INSIDER TRADING

Introduction

Insider trading essentially denotes dealing in a company‘s securities on the basis of

confidential information relating to the company which is not published or not
known to the public used to make profit or loss. It is fairly a breach of fiduciary duties
of officers of a company or “connected” persons as defined under the SEBI
regulations, 1992, towards the shareholders. Insider terms actually include both legal
and illegal conduct. The legal version is when corporate insider officer, directors, and
employees buy and sell stock in their own companies. When corporate insiders trade
in their own securities, they must report their trades to SEBI. Illegal insider trading
refers generally to buying or selling a security, in breach of fiduciary duty or other
relationship of trust and confidence, while in possession of material , non public
information about the security.

Who are insider traders?

 Corporate officers, directors, and employees who traded the corporation’s

securities after learning of significant, confidential corporate developments.
 Friends, business associates, family members, and other types of such officers,
directors, and employees, who traded the securities after receiving such
information.
 Employees of law, banking, brokerage and printing firms who were given such
information to provide services to the corporation whose securities they traded.
 Govt employees who learned of such information because of their employment
by the govt.
 Other persons who misappropriated, and took advantage of, confidential
information from their employers.
Why forbid insider trading?

 The prevention of insider trading is widely treated as an important function of

securities regulation.
 In order to make sense of insider trading , we must have basic understanding of
markets, prices and role of markets in the economy.
 Insider trading appears unfair, especially to speculators outside a company who
face difficult competition in the form of insider trading.

History behind Insider Trading Regulation in India

 Insider trading in India was unhindered in its 130 year old stock market till about
1970.
 In 1979, the Sachar committee recommended amendments to the companies
Act, 1956 to restrict prohibit the dealings of employees . Penalties were also
suggested to prevent the insider trading.
 In 1986 the Patel committee recommended that the securities contracts Act,
1956 may be amended to make exchange curb insider trading and unfair stock
deals.
 In 1989 the Abid Hussain committee recommended that the insider trading
activities may be penalized by civil and criminal proceedings and also suggested
the SEBI formulate the regulations and governing codes to prevent unfair
dealings.
 India through SEBI regulations 1992 has prohibited this fraudulent practice.
 These regulations were drastically amended in 2002 and renamed as SEBI
regulations 1992.
 Only 14 cases taken up by SEBI for insider trading in 2003-04 , which went down
to only 7 in 2004-05.
 In terms of cases completed, the no was only 9 and 5 respectively.
 So does India has fewer incidence of insider trading or our systems/laws not
geared enough to detect such cases?
Regulatory aspects of prohibition of Insider Trading

 SEBI prohibition of Insider Trading regulation 1995.

 Section 11(2) E of companies act 1956 prohibits the Insider Trading
 What is Insider Trading is not defined in the companies act -1956

Why there is need for the Prohibition of Insider Trading???

As per SEBI the Prohibition of Insider Trading is required to make Securities Market:

 Fair & Transparent

 To have a level playing field for all the participants in the market
 For free flow of information & avoid information asymmetry

Who is Insider???

Who is Insider is defined under the SEBI Prohibition of Insider Trading regulation 2 (e)

Insider is the person who is “connected” with the company , who could have the
Unpublished price sensitive information or receive the information from somebody
in the company.

For the purpose this definition, words “connected person” shall any person who is a
connected person six months prior to an act of insider trading

Who Can be a connected person???

It could be director of the company, or is deemed to be a director of the by virtue of

sub-clause (10) of section 307 of the companies act 1956

He /She could be officer or professional of the company or holding a business

relationship with the company.

Any person having UPPI from the any subsidiary or group company is also stated to
be the connected person.

Connected person can also be from intermediary’s like stock exchange, Merchant
Bank , Transfer agent, debenture trustee, Bankers & relatives of promoter or of BOD.
Relatives are defined very extensively in the company’s act 1956

1. Father
2. Mother
3. Son
4. Son’s wife
5. Daughter
6. Father’s father
7. Father’s mother
8. Mother’s mother
9. Mother’s father
10. Son’s son
11. Son’s son’s wife
12. Son’s daughter
13. Son’s daughter’s husband
14. Daughter’s husband
15. Daughter’s son
16. Daughter’s son’s wife
17. Daughter’s daughter
18. Daughter’s daughter’s husband
19. Brother
20. Brother’s wife
21. Sister
22. Sister’s husband

But several close relatives are excluded like all in-laws (Brother-in-law, Father-in-law
etc.)-Brothers’ wife’s brother etc.

