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As a result of the phenomenal Bull Run in almost all the major stock markets throughout the
world, the shareholding population has grown up. India is one of the well regulated and fast
growing emerging markets.

The market regulators are always concerned about the health of the capital markets since any
kind of malpractice may make the retail investors lose their hard earned money. One such scam
was unearthed in 1992 in India.

The term 'insider trading' means act of buying or selling a security in the open market by an
insider. By virtue of being an insider he may have access to some confidential, price sensitive
information not disclosed to the media or public. ("Price-sensitive information" means periodical
financial results of companies, dividend declaration, issue or buy back of securities, any major
expansion plans or execution of new projects, amalgamation, mergers, demergers or takeovers,
disposal of whole or substantial part of business and significant changes in policies, plans or
operations of the company). He may indulge in accumulating the stock over a period of time, and
when the news is out in public domain he may sell his holdings in the market. This is considered
to be a serious economic offence.

Now with the capital markets being transparent, many countries have actually imposed
legislative sanctions on insider trading. The United States formed the Securities Exchange
Commission, which, under the insider trading sanctions act, may impose civil penalties in
addition to initiating criminal proceedings. In India SEBI or the Securities Exchange Board of
India is the market regulator; SEBI has drawn guidelines to prevent insider trading and price
over manipulation.

History behind the regulatory mechanism in India:

Insider trading in India was unhindered in its 125 year old stock market till about 1970. It was in
the late 1970's this practice was recognized as unfair.
In 1979, the Sachar committee said in its report that company employees like directors, auditors,
company secretaries etc. may have some price sensitive information that could be used to
manipulate stock prices which may cause financial misfortunes to the investing public. The
company recommended amendments to the company¶s act, 1956 to restrict or prohibit the
dealings of employees / insiders. Penalties were also suggested to prevent the insider trading.

In 1986 the Patel committee recommended that the securities contracts (Regulations) Act, 1956
may be amended to make exchanges curb insider trading and unfair stock deals. It suggested
heavy fines including imprisonment apart from refunding the profit made or the losses averted to
the stock exchanges.

In 1989 the Abid Hussain Committee recommended that the insider trading activities may be
penalized by civil and criminal proceedings and also suggested that the SEBI formulate the
regulations and governing codes to prevent unfair dealings.

Following the recommendations by the committees, India through Securities and Exchange
Board of India (Insider Trading) Regulations 1992 has prohibited this fraudulent practice and a
person convicted of this offence is punishable under Section 24 and Section 15G of the SEBI Act
1992. These regulations were drastically amended in 2002 and renamed as SEBI (Prohibition of
Insider Trading) Regulations 1992. Both the Insider Trading Regulations are basically punitive
in nature in the sense that they describe what constitutes insider trading and then seek to punish
this act in various ways. More importantly, they have to be compiled with by all listed
companies; all market intermediaries (such as brokers) and all advisers (such as merchant
bankers, professional firms, etc.).

Initially the term "insider" was used to mean a person who has access or connection to the
unpublished price sensitive information. However, if one comes to know about the information
independent of such a connected person, then he may not, theoretically, be called an insider.

The insider trading allegation against Hindustan Lever (HLL) for purchasing eight lakh shares of
Brooke Bond Lipton India (BBLIL) from Unit Trust of India a month before the merger of the
two companies was announced. After the case against HLL (Hindustan Lever Limited) SEBI
amended the regulations and defined "insider" as a person who is reasonably expected to have
access to such unpublished price sensitive information.

Also the definition of "price sensitive information" has been changed after the case against HLL.
It meant earlier that any information which related to the listed matters or was of concern,
directly or indirectly, to a company, and was not generally known or published by such company
for general information, but which if published or known, was likely to materially affect the
price of securities of that company in the market. Now it is modified like this: 'price sensitive
information' means any information, which relates directly or indirectly to a company and which
if published, is likely to materially affect the price of securities of company. "Unpublished"
means information, which is not published by the company or its agents and is not specific in
nature.

Regulation 3 of the SEBI Regulations prohibits dealing, communication or counseling on matters

relating to insider trading. It states that no insider shall either on his own behalf or on behalf of
any person, deal in securities of a company listed on any stock exchange when in possession of
any unpublished price sensitive information or communicate, counsel or procure directly or
indirectly any unpublished price sensitive information to any person who while in possession of
such unpublished price sensitive information shall not deal in securities.

Thus, according this regulation, insider trading means:

1. Involvement of Insiders;

2. Presence of unpublished Price Sensitive Information;

3. Using such information for dealing in securities.

Regulation 3A was also added in the the SEBI (Prohibition of Insider Trading) Regulations,
1992. Regulation 3A reads "No company shall deal in the securities of another company or
associate of that other company while is possession of any unpublished price sensitive
information." No such provision directly prohibiting companies from dealing in securities
existed prior to the amendment.
Regulation 4A provides that where the Board suspects that any person has violated any provision
of these regulations, it may make any enquiries to form a prima facie opinion as to whether there
is any violation of the Regulations. Where the Board, is of prima facie opinion that it is
necessary to investigate, and inspect the books of account, records or documents of an insider for
the purpose of investigating the complaints received from investors, or to investigate motto upon
its own knowledge to protect investors, it has been given the power to do so under Regulation 5.
Further, the procedure to be followed in such investigation has been laid down in Regulation 6.

The Securities and Exchange Board of India Act, 1992 under Section 15G provides for penalty
for the offence of insider trading. It is submitted that this section is basically preventive as well
as punitive in nature as it puts the penalty for insider trading extraordinarily high at Rupees
twenty five crores or three times the amount of profits made, whichever is higher. In addition to
this section there is also a general section 24 that deals with all kinds of violations of the Act and
the Regulations. This section provides for a maximum imprisonment of ten years or a fine, which
may extend to rupees twenty five cores, for any violation of the provisions of the Act or the
Regulations made there under.

In 2002, Regulation 11 that was invoked by SEBI to justify it's actions in the case, was also
radically modified. The Appellate Authority in the above mentioned case had held that under the
Regulations, SEBI had no power to give compensation to the effected party, something that
SEBI had done. The amendment sought to remove this limitation on SEBI's power by providing
in clauses (d) and (e) that SEBI could declare the transaction in securities null and void and
direct the person who acquired the securities in violation of these regulations to deliver the
securities back to the seller. If the buyer is not is a position to deliver such securities, the market
price prevailing at the time of issuing such directions or at the time of transaction whichever is
higher shall be paid to the seller.

In 2004 there was an allegation of Global Trust Bank prices being manipulated. It was alleged
that 2 crore shares of GTB shares were sold in the market before Reserve Bank of India declared
a moratorium. In the four preceding working days before July 24, the National Stock Exchange
(NSE) and the Bombay Stock Exchange (BSE) showed heavy trading of GTB shares. During
these four days, 68.27 lakh shares were sold and delivered at the NSE and 19.84 lakh shares at
the BSE.

Insider trading allegations surfaced again when Orbitech Solutions was merged with Polaris.
There were media reports for about one month on the possibility of a merger between them. In a
reply to media reports, Polaris informed the stock exchanges that the board of the company had
approved of acquisition plans but had not decided on which company to acquire. But later the
company announced the details of the merger of OrbiTech with it.