulations have created challenges in understanding the correct position in law and in analysing past events and developments.

To help solve this problem, we have prepared a relational database by identifying the constituent elements of the violation of "insider trading" in the PIT Regulations. The database does not map changes to the disclosure requirements in the PIT Regulations.

The prohibitions under the PIT Regulations may appear straightforward but are often complex in practice and implementation. For example, understanding insider trading requires understanding (i) what constitutes UPSI, which in turn requires understanding what constitutes generally available information, and (ii) who is an insider, which in turn requires understanding the scope of terms such as "connected person", "deemed to be connected person", and "immediate relative". Moreover, certain regulated entities are required to adopt a code of conduct - a requirement that initially applied only to listed companies but now applies to entities such as mutual funds and intermediaries.

Based on the above, we have identified the following key definitions that require clarity for better compliance with, and understanding of, the PIT Regulations:

  • Connected person;
  • Deemed to be connected person;
  • Insider;
  • Immediate relative / relative;
  • Trading;
  • Unpublished price-sensitive information (UPSI); and
  • Generally available information.

We have also identified the following violations of the PIT Regulations:

  • Communication of UPSI
  • Trading when in possession of UPSI; and
  • Failure to implement or comply with the code of conduct.

These issues are referred to as 'Indicators' in our database.

We expect that this will be helpful for researchers and market participants to analyse the evolution of these indicators and the legal framework for insider trading. Our indicators are linked to: (i) related regulatory instruments, such as amendments (along with the date on which the amendment takes effect), SEBI's board meetings, consultation papers, and circulars, and (ii) provisions of the earlier insider trading regulations (i.e., the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992 (1992 Regulations)).

For example, the definition of UPSI is mapped to an amendment in 2018, two consultation papers, two board meetings, and the provision of the 1992 Regulations that defined UPSI. This allows a user to map all documents in which an indicator has been discussed, and then understand and analyse: (i) the current legal position, (ii) the evolution of a definition or a violation, and (iii) the SEBI's reasoning in introducing certain amendments and the impact of specific documents, such as consultation papers, on regulatory provisions.

The database is available here. We encourage you to read the tab titled "Read me" to understand how to navigate this database.

We will update this to reflect any further changes to the PIT Regulations. If you notice any errors or inconsistencies, please reach out to us at info@trustbridge.in, and we will make the necessary corrections.


Natasha is a Senior Research Fellow at TrustBridge.

Sunday, February 09, 2025

Improving electricity regulation in Tamil Nadu

by Akshay Jaitly, Charmi Mehta, Rishika Ranga, Renuka Sane, Ajay Shah and Karthik Suresh.

The Indian electricity sector is a centrally planned sector that faces increasing financial stress. In other words, a centrally planned decarbonisation would result in enlarged costs and political difficulties. The path forward for electricity reforms is to make changes one state at a time. We have started this journey with the state of Tamil Nadu.

The case of Tamil Nadu is particularly interesting. It holds great potential when it comes to the energy transition with high potential of offshore wind and solar. However, poor quality of supply along with indiscriminate subsidies for domestic and agricultural consumers has led to deep levels of fiscal stress on the Tamil Nadu state exchequer. Fiscal stress harms investibility in electricity, which is particularly a challenge for renewables. Due to multiple reasons, some of which may be attributed to the political economy at the state level, the state of Tamil Nadu has also revised tariffs only four times since the Electricity Act was enacted in 2003. These tariff revisions have often not reflected the cost of supply of electricity (e.g., the tariff revisions in 2017).

While the electricity sector in Tamil Nadu has recently undergone institutional changes in the form of TANGEDCO's demerger, the present state of regulatory challenges has not been adequately addressed. In a new paper, Improving electricity regulation in Tamil Nadu, we present evidence on regulatory failures of the electricity regulator in Tamil Nadu (TNERC) and contextualise the impact of this on associated aspects of public finance and private finance. We bring the knowledge of regulatory theory to bear upon the possible causes of these failures. We discuss the TNERC's performance on elements that make up a well-functioning regulator, such as clarity of purpose, separation of powers, selection of board members, fair adjudication, public consultations and financial independence.

