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    Insider Trading

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    ashh
    Insider trading refers to purchasing or selling a company's securities while in possession of non-public material information. It is considered an unfair practice that disadvantages other shareholders who do not have access to such insider information. Laws and regulations aim to prevent insider trading by defining it, requiring disclosure of holdings and transactions by insiders, restricting access to sensitive information, and establishing penalties for violations.

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    Insider Trading

    Uploaded by

    ashh
    31 views6 pages
    Insider trading refers to purchasing or selling a company's securities while in possession of non-public material information. It is considered an unfair practice that disadvantages other shareholders who do not have access to such insider information. Laws and regulations aim to prevent insider trading by defining it, requiring disclosure of holdings and transactions by insiders, restricting access to sensitive information, and establishing penalties for violations.

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    Insider trading refers to purchasing or selling a company's securities while in possession of non-public material information. It is considered an unfair practice that disadvantages other shareholders who do not have access to such insider information. Laws and regulations aim to prevent insider trading by defining it, requiring disclosure of holdings and transactions by insiders, restricting access to sensitive information, and establishing penalties for violations.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    31 views6 pages

    Insider Trading

    Uploaded by

    ashh
    Insider trading refers to purchasing or selling a company's securities while in possession of non-public material information. It is considered an unfair practice that disadvantages other shareholders who do not have access to such insider information. Laws and regulations aim to prevent insider trading by defining it, requiring disclosure of holdings and transactions by insiders, restricting access to sensitive information, and establishing penalties for violations.

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    © All Rights Reserved
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    INSIDER TRADING

    Insider trading refers to the practice of purchasing or selling a publicly


    traded company’s securities while in possession of material information that is
    not yet public information. Material information refers to any and all
    information that may result in a substantial impact on the decision of an investor
    regarding whether to buy or sell the security. By non-public information means
    the information is not legally out in the public domain and that only a handful of
    people directly related to the information possess. An example of an insider
    may be a corporate executive or someone in government who has access to an
    economic report before it is publicly released. Insider trading is defined as a
    malpractice wherein trade of a company's securities is undertaken by people
    who by virtue of their work have access to the otherwise non-public information
    which can be crucial for making investment decisions.

    When insiders, e.g. key employees or executives who have access to the
    strategic information about the company, use the same for trading in the
    company's stocks or securities, it is called insider trading and is highly
    discouraged by the Securities and Exchange Board of India to promote fair
    trading in the market for the benefit of the common investor. Insider trading is
    an unfair practice, wherein the other stock holders are at a great disadvantage
    due to lack of important insider non-public information. However, in certain
    cases if the information has been made public, in a way that all concerned
    investors have access to it, that will not be a case of illegal insider trading.

    The Securities and Exchange Board of India (Prohibition of Insider


    Trading) Regulations 1992, does not directly define the term Insider Trading.
    But it defines the term "Insider", "Connected Person" and "Price Sensitive
    Information". Insider Trading is the trading of securities of a company by an
    Insider using company's non-public, price-sensitive information while causing
    losses to the company or profit to oneself.

    Eg: The CEO of a company divulges important information about the


    acquisition of his company to a friend who owns a substantial shareholding in
    the company. The friend acts upon the information and sells all his shares
    before the information is made public.
    Insider Trading has been around the United States from 1792. Hence,
    Laws against Insider Trading was formed strictly in the United States of
    America. The market crash in 1929 due to prolonged "lack of investor's
    confidence" in securities market followed by the Great Depression of US
    Economy, gave rise to the enactment of the Securities Act of 1933. The
    foundation of Insider Trading law was laid down by the Supreme Court of US
    in Strong vs Repide. Statutory Insider Trading Laws were first passed in the
    year 1933 and the Securities Exchange act in 1934. The second act created SEC
    (Securities Exchange Commission) to regulate the secondary trading of
    securities. These Acts were meant to create more transparency among the
    investors and placing due diligence on the preparers of the documents
    containing detailed information about the Security.

    In the United States vs Carpenter, 1986, the Supreme Court cited that the
    usage of Inside Information received by virtue of confidential relationship must
    not be used or disclosed and by doing so, the individual gets charged for Insider
    Trading. In 1997, O'Hagans Case, the court recognised that a company's
    information is it's property: " A Company's confidential information qualifies as
    property to which the company has a right of exclusive use. The undisclosed
    misappropriation of such information in violation of fiduciary duty constitutes
    fraud akin to embezzlement-the fraudulent appropriation to one's own use of
    money or goods entrusted to one's care by another." In 2007, representatives
    Brian Baird and Louise Slaughter introduced a bill "Stop Trading on
    Congressional Knowledge Act or STOCK Act".

    Insider Trading in India:

    1. In 1948, First concrete attempt to regulate Insider Trading was the


    constitution of Thomas Committee. It helped restricting Insider trading by
    Securities Exchange Act, 1934.

    2. In 1956, Sec 307 & 308 were introduced in the Companies Act, 1956. This
    change made it mandatory to have disclosures by directors and officers.

