Speaking at the Securities Summit, 1998, on "Legal infrastructure for capital markets", Shroff said financial institutions are privy to price-sensitive information as companies often approach them for consent before implementing certain decisions.

He added that such a piquant situation has necessitated an absolute revamp of the insider-trading regulations.

"The position of financial institutions needs to be clarified. They are always in the possession of information of utmost price sensitivity," said Shroff.

Shroff pointed out that an insider can at worst pay a fine for insider trading of up to Rs 5 lakh and get away with profits several times greater in the absence of a power of disgorgement of profits.

"Further, Sebi's powers enable it to only sniff and bark but not bite. Seen purely from a legalangle, Sebi is a toothless tiger, which only recently received some limited powers," said Shroff.

Shroff also discussed some of the recommendations of the Dhanuka Committee, (of which he is a member), which has been set up to examine the deficiencies in the Sebi Act, SCR Act and Depositories Act, as also relevant chapters of the Companies Act. This panel has concluded that there are several regulatory gaps.

According to the recommendations made by the committee, the penalty for insider trading should also include non-insiders who are knowingly parties in conspiracy along with the insider. Provision for unlimited disgorgement of profits and penalties as a multiple of the profit made or loss averted, is suggested.

On derivatives trading, Shroff said that from a legal standpoint, there is some doubt whether the present definition of "securities" in the SCRA is wide enough to include such an instrument.

"Aside from the legislative changes, the government can issue a notification and include suchinstruments," said Shroff.

He added that clarity of treatment of profits as speculative gains or losses, the nature of the income on such derivatives, disclosure of the tax risk and acceptable accounting standards will need to be in place before derivatives trading is permitted. "In the case of deep discount bonds, the tax treatment was clarified after thousands of crores of bonds had been issued. This should not be allowed for derivatives trading," he added.