Many aspects of regulatory reform require amendments to the Electricity Act, and hence the problem statement lies in identifying the levers available to make progress in Tamil Nadu. We identify several levers that the state government can use to undertake reforms, well within its powers under the Electricity Act, to make Tamil Nadu a turnaround story and a model for good electricity regulation nationwide. When these improvements are put into motion, they will materially change the views of private investors on the feasibility of investment in the Tamil Nadu electricity sector. This paper offers ideas on how this can be done.


Akshay Jaitly, Rishika Ranga and Renuka Sane are researchers at Trustbridge Rule of Law Foundation. Charmi Mehta, Ajay Shah and Karthik Suresh are researchers at XKDR Forum.

Tuesday, February 04, 2025

Announcements

Call for Papers: 16th Emerging Markets Conference

14th - 17th December, 2025

XKDR Forum in collaboration with Vanderbilt law School is inviting papers to be submitted for the 16th Emerging Markets Conference, 2025. In the past, the audience for these events has comprised of academics, participants from the legal and financial industry, policy makers from government and regulators.

Details of the previous conferences can be viewed at https://emergingmarketsconference.org/. The conference aims to cover presentations and discussions across the following set of research topics:

  • The sources of economic success or failure in EMs.
  • Finance in EMs (households, financial markets, financial intermediaries, firms and finance, finance and growth).
  • Political economy, law, public administration, regulation in EMs.
  • The impact of populism upon the possibility of sustained growth.
  • Insights into large EMs that matter in and of themselves.
  • Insights from narrow research projects that illuminate EMs in general.
  • The new phase of globalisation and its consequences for international trade, international finance and the nature of the EM firm.
  • Features of a society that enable or disable convergence into the ''normal'' package of high levels of freedom and prosperity.
  • The puzzles faced by all kinds of decision makers: individuals, civil society actors, firms, all levels of government.
  • Grand challenges such as climate change: implications for EMs and ramifications of choices made in EMs.
  • State capability in EMs

The ideal papers for EMC shed light on the great questions of the age, while being analytically sound and persuasive.

Conference design

For EMC 2025, we intend to bring on board a wider research papers, panels on contemporary policy and keynotes by experts in the area of finance, economics and law. The conference this year will be completely in - person mode.

Best Discussant Award

Each year, we award the Emerging Markets Conference discussant award for the best discussant and the first runner up discussant of the papers presented on each day of the EMC. The discussants are selected by an audience poll.

Program Committee

  • Adam Feibelman, Tulane University
  • Ajay Shah, XKDR Forum
  • Bidisha Chakraborty, Saint Louis University
  • Dan J Awrey, Cornell Law School
  • Harsh Vardhan, Independent
  • Indradeep Ghosh, Dvara Research
  • Joshua Felman, J. H. Consulting
  • Kose John, NYU Stern
  • Kumar V, SMU – Cox School of Business
  • Marios Panayides, The University of Oklahoma
  • N. Prabhala, Johns Hopkins University
  • Pab Jotikasthira, SMU – Edwin L Cox School of Business
  • Pradeep Yadav, The University of Oklahoma
  • Rambhadran Thirumalai, ISB
  • Rajeswari Sengupta, IGIDR
  • Renuka Sane, TrustBridge
  • Sanjay Kallapur, ISB
  • Susan Thomas, XKDR Forum
  • Tanika Chakraborty, IIM Calcutta
  • Yesha Yadav, Vanderbilt University

Important dates

  • Paper submission deadline: 30th July 2025.
  • Expected date for notification of acceptance: 1st September 2025.
  • Dates of the conference: 14th - 17th December 2025.

Support

Financial support for academic authors whose papers have been accepted at the conference includes travel support of up to USD 500 as well as accommodation at the conference venue for 3 nights of the conference (14th to 17th December).

Registration and contact details

Submissions: Please submit your papers in pdf format by following this link here
For any clarifications, please reach out to Jyoti at outreach@xkdr.org

Friday, January 03, 2025

Markets in everything: using Coasean bargains to resolve culture conflicts

by Samrudha Surana and Bhargavi Zaveri-Shah.

