6.insider Trading in India
6.insider Trading in India
6.insider Trading in India
www.emeraldinsight.com/1359-0790.htm
JFC
24,1
Insider trading in India –
regulatory enforcement
Anil Kumar Manchikatla and Rajesh H. Acharya
School of Management, National Institute of Technology Karnataka,
48 Mangalore, India
Abstract
Purpose – The purpose of this paper is to study the effectiveness of insider trading enforcement actions in
India and international dimensions.
Design/methodology/approach – The research is based on the insider trading regulations and
amendments made during the period 1992-2015.
Findings – The notable observation of the study is the dearth of insider trading conviction and the paucity
of prosecution for insider trading offences in India. It is difficult to resist the conclusion that surveillance and
enforcement matter more than the drafting of the relevant statutes and regulations in emerging markets.
Whereas, developed countries have a better record of prosecution than emerging markets.
Research limitations/implications – Future research may explore the factors that hinder effective
regulation and recommend new methods to increase the impact of Securities and Exchange Board of India
insider trading regulation.
Originality/value – The current paper presents guidance for the foreign institutional investors, regulators
and market participants on insider trading regulation and prosecution in India.
Keywords India, Emerging markets, Insider trading, Legal trading, Regulatory ambiguity,
Trade on disclosures
Paper type Research paper
1. Introduction
The stock exchanges of a nation are the key segment of its capital market. A healthy capital
market can be created if the stock exchanges are well regulated. In the current economic
environment around the world, an active enforcement of criminal laws and regulations has
increased its focus on punishing and preventing insider trading and market abuse. The
insider trading prosecution has to expose the evidence of insider trading by using forceful
devices such as wiretaps. The US Court juries have frequently been sentencing those who
have chosen to go to tentative and dishing out severe fines to the guilty defendants. Insider
trading means trading by any individual in the securities of a company by having
price-sensitive information of the company before it is available to the general public with an
intention of making abnormal profits or avoiding losses. “Insider means any individual who
has access to unpublished price sensitive information with respect to securities of a
company”, conferring to Securities and Exchange Board of India SEBI (Prohibition of Insider
Trading) Regulations (1992). In a similar vein, Section 195 of The Companies Act (2013)
states that insider trading is an act of buying, selling, subscribing or agreeing to subscribe in
the securities of companies directly or indirectly by the key management personnel or the
director of the company and sensibly anticipated to have access to Unpublished Price
Journal of Financial Crime Sensitive Information[1] (UPSI) with reference to the company as well as its securities is
Vol. 24 No. 1, 2017
pp. 48-55 deemed to be insider trading.
© Emerald Publishing Limited
1359-0790
The term insider trading is subject to many definitions and connotations, and it
DOI 10.1108/JFC-12-2015-0075 encompasses both legal and prohibited activity. When a corporate insider trades by adhering
to all the regulations, it is called legal insider trading, and any violation of that amounts to Insider trading
prohibited activity. However, general public holds a misperception that insider trading is a in India
prohibited activity. The past several decades have witnessed an increase in insider trading.
To discourage trading on material non-public information, corporate insiders face several
restrictions on their trading.
Insider trading is a word generally associated with prohibited behavior. It is an action of
purchasing and selling of securities by an individual having UPSI of the company before it is
accessible to the common public with an objective of creating abnormal earnings and
49
evading losses (Corporate Governance an Emerging Scenario, published by National Stock
Exchange, 2010).
Corporate insiders are allowed to trade in their own company’s stock, but are required to
disclose these transactions to avoid the misuse of any non-public price-sensitive information.
SEBI has framed numerous disclosure regulations for insiders to build investor confidence
and increase the transparency in securities trading. The aim of these disclosures is to create
a level playing field to all the participants in the market. When a corporate insider trades
by adhering to all the regulations, it is called legal insider trading, and any violation of that
amounts to illegal insider trading. Therefore, to monitor insider trading activities, they are
required to disclose their legal trades to SEBI in a timely manner.
The Companies Act (2013) passed by the Indian parliament also devised the code of
conduct for the administration of these regulations. The listed companies in India are guided
by Clause 36 of the Listing Agreement of the stock exchanges, which states that the issuer
will inform to the stock exchanges, where the company is listed, immediately of events such
as closure on account of power cuts, lockouts and strikes, and all events that have a posture
on the operations/performance of the firm as well as price-sensitive information together at
the period of happening of the event and consequently after the end of the event to facilitate
the shareholders and the public to assess the position of the issuer and to avoid the creation
of a false market in securities. To improve the fairness and transparency in the capital
markets, SEBI has made several amendments to its SEBI (Prohibition of Insider Trading)
Regulations (1992).
