Derivatives Trading

Prepared by: Guided by:

Name: Saurav Sureka Prof.S.K.Lobwo
Roll No: 308
St. Xavier’s College(Autonomous)
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Contents

Objectives of the Study

Research Methodology

Introduction: What is Insider Trading?

Elements of Insider Trading

Who is an Insider?

What is Material Price Sensitive Information?

Analysis

Why should Insider Trading be controlled?

Significant Penalties

SEBI’s measures to prevent Insider Trading

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Objectives of the Study
To provide an
overview of
insider
trading

To bring out To give a brief

the motive Objectives analysis on
behind insider some of the
trading cases of
insider trading

To prevent
others and
myself from
illegal insider
trading

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Research Methodology

I have collected secondary data by collecting the detailed

analysis of some of the cases of insider trading with the help
of Internet.

Maximum part of my project is based on description. It

explains how Insider trading has evolved in 21st century, it’s
impact on the investors of the country, their perception, the
consequences of adapting to the methods of insider trading
and giving a brief analysis of some of the alternatives or the
ways to prevent the issues of insider trading.

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Introduction: What is Insider Trading?
Concept

Insider trading is the trading of a public company's stock or

other securities (such as bonds or stock options) by individuals
with access to nonpublic information about the company.

In various countries, some kinds of trading based on insider

information is illegal. This is because it is seen as unfair to other
investors who do not have access to the information, as the
investor with insider information could potentially make larger
profits than a typical investor could make.

Now, let’s dive into the basics to further understand the topic:

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Elements of Insider Trading

Insider

Possession
Material Unpublished
Price Sensitive
Information

Deals in Securities
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Who is An Insider?

Person who is or was connected with the

company or is deemed to have been
connected with the company and is
reasonably expected to have access, by
virtue of such connection, to
unpublished price sensitive information
in respect of securities of the company,
or who has received or has had access
to such unpublished price sensitive
information.

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What is material price sensitive information?
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. The following shall be deemed price sensitive
information:
Periodical financial results of the company;
Intended declaration of dividends (both interim and 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; and
Significant changes in policies, plans or operations of the company.
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Analysis
Hindustan Lever Limited v. SEBI
The facts of the case concerned the purchase by HLL of 8 lakh shares of BBLIL from the Unit
Trust of India (UTI) on March 25, 1996. This purchase was made barely two weeks prior to a
public announcement for a proposed merger of HLL with BBLIL.
Upon investigation, SEBI by its Order dated March 11, 1998 (Order) found that, at the time of the
purchase of shares of BBLIL from UTI, HLL was an “insider” as under Section 2(e) of the 1992
Regulations, the relevant extract of which describes an insider as any person who:
“(i) is or was connected with the company or is deemed to have been connected with the
company and is reasonably expected to have access by virtue of such connection to unpublished
price sensitive information in respect of securities of the company, or
(ii) has received or has had access to such unpublished price sensitive information.”
SEBI held that, since, HLL and BBLIL were subsidiaries of the same London based Unilever, and
were effectively under the same management, HLL and its directors had prior knowledge of the
merger. Thus, HLL was covered under the definition of an insider as above defined.
SEBI also held that HLL was in possession of UPSI as defined under Section 2(k) of the 1992
Regulations which includes any information in relation to amalgamation, merges and takeovers
that “is not generally known or published by such company for general information, but which if
published or known, is likely to materially affect the price of securities of that company in the
market”.

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As per SEBI, the fact that the information about the merger was available with HLL was enough
to satisfy the requirement of Section 2(k) above.
An appeal was filed by HLL against the said SEBI Order before the Securities Appellate
Authority. On the question of whether HLL could be termed as an insider, the Appellate Authority
agreed with the SEBI Order to hold that, the information available with HLL in relation to the
merger was beyond merely self-generated information, i.e., information arising out of its own
decision making. Further, with respect to the merger, the Appellate Authority noted that the
existence of directors common to both HLL and BBLIL, and a common parent company in
Unilever meant that they (i.e., HLL and BBLIL) were in effect under the same management.
Consequently, HLL could be termed as an insider under the 1992 Regulations and it could
reasonably be presumed that HLL was privy to decision making on the merger issue in the
BBLIL board.
On the question of whether the information available with HLL constituted UPSI, the Appellate
Authority agreed with the contentions of HLL that, for information to be considered as UPSI, it
must meet the dual requirements envisaged under Section 2(k) of the 1992 Regulations, i.e.:
The information must not be generally known or published by the company; and
If published or known, is likely to materially affect the prices of securities of that company in the
market.

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The Result
The Appellate Authority held that for information to be generally known, it is not required to be
confirmed or authenticated by the company as it would otherwise fall under the category of
information “published by the company”. The Appellate Authority appreciated the evidence
produced by HLL, including various news articles covering the merger, and concluded that the
information of the merger was generally widely known to the public, and thus failed the first test
to qualify as UPSI as per the abovementioned Section 2(k) of the 1992 Regulations.
HLL also argued that, the information of the merger of two healthy, profit – making companies
is per se not price sensitive, as price sensitivity would arise in case of merger between a strong
company and a weak company, which impacts the share price of the companies. The Appellate
Authority however noted that even in the merger of two healthy companies there are synergistic
possibilities which could lead to price sensitivity for either company. Thus, the Appellate
Authority agreed with SEBI’s conclusion that information of the merger was price sensitive
(though not ‘unpublished’). The matter is currently pending before the Supreme Court.