Introduction

In pluralistic societies with multiple, and often conflicting, cultural, religious, or ethical beliefs, disputes between groups with conflicting norms are highly likely. Take the case of a diverse society such as India. Hindus often complain about the Muslim cleric's call to prayer on loudspeakers, non-Hindus complain about the noise levels during celebratory festivals, Jains complain about the eating habits of other communities, and so on. Often, such conflicts get escalated to courts in the form of disputes, to the government in the form of lobbying for bans, or worse, as law and order problems. Pluralistic societies almost always face the following question: how can differences between conflicting norms be reconciled without resorting to State coercion or violence? In this article, we argue that voluntary commercial transactions between parties with conflicting norms are a powerful mechanism to resolve such conflicts.

Drawing from Ronald Coase's work on externalities and property rights, we argue that the principles underlying Coasean bargaining are not limited to economic contexts, but are also broadly applicable to social and cultural disputes. By internalizing the costs associated with conflicting norms, Coasean bargains enable parties to reach mutually beneficial agreements through voluntary exchanges. We illustrate this through a recent real-world example from India, where voluntary market transactions helped members of two religious communities reconcile their conflicting religious norms. A key policy implication of our argument is that it is imperative for policymakers to minimize the transaction costs for such voluntary transactions.

Coasean bargains in theory

Conflicts arise when one person's actions impose costs on another, creating competing interests that must be balanced. The economist, Ronald Coase, illustrated this through an example of cattle owners and farmers (Coase, 1960). Straying cattle may destroy a neighbouring farmer's crops, benefiting the cattle owner but harming the farmer. Preventing the cattle from straying, however, would impose a cost on the cattle owner. The problem is clear: allowing the cattle to stray increases cattle supply at the expense of crops, while restricting their movement favours crops at the expense of cattle. This is a problem of a reciprocal nature. Resolving such conflicts requires determining the value of what is gained versus what is sacrificed. In such cases, using a stream of case law from the US courts, Coase argued that instead of the State determining the hierarchy of who should prevail, one of the parties could internalize the costs arising to the other, from the exercise by the former of her property right. A Coasean bargain offers a way for individuals to resolve such conflicts through voluntary agreements that align their interests and minimize the costs of the conflict. For instance, a farmer might pay a cattle owner to install fencing, or the cattle owner might compensate the farmer for crop damage. When multiple actors are involved-such as several cattle owners and farmers-the feasibility of Coasean bargains depends on the transaction costs. While high transaction costs may prevent agreements in some cases, parties able to negotiate successfully can still improve their situations by reaching mutually beneficial agreements.

While Coase advocated this framework for the allocation of conflicting property rights, in the next few paragraphs, we demonstrate that the framework has implications for enforcing conflicting values as well.

A Coasean bargain in action

Last year, on the occasion of Eid Al Adha (Bakri-Eid) a festival widely celebrated in India and several countries with a significant Muslim population, a group of people were reported to have raised some money and purchased some goats from an Old Delhi market to rescue them from ritualistic slaughter. This incident was seen as an act of religious intolerance on the part of the rescuers. The undertone of these arguments was that the animal rescue on Eid Al Adha was driven by the rescuers' religious intolerance for Muslims and not genuine compassion towards animals. The rescuers profess Jainism, a religion founded on the value of ahimsa (non-violence towards all life forms). The Jain community is perceived to be populated by rich Jain merchants, who generally vote for the BJP. In a society so deeply divided on religion as India is today, this context creates suspicion for the rescuers' motivations behind this act.

The act of rescuing animals through voluntary transactions between the rescuers and the animal vendors is an example of a Coasean bargain that enabled the Jain and Muslim communities to resolve conflicting values without impinging on the rights of the other community. In this incident, the Jain purchasers perceived a harm from the sale of goats for slaughter . But, to stop the sale of goats would have harmed the seller. If the seller refused to sell to the Jains, the cost of slaughtering goats would have been internalized by the seller in the form of forgone payments from the Jains. In this case, the Jains internalized the costs that would have arisen from the slaughter of the goats purchased by them. Both the buyers and the sellers benefitted from the transaction. The sellers of the animals got value for their goats. The buyers got 'value' for their money in the sense that they managed to use the money to honour a value that they hold. As a Muslim man interviewed by the news reporter said in response to this incident, "It's their religion, and if saving animals (like goats) is part of it, we don't mind. Let everyone practise what brings them peace."