    3. 1979, the Sachar Committee recognized the need for amendment of the
    Companies Act, 1956 as employees having company's information can misuse
    them and manipulate stock prices.

    4. 1986, Patel committee recommended that the Securities contracts


    (Regulations) Act, 1956 be amended to make exchanges reduce Insider Trading.
    5. 1989, Abid Hussain Committee recommended that the Insider Trading
    Activities be Penalized by civil and criminal proceedings and also suggested
    that SEBI formulate the regulations and governing codes to prevent unfair
    dealings.

    6. 1992, India has prohibited the fraudulent practice of Insider Trading through
    "Security and Exchange Board of India (Insider Trading) Regulations Act,
    1992. Here, a person convicted of Insider Trading is punishable under Section
    24 and Section 15G of the SEBI Act, 1992.

    7. 2002, the Regulations were drastically amended and renamed as "SEBI


    (Prohibition of Insider Trading) Regulations, 1992.

    Controlling Insider Trading

    • To protect general investors.

    The manipulation of market by using Insider trading generally causes great


    losses to a company, thus leading to loss for investors or great profit only for the
    Insiders and no investor. It steals away the possibility of earning profit from an
    investor.

    • To protect the interest and reputation of the company.

    Once a company faces a problem of Insider Trading, investors tend to lose


    confidence in the company and stop investing in the company and also selling
    all the stocks of the company.

    • To maintain confidence in the stock exchange operations.

    With SEBI also regulating all the trading’s, if any Insider gets a chance to get
    past the laws, it decreases the investors’ confidence in the stock exchange
    operations itself.

    • To maintain Public confidence in the financial system as a whole.

    Indian Financial Market is still very low in the domestic investment rate. To
    have a healthy economy, a proper financial system is a must and for that,
    confidence in the market is of utmost importance.
    Reasons for prohibiting insider trading

    1. Insider trading appears biased to investors as insiders have additional


    price sensitive information before them and can use it to make profits
    while the late reception of information makes investors suffer loss or not
    gain the deserved profits.
    2. If a market is integrated and free of illegal trading, it may lead to healthy
    growth of the market and such markets can inspire the confidence of the
    Investors.
    3. Insider trading leads to loss of confidence of Investors on the market
    which can lead to a halt in market dealings.

    Under SEBI Act, 1992- Penalty for insider trading- Sec.15G.

    If any insider who,—

    (i) either on his own behalf or on behalf of any other person, deals in
    securities of a body corporate listed on any stock exchange on the
    basis of any unpublished price-sensitive information; or
    (ii) communicates any unpublished price-sensitive information to any
    person, with or without his request for such information except as
    required in the ordinary course of business or under any law; or
    (iii) counsels, or procures for any other person to deal in any securities of
    any body corporate on the basis of unpublished price-sensitive
    information, shall be liable to a penalty which shall not be less than
    ten lakh rupees but which may extend to twenty-five crore rupees or
    three times the amount of profits made out of insider trading,
    whichever is higher.

    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.

    • SEBI may initiate criminal prosecution; or

    • SEBI may issue order 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.
    Methods of Prevention of Insider Trading

    1. Disclosure of Interest by corporate insiders.


    a. Listed companies:
    -If change exceeds 2% of the total voting right of persons holding more
    than 5% of the shares/voting rights.
    -If change exceeds Rs.5,00,000/25000 shares/ 1% of capital by Directors
    and officers.

    b. Other entities:

    -Initial statement of holdings.

    -Periodic statement of holdings. This can show any suspicious time based
    and trading based activities by Insiders.

    2. Disclosure of Price Sensitive Information:

     Limited access to price sensitive information, for ex.: Need to know


    basis.
     Dissemination of information by the Stock Exchange.
     Transmitting information to news agency.

    3. Chinese Wall:

    Separate inside area from public areas and bringing over the wall.

    4. Trading Window Facility:


     Decided by the company.
     Closed during the time price-sensitive information is not published.
     Opened 24 hours after the information is made public.
     Allowing the exercise of ESOP.

    5. Minimum holding period:

     Securities to be held for minimum period of 30 days to be considered


    investment.
     30 days holding from the date of IPO allotment.
     Only personal emergency cases be excluded

    6. Pre-clearance of trades prevents Front Running.


    Legal and illegal Insider Trading

    It is quite natural for an insider who is working in a company to come


    across some inside information. It would be violation of human rights and
    would defy the logic of freely tradable securities, if Insiders are not permitted to
    trade for themselves. That would be unreasonable. It would be irrational to stop
    promoters of a company from dealing in their securities. Thus, the restriction on
    the corporate insider is directly or indirectly using the price sensitive
    information that they hold to the exclusion of the other shareholders in arriving
    at trading decisions. There is absolutely no restriction on insiders in trading in
    securities of the company if they do not hold any price sensitive information
    that the public is not already aware of. During the short while promoters and
    insiders can use the information to their advantage by guessing market reaction
    to the news or information.

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