It was directed that HLL compensate Unit Trust of India to the extent of Rs. 3.04 crore.
It wass also ordered that prosecution be launched by SEBI against HLL and five directors S.M.
Datta, K.B. Dadiseth, R. Gopalkrishnan, A. Lahiri and M.K. Sharma of HLL along with HLL..

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Analysis
On the basis of the experts opinion survey and case study a various world Famous insider Trading
Cases and other source the following are the finding:-

 On paper, India's laws on insider trading are more stringent than international ones. From
merely barring insiders from trading on the basis of unpublished price-sensitive information, the
laws have moved on to prohibiting anyone in the possession of such information from trading.
And proof that the information was not shared is no longer acceptable defense against charges
of insider trading; today, an accused needs to prove that such information could have never
been shared. This shifts the focus on to the accused to prove that there has been no insider
trading.

 "Insider Trading is victimless Crime" the following quote here in suggested that this crime is not
done with an intention to effect the financial position of the General Investor. But without any
intention, the general investor comes into this trap and is affected largely.

 Despite the control and regulation restriction imposed on insider trading at stock exchange in
India or all over the world, these laws have not been effective to curb these kinds of activities
within the stock exchange.
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 "SEBI" website is also not properly constructed. As insider trading directly comes under the
control of SEBI, therefore, any person seeking information on this topic will explore the SEBI's
website but will not get any information. With almost full exploration of website, you will get the
law on insider trading which will be an exhaustive process and will require lot of time. The website
also does not give any information on the no. of case that are charged under insider Trading and
any of the other default about this topic.

 The "Insider Trading Regulation 2002" is also not properly formed. Most of the terms and
expressions used under this law are incomplete and on this basis, only some of the Companies
escape the charges of insider trading. HLL insider Trading, BOM -ICICI Merger Case are still
pending on these ground.
 Based on survey and people contacted for Insider Trading Questionnaire, there are many sub-
brokers and educated people, who are merely acquitted with the word insider trading. When they
are just acquitted with the word then the knowledge about laws, regulation and its effect on
shareholder are doubtful.
 There has been a silent battle going on between various groups of people as some set of
researchers want to legalize the insider trading so that all the punishments are curbed. The
researchers who wants to legalize these kind of activities also do not have strong reasons on
which basis they want to give insider Trading this platform.
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 It is very difficult to distinguish which information is price sensitive and which is not.
Because even a very small information can bring large no. of upswings and downswings
in the prices of shares.
 Round the Globe various cases relating to insider Trading has been seen. But nowhere
including SEBI has not been successful to investigate the case before it has occurred. All
the cases reported for insider trading have come to knowledge of SEBI well after the
trading operations have been performed.
 Though SEBI keep's the eye on each and every trading activity of people connected with
the Companies but of no use. As the insiders Trader are smarter and they perform their
operations so cleanly that even SEBI cannot notice happening of such events in the stock
market.
 SEBI's Insider Trading Act and Companies policies and procedures for the insider trading
are not adequate enough to prevent insider trading. Because generally top level executive
frame the policies and they can manipulate or misuse a slight clause according to them so
as to gain the profit.
 In recent amendments, the SEBI is including insider trading under "Prevention of Money
laundering of Act” (PMLA) so that the punishment for the inside Trader is severed and
they are afraid to indulge in such kind of trading activity.

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Insider trading is such an activity where proving the charge against the insider
is an arduous task.

In this type of trading generally, the individual investor is the most affected
because the big broker, institutional investor keeps a trap on the market and
buy& sell accordingly. Therefore general investor is most affected and they are
not aware of this slap on their face.

India's first, and most high-profile case of alleged insider trading involved
Hindustan Lever Limited (HLL) and five of its directors just ahead of the
company’s merger with Brooke Bond Lipton India. SEBI asked HLL to pay Rs.
3.04 crore as penalty, but the Appellate Authority in the Finance Ministry set
aside its order. So is the case with all the other cases, which are under SEBI.

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Everybody in the share market be it the primary insider, secondary insider,
broker, auditors, or general investors, would like to take the advantage of the
price sensitive information to make gain in market though they may consider
trading on inside information as illegal. The picture below gives that how the
judge who has no link with the share market and rarely deals in the shares.
But when there is a chance of getting a inside information than the judge
also wants to make unfair amount of profits.

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Why should Insider Trading be controlled?
 To protect the general investors.

 To protect the interest and reputation of the

company.

 To maintain confidence in the stock exchange

operations.

 To maintain public confidence in the financial

system as a whole.

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Significant Penalties
 SEBI may impose a penalty of not more than Rs. 25
Crores or three times the amount of profit made out
of insider trading; whichever is higher; or

 SEBI may initiate criminal prosecution; or

 SEBI may issue orders declaring transactions in

securities based on unpublished price sensitive
information; or

 SEBI may issue orders prohibiting an insider

or refraining an insider from dealing in the securities
of the company
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SEBI`s measures to Prevent Insider Trading
 May appoint an investigating officer, auditor.

 Communicate with insider and give him an opportunity for his explanation.

 SEBI amends the act, by updating the list of connected persons with the
insiders.

SEBI may:

1. initiate criminal prosecution against insider.

2. give directions to insiders for protecting the interest of investors and security
market.

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