Coasean bargains work where the property rights of the people are more or less clearly defined. For example, consider a hypothetical, but realistic, scenario in a diverse urban neighbourhood where a temple's ceremonies or a mosque's call to prayer disturbs the residents of that neighbourhood. Under a Coasean bargaining framework, a standard example similar to this scenario is that of a firm installing a noise-creating windmill affecting the adjoining property owners' enjoyment of their property. In a world where the law confers property rights on people, a negotiation can start. The firm would offer the people some money in exchange for putting up with the noise, and people sensitive to the noise will perhaps use that money to install noise proof windows. These bargains are possible because nuisance has been defined as a tort under common law. That is, the law entitles people to enjoy their property without disturbance. Similarly, in our hypothetical scenario, in a diverse neighbourhood, the group affected by the noise levels might offer to fund the temple's or mosque's acquisition of a quieter sound system to reduce the noise impact. Alternatively, the temple or mosque may make a similar offer to the neighbourhood residents allowing them to enjoy their property without interruption. In the absence of such clarity on property rights, the scope for arriving at Coasean bargains is extremely limited. Similarly, in instances where the property rights are contested, such as whether the land on which a mosque stands belongs to the trust which runs the mosque, Coasean bargains may not offer a solution. In such cases, it would generally fall upon the courts to define the property right.

Coasean bargains versus coercion

A key benefit of Coasean bargains is that they help build a culture of religious tolerance, as compared to the use of State institutions to address religious conflicts. Even in countries whose constitutions allow their citizens the freedom to practice and propagate a religion of their choice, the State machinery is often used to perpetuate religious leanings. For example, in India, almost every year, like clockwork, several petitions are filed at one court or another in or around the festival of Eid-Al-Adha to restrict ritualistic animal slaughter.

Asking the State and courts to resolve these conflicts is problematic as it empowers them to impose a hierarchy of values on the society at large. For example, in the case illustrated above, a court order restricting the rights of Muslims to slaughter animals would have impliedly placed a higher value on the ritualistic notion of slaughter than the Jains' religious notion of non-violence towards animals. Since courts are designed to enforce rights and interpret laws, they are ill-suited to resolve conflicting values or norms that do not contradict the law. For example, consider the following conflicting values:

  1. animal welfare activists rescuing goats from ritualistic slaughter
  2. climate activists purchasing ceramic Ganesha idols from the vendors of such idols and disposing them to pre-empt them from being submerged in the ocean
  3. climate activists purchasing firecrackers during Diwali and disposing of them to pre-empt noise and air pollution

It is hard for any central institution to explain why one of these values should take precedence over the other, and then impose such preference ordering over the rest of society. In a voluntary transaction, on the other hand, the question of addressing the hierarchy of values is immaterial, since the transaction is based on the subjective value that each party places on their beliefs. A Coasean bargain allows the people practising these conflicting values to order their preferences without forcing them to do so. Further, empowering the State creates opportunities for rent seeking. In electoral democracies, this risks allowing a majoritarian bias to be played out in such conflict resolution, and exacerbates the mistrust of people in the State and the courts.

Voluntary transactions that allow the transacting parties to uphold norms that are important to them are similarly preferable to the common counterfactual of violence, aggression and the exclusion of practices that don't meet one's religious or philosophical leanings.

Conclusion

The Coasean framework underscores the power of voluntary agreements to internalize costs and balance competing economic interests between persons. We extend this intuition to the resolution of conflicting religious and cultural norms, which are likely to exist in any pluralistic society. The incident of Jain members purchasing goats during Eid Al Adha demonstrates how Coasean bargaining through market mechanisms can resolve religious conflicts without state intervention. This case demonstrates that voluntary market transactions, motivated by individual preferences, can yield broader societal benefits by reducing friction between conflicting norms. In a country like India that is ridden with cow protection laws, state sponsored beef bans and religious violence, the volition of this transaction has tremendous significance.

