Here's how insider trading, the scourge for bourses, makes its way into betting

The Companies Act, 2013 contains a provision that has not been adequately applauded – Section 194 that keeps the managerial personnel of a company from buying call and put options in the derivatives segment of stock exchanges for the shares of the company and its subsidiaries. Why options trading in particular? Because options trading is quintessentially conducive to insider trading. This however does not mean the Companies Act gives its thumbs up to insider trading in the cash segment and in the futures trading part of the derivatives segment.

While the market regulator the Sebi comprehensively deals with the problem of insider trading, the Companies Act has been alive to the need for keeping managerial personnel away from a segment that by its very nature beckons them to the detriment of others. That options trading is best suited for managerial personnel more than other insiders can be explained with an example. Let us say director finance sitting on the board of a listed company has Rs 1 lakh to spare and let us say his company’s Rs 10 share is trading at Rs 1,000. At best he can buy 100 of it in the cash segment but he can buy the right to buy the shares for a tiny fraction of the cost and leverage his investment to a telling effect. Suppose the call option to buy the share at Rs 1,000 one month from now is available for Rs 10 and let us say he has inside information that a happening in the company in few days would catapult the quotation to a new high, he would buy 10,000 units of call option.

One must note he is gambling away his wealth because if he does not exercise his right to buy the shares which he would if his optimism is not born out for some reason or the other, his investment of Rs 1 lakh would vaporise into thin air. But as told earlier he is cocky about his inside information which indeed materialises and let us say the quotation leapfrogs to Rs 1,500. He would exercise his call option and go the cash segment to sell 10,000 shares at a profit of Rs 500 each thus making a killing of Rs 49 lakh (50 lakh minus 1 lakh cost of call options) whereas had he preferred the straight and narrow of cash segment he would have had to content himself with a profit of just Rs 0.50 lakh. The parliamentarians, hitherto pilloried for their supposed lack of practical knowledge, have after all shown remarkable prescience this time round.

What Gurunath Meiyappan and Raj Kundra, the two outlawed cricket enthusiasts, so to speak, have done is to emulate the corporate czars on the betting front. Sometimes insiders get brazen and go to the extent of creating news and profit from it. Mayyappan and Kundra reportedly plotted the downfall of their teams meticulously in league with the important players of their teams and contrived to score a defeat. While their teams might have lost, they themselves made tons of money in the betting sweepstakes. The Justice Lodha committee, small wonder, has come down with a heavy hand on them.

L’affaire IPL betting has reiterated more than ever before the need for legalizing betting in the country sans the scourge of insider betting. While insiders must be kept away from the betting sweepstakes, others must be allowed to take positions. The Sebi reads the riot act to insiders in the stock exchange though unfortunately with little success to show which is altogether a different matter. The government too can prescribe heavy penalties including a jail term for insider betters but it should not throw the baby with the bathwater as it has been doing all these years. While betting on race horses is kosher across the country and betting on casinos in Sikkim and Goa too is kosher, all other forms of betting is a strict no-no. Pray why?

Human beings sniff profit possibilities and love betting. In the epic Mahabharath, the otherwise virtuous Yudhishthir loves gambling so much that he gambles away his polyandrous wife Draupadi. Warren Buffet the legendary US investor of Berkshire Hathaway fame has made piles of money for himself and his investors thanks mainly to his gambling instincts – to smell profit possibilities several years in advance in scrip. It would be idle for the government to sit on judgment on this most cardinal if slightly carnal instinct of human beings.