What is price sensitive information???

The Price sensitive information is defined in Regulation 2(h)(a) of the prohibition of

Insider Trading.

“It means any information which relates directly or indirectly with the company &
which if published is likely to materially affect the prices of the security’s of the
company”.
The information which is deemed to be price sensitive are like……….

 Periodical financial results

 Intended declaration of the dividends(both Interim & Final)
 Issue of securities or buy –back of securities
 Any major expansion plans or execution of new projects.
 Amalgamation & mergers or takeovers.
 Disposal of the whole or substantial part of the undertaking
 Any significant changes in policies, plans or operations of the company.

Regulation 3 of the Prohibition of Insider trading

 No Insider should deal insecurity , while in possession of UPPI.

 He / She should not communicate or procure the UPPSI to others.

Regulation 3(B)

This regulation states that there should be “Chinese Wall” Within the company & one
department should not know about what other departments are doing.

Disclosures for prohibition of Insider Trading

• Initial Disclosure

Like buying the stake greater than the 5% of the paid up capital of the company ,the
acquiring company should inform the Stock Exchange within 2 days of acquiring the
stake.

The new director should disclose all its trade position in Equity or derivatives with in
2 days of its appointment.

• Continuous Disclosure

 If the director changes its holding by 2% .

 Investment of Rs 5 Lacs or 25000 shares or buying the 1% stake of the paid up
capital whichever is the least should be disclosed.
 All holdings in securities of that company
 Periodic statements of all transactions
 Annual statement of all holdings
 Any other disclosure of the company to stock exchanges.
SEBI’s Power to make inquiries and inspection

Regulation 4A

If the SEBI suspects that any person has violated any provision of these regulations, it
may make inquiries with such persons.

The SEBI may appoint officers to inspect the books and records of insider(s) for the
purpose of inspection.

The SEBI can investigate and inspect the books of account, either records and
documents of an insider on prima facie.

SEBI can investigate into the complaints received from investors, intermediaries or
any other person on any matter having a bearing on the allegations of insider
trading.

RAKESH AGARWAL vs. SEBI Case

 One of the most famous case highlighting the vulnerability of the SEBI’s 1992
regulations.
 Rakesh Agarwal, MD of ABS Industries Ltd was involed in negotiations with Bayer
A.G, regarding their intention to takeover ABS.
 As per SEBI, Rakesh Agarwal had access to the Unpublished price-sensitive
information.
 SEBI alleged that prior to the announcement of acquisition, Rakesh Agarwal,
through his brother-in-law, had purchased shares of ABS and tendered the said
shares in the open offer made by Bayer.
 Rakesh Agarwal contended that he did this in the interests of the company.
 Pursuant to Bayer’s condition to acquire at least 51% shares of ABS, he, through
his brother-in law bought the shares and later sold them to Bayer.
 The SEBI directed Rakesh agarwal to “deposit Rs 34,00,000 with Investor
Education & Protection Funds of Stock Exchange, Mumbai and NSE.
 SAT held that the SEBI order directing Agarwal to pay Rs 34 lakh couldn’t be
sustained, on the grounds that Rakesh Agarwal did that in the interests of the
company.
STEPS THAT CAN BE TAKEN TO STOP INSIDER TRADING ARE GIVEN BELOW:

1. Punishment: Anybody found guilty of insider trading may be punished by way of

suspensions, dismissal and other suitable actions

2. Surveillance: The activities of insiders may be monitored with the help of spices
and-or electronic gadgets like close circuit camera. Such surveillance may serve as a
check on insider trading.

3. Phone Tapping: The telephones of persons likely to indulge in insider trading may
be tapped. Records of their telephone talks will serve as a legal evidence. The
knowledge that their telephones are being tapped is likely to serve as a deterrent.

4. Denying Access: Companies may ensure that the persons who are likely to
undertake insider trading do not gain access to price sensitive information.
Whenever necessary vital documents, files and minutes may be kept under the
charge of responsible executives. Such executives may be made accountable for any
leakage of vital information.