While rooted in a specific cultural context, the insights derived from this example resonate beyond India. The Coasean approach underscores how the market enables each party to achieve their goals while respecting others' freedoms, creating positive societal benefits as an unintended consequence. Many seemingly intractable conflicts between religious communities might find resolution not through legal battles or state intervention, but through Coasean bargaining, where mutual respect and cooperation emerge naturally from the market process, even when religious tolerance itself is not the participants' primary goal.

Finally, as Coase emphasized, the feasibility of these transactions is dependent on the transaction costs. In environments with high transaction costs, such transactions will be fewer, if at all. The goal of the policymaker, therefore, should be to lower the transaction costs to make Coasean bargains between extremely unlikely transacting parties work.

Reference

Coase, Ronald (1960), "The Problem of Social Cost", Journal of Law and Economics, 3 (Oct., 1960).


The authors thank Ajay Shah and three anonymous referees for their inputs.

Monday, December 23, 2024

Digital transformation and the paradox of financial inclusion in India

by Suyash Rai.

India has made great strides in digital technology, becoming a leading exporter of digitally delivered services to the global economy. These capabilities with computer technology fuelled hopes that digital transformation could yield gains for the Indian state that are comparable to those seen in the private sector. The `Digital Public Infrastructure (DPI)' approach, with India's Aadhaar digital ID system as a prime example, is presented as a path to higher GDP growth for developing countries. There is an emerging debate on the role of the state in shaping the development and deployment of DPIs.

Two key pillars of the Indian story with DPIs are identity services ("Aadhaar") and their impact on financial inclusion. In a new working paper, Economic development and digital transformation: Learning from the experience of Aadhaar and financial inclusion in India, I critically examine the Indian progress on financial inclusion between 2011 and 2021, revealing a paradox: while account ownership surged, account usage remained low.

The facts

The paper analyses India's performance compared to other lower middle-income and middle-income countries. The evidence shows:

  • Impressive account opening: India witnessed remarkable progress in account penetration, surpassing the average improvement in middle-income countries.
  • High inactivity: A significant percentage of accounts in India were inactive, far exceeding the average for middle-income countries.
  • Low account usage: India lagged behind in account usage for both consumption smoothing (regular deposits and withdrawals) and digital payments, indicating a gap between account ownership and actual financial inclusion.

The role of government mandates and Aadhaar

We argue that the rapid scale of account opening was caused by a series of government and Reserve Bank of India (RBI)mandates, particularly the Pradhan Mantri Jan Dhan Yojana (PMJDY). While Aadhaar played a role, it was primarily used as a physical ID for KYC, rather than as a digital ID through e-KYC. The gains in account opening may have a lot to do with state coercion and less to do with DPI.

The primary objective driving these initiatives was to facilitate direct benefit transfers (DBT) for welfare schemes. The government's focus on DBT aimed to reduce leakages and improve attribution for its welfare programs in the eyes of voters.

Why did this approach yield disappointing results?

The paper explores several reasons for the limited account usage despite the increase in account ownership:

  • The lack of a viable business model: No-frills accounts, with zero minimum balance and free transactions, are commercially unattractive for banks.
  • Mismatch between the solution and the problem: The focus on account opening for DBT didn't necessarily translate into accounts that address the richness and complexity of finance for the poor, of meeting the diverse needs of users for consumption smoothing and payments.

Lessons

The top-down approach, with a readiness to utilise the coercive power of the state, has limitations. While the government achieved its objective of scaling up DBT, this came at the cost of genuine financial inclusion and limited the potential uses of Aadhaar as a DPI.

We highlight the need for a more balanced approach, considering market forces and user needs, so as to obtain better outcomes with DPIs. We stress the importance of political creativity, institutional reforms, and a broader understanding of public value, beyond narrow fiscal objectives, when designing and implementing DPIs.

We offers insights into the complexities of digital transformation and financial inclusion, challenging the simplistic narrative of Aadhaar's success. These experiences invite us to rethink the role of the state in shaping DPIs and consider alternative approaches that can truly leverage technology for inclusive and sustainable development.


Suyash Rai is a Fellow at Carnegie India and a Visiting Research Fellow at the xKDR Forum

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Monday, December 09, 2024

Announcements

A course: Political Economy of Development

by Abhinav Singh.