Insider trading takes place lawfully daily, when the employees, directors or officers and
corporate insiders purchase or sell securities of their own businesses within the restrictions
of the company policy and the code of practice prevailing for listed companies. The
mandatory disclosures which are to be made to SEBI are as follows: disclosure to the stock
exchange by the listed company, disclosure to the stock exchange by an individual who is a
director or officer of a listed company and disclosure to the stock exchange by a person who
is a promoter or portion of the promoter group of a listed company.
The liberalization of India’s economy in 1991 made a considerable development of capital
market and regulatory reforms. The stock market crash in India at the beginning of 1992,
stock manipulation by Harshad Mehta, has highlighted the issues of transparency and
motivated the enforcement of insider trading laws in India to regulate and supervise by
SEBI. The current paper centers on the way the SEBI has been aspiring to fulfill the
regulatory objectives established on this merge. The research is based on the SEBI
(Prohibition of Insider Trading) Regulations (1992) and amendments made during the period
1992-2015. The notable observation of the study is the dearth of insider trading conviction
and the paucity of prosecution for insider trading offences in India. SEBI in the year 2015 has
shown interest to increase the enforcement actions in line with the international standards.
The purpose of this paper is to conduct a comprehensive overview of insider trading
regulations in India. We divide our study into four sections. First, we present the insider
trading regulations around the world, and in the second section, we present an overview of
JFC SEBI (Prohibition of Insider Trading) Regulations (1992 and 2015). The third section
24,1 discusses insider trading investigations by SEBI, and the paper is concluded in the final
section.
25
Number of cases
20
15
10
Year
5. Conclusion
Although the debate about the pros and cons of allowing insider trading in stock markets has
been quite contentious in the law and finance literature, to retain market integrity and
investor confidence, insider trading prohibitions are crucial. Developed countries have a
better record of prosecution than emerging markets (Bhattacharya and Daouk, 2002).
Meanwhile, in the mid-1990s, several cases of insider trading comprising reputed business
groups were probed and brought to court by SEBI, but unlike the USA SEC, the Indian
regulator was unable to secure a conviction in most of them. In the USA, insider trading
activities are generally detected premature through various stock watch mechanisms of
individual exchanges as well as the SEC. Both the exchanges and SEC examine any
suspicious transactions, and heavy penalties are imposed on the violators either by the
exchanges or SEC.
It is difficult to resist the conclusion that surveillance and enforcement matter more than
the drafting of the relevant statutes and regulations. Publicized cases of insider trading are
remarkably rare in India. However, tougher laws work better in reducing the incidence of
illegal insider trading and delayed disclosures to the regulating bodies. We thus suggest
SEBI to design detection mechanisms to eliminate illegal insider trading. It has to impose
huge penalties on those who violate the law. Future research may explore the factors that
hinder effective regulation and recommend new methods to increase the impact of SEBI
insider trading regulation.
Note
1. As per SEBI (Prohibition of Insider Trading) Regulations (2015), it is referred as “generally
available information”.
References
Bhattacharya, U. and Daouk, H. (2002), “The world price of insider trading”, The Journal of Finance,
Vol. 62 No. 4, pp. 75-108.
Bushman, R., Joseph, P. and Smith, A. (2004), “What determines corporate transparency?”, Journal of
Accounting Research, Vol. 42 No. 2, pp. 207-252.
Eleswarapu, V.R. (2006), “The impact of legal and political institutions on equity trading costs: a
cross-country analysis”, Review of Financial Studies, Vol. 19 No. 3, pp. 1081-1111, doi: 10.1093/
rfs/hhj026.
Fama, E. (1970), “Efficient capital markets: a review of theory and empirical work”, The Journal of
Finance, Vol. 25 No. 2, pp. 383-417.
Misra, M. (2011), “Insider trading: Indian perspective on prosecution of insiders”, Journal of Financial
Crime, Vol. 18 No. 2, pp. 162-168.
Reports Insider trading
The Abid Hussein Committee report. in India
The Companies Act (2013).
Corporate Governance: An Emerging Scenario, published by National Stock Exchange (2010).
Indian Securities Market, A Review (2013), published by National Stock Exchange of India Ltd (NSE).
The Patel committee report.
The Sachar committee report.
55
SEBI (Prohibition of Insider Trading) Regulations (1992).
SEBI (Prohibition of Insider Trading) Regulations, 2015.
SEBI (Prohibition of Insider Trading) (Amendment) Regulations (2002).
SEBI Annual Report, 2009-2010.
SEBI Annual Report, 2012-2013.
For instructions on how to order reprints of this article, please visit our website:
www.emeraldgrouppublishing.com/licensing/reprints.htm
Or contact us for further details: [email protected]