INSIDER TRADING IN INDIA

Insider trading 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 towards the shareholders

To prevent such acts and to promote fair-trading in the market for the interest of common investors, the stock market regulator SEBI (the Securities and Exchange Board of India) has prohibited the firms to purchase their own shares from the secondary market. Insider trading is one of the most serious malpractices that exist in the market. The prevention of insider trading is widely treated as an important function of securities regulation.

Section11 (2) e of companies act, 1956 states Prohibition of insider trading is necessary to make securities market-

  • Fair and transparent.
  • To have level playing field for all the participants in the market.
  • For free flow of information and avid information asymmetry.

Insider is defined under the SEBI Prohibition of Insider Trading regulation2 (e) as –
Insider is the person who is connected with the company, who could have the unpublished price sensitive information or receive the information from somebody in the company.

According to Section 3 SEBI regulations of Insider trading 1992, it is given that no insider or a connected person has the right to publicly disclose or display any secret information related to the affairs of the company if the made public can affect the price or securities of the company.

According to the Section 12 of the Act, all the listed companies with the SEBI, intermediaries, self-regulatory organizations, recognized stock exchanges, public finance institutions, corporate or professional firms should form the internal procedure code and moral ethics on the lines of rules given in the Schedule 1 of the act and should strictly adhere to them to prevent illegal insider trading in their companies.

What is UPSI?

UPSI refers to a piece of exclusive information related to a firm’s stock prices, quarterly results, acquisition deals, mergers or any kind of sensitive activities that have not been shared with the public at large. When insiders are able to access the UPSI, they illegally conduct trade dealings for personal gains.

Information deemed to be price sensitive are-

  • Periodical financial results
  • Intended declaration of the dividends
  • Issue of securities or buy-back of securities
  • Any major expansion plans or execution of new projects
  • Amalgamation and mergers or takeovers
  • Any significant changes in policies, plans or operations of the company.

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 stockholders 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. 

A study claim that illegal insider trading raises the cost of capital for securities issuers, thus decreasing overall economic growth. However, economists cannot be confident of this conclusion because data on illegal insider trading is not available; the nature of the activity renders it impossible to gather data.

OBLIGATIONS OF THE COMPANY

Every listed company has the following obligations under the SEBI (Prohibition of Insider Trading) Regulations, 1992

  • To appoint a senior level employee generally the Company Secretary, as the Compliance Officers; 
  • To set up an appropriate mechanism and to frame and enforce a code of conduct for internal procedures, 
  • To abide by the Code of Corporate Disclosure practices as specified in Schedule ii to the SEBI (Prohibition of Insider Trading) Regulations, 1992 
  • To initiate the information received under the initial and continual disclosures to the Stock Exchange within 5 days of their receipts; 
  • To specify the close period;
  • To identify the Price Sensitive Information
  • To ensure adequate data security of confidential information stored on the computer; 
  • To prescribe the procedure for the pre- clearance of trade and entrusted the Compliance Officers with the responsibility of strict adherence of the same

PENALTIES

Following penalties /punishments can be imposed in case of violation of SEBI (Prohibition of Insider Trading) Regulations, 1992

  • SEBI may impose a penalty of not Rupees 25 Crores or three times the amount of profit made out of insider trading; whichever is higher 
  • SEBI may initiate criminal prosecution 
  • SEBI may issue orders declaring transactions in securities based on unpublished price sensitive information 
  • SEBI may issue orders prohibiting an insider or refraining an insider from dealing in the securities of the company

INFOSYS INSIDER TRADING CASE

In July 2020 SEBI found two Infosys employees guilty of insider trading, the two apparently passed on price-sensitive information to six others for trades in Infosys shares in the F&O market and pocketed a few crores worth of gains. SEBI has banned all the parties involved in these trades from buying and selling any shares, and Infosys has initiated an internal investigation into the matter.

INDIABULLS INSIDER TRADING CASE

This case is one of the latest case law, which is related to insider trading. In this case, the executive director of Indiabulls was accused of making Rs. 87 lakhs unlawfully by trading in Indiabulls when they had access to unpublished secret information of sale of land and property privately which is the subsidiary of Indiabulls venture limited. According to the regulator, the executive director of the Indiabulls venture limited was in the management committee of the Indiabulls, therefore she was an insider and her husband too was an insider. These unlawful gains were made in the year from 2017-19. 

The SEBI ordered that strict criminal action be taken against the IVF and both the executive director of the company and her husband has to impound Rs. 87.4 lakhs both jointly and severally. It was further directed that no debts should be made without the prior permission of SEBI.

CONCLUSION

According to statistics, it is noticed that insider trading has been significantly reduced in the past few years. It is due to the strict and haste action by the SEBI and strict norms and guidelines laid down by the SEBI. It is now we have to look forward to the future that the recent changes and amendment in the SEBI prohibition of insider trading regulation has been successfully implemented or able to curb the insider trading or not.

Aishwarya Says:

I have always been against Glorifying Over Work and therefore, in the year 2021, I have decided to launch this campaign “Balancing Life”and talk about this wrong practice, that we have been following since last few years. I will be talking to and interviewing around 1 lakh people in the coming 2021 and publish their interview regarding their opinion on glamourising Over Work.

If you are interested in participating in the same, do let me know.

Do follow me on FacebookTwitter  Youtube and Instagram.

The copyright of this Article belongs exclusively to Ms. Aishwarya Sandeep. Reproduction of the same, without permission will amount to Copyright Infringement. Appropriate Legal Action under the Indian Laws will be taken.

If you would also like to contribute to my website, then do share your articles or poems at adv.aishwaryasandeep@gmail.com

We also have a Facebook Group Restarter Moms for Mothers or Women who would like to rejoin their careers post a career break or women who are enterpreneurs.

We are also running a series Inspirational Women from January 2021 to March 31,2021, featuring around 1000 stories about Indian Women, who changed the world. #choosetochallenge

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.