Political economy of development is an 8-module course that combines theory with historical evidence to help you understand economic development.

When studying economic development, people often struggle because:

  • They can't find a clear learning path
  • The concepts can be tricky
  • Many discussions jump to solutions without examining why good ideas often fail

This course offers a structured way to work through these challenges.

We explore one central question: why do so few countries achieve rapid economic growth, even though some have shown us how? At independence, India had modern institutions, a diverse industrial structure, and a committed leadership. Yet it grew more slowly than Taiwan and South Korea. We try to understand why.

Course Structure

We start with the basics of economic growth, examine India's development path, and compare it with Taiwan, one of the rare success stories of the 20th century.

The course runs for 2 weeks with:

  • 4 live weekend lectures
  • 4 self-paced modules on our learning platform

The December 2024 cohort starts December 21. You can learn more at the course webpage.

About polekon

Polekon's mission is to make political economy more accessible for non-experts. We run focused courses on big questions and organize discussion-based seminars for deeper learning. If you'd like updates about future courses and seminars, please sign up for our mailing list.

Judicial overreach: Bypassing expert tribunals in the electricity sector

by Natasha Aggarwal and Bhavin Patel.

A 2023 decision of the Supreme Court (The Southern Power Distribution Company of Telangana State v. Agarwal Foundaries Private Limited and Another, SLP (C) No. 14047-14066/2019) underscored the importance of judicial deference to expert bodies, stating that the High Court should have remanded a technical matter to the Appellate Tribunal for Electricity (APTEL) instead of adjudicating it itself.

The Electricity Act, 2003 establishes a framework under which appeals from orders of the Central Electricity Regulatory Commission and State Electricity Regulatory Commission (SERCs) may be filed before the APTEL. In 2021-22, only 12 appeals from the Telangana State Electricity Regulatory Commission (TSERC) were filed before the Appellate Tribunal for Electricity (APTEL), while 85 appeals were filed before the Telangana High Court (that is, more than seven times the number of appeals before the APTEL). Therefore, a large number of challenges to the TSERC's orders were filed before the High Court, and not the APTEL, a sector-specific expert body. Notably, this problem is not unique to Telangana and exists in other states from time to time. For example, in 2019-20, 21 appeals from the Odisha Electricity Regulatory Commission were filed before the APTEL while 34 writ petitions were filed before the High Court.

The trajectory of the TSERC's orders, from the TSERC to the Telangana High Court, raises questions on the grounds and scope of judicial review of these orders and their adherence to well-established principles of administrative law. These principles caution against judicial overreach in reviewing regulatory decisions. Over time, the Supreme Court of India has established the circumstances in which judicial review is permitted as well as the considerations that may be relevant in deciding to exercise judicial review.

In a recent paper, Bypassing expert tribunals through writs: Judicial overreach in review of the Telangana State Electricity Regulatory Commission's orders, we study 179 writ petitions and 181 writ appeals involving the TSERC before the Telangana High Court between 2014-2022 and examine whether judicial review of the TSERC's orders by the High Court is within the permitted limits in administrative law.

Our study reveals that 52.5% of the writ petitions in our subset and 58% of the writ appeals in our subset fall squarely within the scope of the matters for which the Electricity Act provides an appellate mechanism through the APTEL. Therefore, the largest number of writ petitions and writ appeals relate to 'substantive matters', which we identify as those that the Electricity Act contemplates as falling within the scope of TSERC's quasi-judicial powers and APTEL's appellate jurisdiction.

The existence of an efficacious alternative remedy, such as an appeal before the APTEL is not a complete bar on judicial review. However, well-established principles of administrative law limit the situations in which courts should entertain matters when such an alternative remedy exists, particularly because specialised tribunals and appellate authorities have the technical expertise to examine the facts and merits of a case. Moreover, the rationale for providing such an appellate mechanism is the requirement of technical expertise, and the APTEL has such expertise while the High Courts may not, and therefore the exercise of judicial review in such situations undermines the objectives of the Electricity Act.


The authors are researchers at TrustBridge Rule of Law Foundation.