Financial

Regulation
Balkrishna Parab
balkrishnaparab@jbims.edu

Capital markets play a crucial role in economic growth and financial stability.
The primary purpose of capital markets is to serve as a mechanism for the
transformation of savings into financing for the real sector, thus constituting
an alternative to bank financing. Markets provide the best (albeit sometimes
imperfect) mechanism for asset pricing. Markets are also a mechanism
through which risk is transferred and risk exposure diversifiedwhich allows
firms to unlock capital for new investments.
Risk transfer and pricing mechanisms in the market allow financial
institutions, such as banks and insurance companies, to manage risk more
efficiently; and markets may therefore work as a buffer for disruption of
banking system and therefore contribute to financial stability. The more
efficient markets are, the better these outcomes are achieved and the greater
the contribution to the economy.

Scope of Regulation
Capital market regulation comprises the regulation of public issuers of
securities, secondary markets, asset management products and market
intermediaries. Regulation is designed to address asymmetries of information
between issuers and investors, clients and financial intermediaries and
between counter-parties to transactions; and to ensure smooth functioning of
trading and clearing and settlement mechanisms that will prevent market
disruption and foster investor confidence.
Essays in Corporate Laws
Balkrishna Parab <balkrishnaparab@jbims.edu>
Jamnalal Bajaj Institute of Management Studies
Economic Rationale
Any serious examination of the role and function of capital market regulation
must sidestep the widespread, yet misguided, belief that capital market
regulation aims at protecting the common investor. Capital market regulation
is not a consumer protection law. Rather, scholarly analysis of securities
regulation must proceed on the assumption that the ultimate goal of capital
market regulation is to attain efficient financial markets and thereby improve
the allocation of resources in the economy. Accepting this assumption,
however, raises an important question: how precisely does capital market
regulation promote market efficiency?
The two main determinants of market efficiency are share price accuracy and
financial liquidity. More accurate share prices and more liquid trading enhance
the efficiency of financial markets.

Price Accuracy
Determinants of
Market Efficiency
Liquidity

Accurate pricing is essential for achieving efficient allocation of resources in

the economy. Liquid markets benefit the economy by reducing the cost of
transacting and the risk associated with investments. Markets are liquid when
traders can buy or sell large quantities, immediately, without causing a
substantial price effect. This liquidity is a function of time, price and quantity.

Information for Making Investment Decisions

Investors make their decisions based on past information, current information
and inside information. Basing investment decisions is also called as technical
analysis and the one based on current information is called fundamental
analysis.
Fundamental investment analysts base their predictions of stock price
behaviour on factors which are fundamental or intrinsic to a company, its
industry, or the economy (for example profits, products, management,
competition, consumer spending, and so on). A market fundamentalist
might issue a purchase recommendation for a company which has
consistently shown year-to-year earnings increases and is in an industry that
he or she believes will grow faster than the economy.

2
 Rationale for Financial Regulation
Balkrishna Parab <balkrishnaparab@jbims.edu>
Jamnalal Bajaj Institute of Management Studies
Technical analysts, by contrast, hold that all such fundamental factors are
reflected in the market behavior of the stock. Thus, to a pure technician, all
data of importance are internal to the stock market, and future stock-price
movements can be predicted from the diligent study of historical stock
market information (for example, changes in stock prices and trading volume).
A market technician might, therefore, base a buy recommendation on a certain
pattern of recent price and volume changes.

Forms of Market Efficiency

The efficient market hypothesis asserts that it would be impossible to
consistently outperform the marketwhich reflects the composite judgment of
millions of participantsin an environment characterized by many competing
investors, each with similar objectives and equal access to the same
information. In the context of this hypothesis, efficient means that the
market is capable of quickly digesting new information on the economy, an
industry, or the value of an enterprise and accurately impounding it into
securities prices. In such markets participants can expect to earn no more,
nor less, than a fair return for the risks undertaken.
In an efficient market, for example, news of an earnings increase would be
quickly and
accurately
assessed by
the combined
actions of
literally
millions of
investors and
immediately
reflected in
the price of
the stock.
The
purported
result of this efficiency is that whether you buy the stock before, during, or
after the earnings news, or whether another stock is purchased, only a fair
market rate of return can be expectedcommensurate with the risk of
owning whatever security is bought.
The efficient market hypothesis three forms of market efficiency: weak-form,
semi-strong form and strong form efficiency. The efficient market hypothesis
states that the rewards obtainable from investing in highly competitive markets
will be fair, on the average, for the risks involved. Importantly, however, the
three forms of the efficient market hypothesis hold that acting on
publicly available information cannot improve ones performance beyond
the markets assessment of a fair rate of return.

3
Essays in Corporate Laws
Balkrishna Parab <balkrishnaparab@jbims.edu>
Jamnalal Bajaj Institute of Management Studies
Weak Form Efficiency
The weak form of the efficient market hypothesis holds that information
on the past movements of stock prices and volumes cannot be used to predict
future stock prices. In examining the validity of this hypothesis, it is useful to
divide the empirical tests into certain categories. First, since any discussion of
the weak form of the hypothesis requires an explicit definition of past, it is
useful to discuss three categories of past-intraday, between 1 and 40 days,
and more than 40 days. Second, since certain results can be statistically
significant and still not provide the basis for a profitable investment strategy, it
is useful to differentiate between two categories of significant research-
statistical and practical.
When the evidence in support of the weak form of the efficient market
hypothesis is viewed in this context, the conclusions are both clear and
consistent. Beginning with the shortest possible time periods (intraday price
changes), there is statistical evidence that such changes are not random.
While this would imply that someone who could trade without commissions
(such as a specialist) might be able to implement inordinately profitable
trading strategies, this level of nonrandomness has no practical significance
for someone who must pay transaction charges.
In the next time interval, the period between 1 and 40 days, there is
absolutely no reliable evidence that historical price and volume
information is statistically, much less practically, significant. In the third
time interval, in excess of 40 days, there is statistical evidence of the
phenomenon of relative strength continuation, where the best performing
stocks tend to show above-average performance in subsequent periods.
Attempts to translate these statistical phenomena into reliable, practical
trading strategies, however, have met with failure.
Thus, two conclusions can be drawn with regard to the weak form of the
efficient market hypothesis:
The weak form of the efficient market hypothesis is a valid description of
the market for anyone who is interested in developing profitable
investment strategies from historical price or volume information.
There is neither a theoretical foundation nor empirical support for
technical analysis based on historical price and volume data.

Semi-Strong Form Efficiency

The most widely used form of fundamental security analysis rests on
developing projections of price-earnings multiples and earnings per share.
Unfortunately, price-earnings multiplies are subject to wide swings for which
there is neither a theoretical nor empirical basis for prediction.
Nonetheless, even though the vagaries of price-earnings multiples compromise
the basis for this kind of analysis, it can be shown that accurate earnings
estimates would provide above-average investment performance.

4
 Rationale for Financial Regulation
Balkrishna Parab <balkrishnaparab@jbims.edu>
Jamnalal Bajaj Institute of Management Studies
The semi-strong form of the efficient market hypothesis however, raises
serious questions about an analysts ability to develop useful earnings
forecasts. Specifically, this form of the hypothesis holds that the analysis of
any publicly available information is pointless because all such information is
already reflected in stock prices.
The evidence here is again clear. First, it has been shown that period-to-period
earnings changes behave in accordance with a random-walk model. This
means that the common practice of basing future earnings projections on
historical patterns of earnings changes is of no value.
Second, studies which have examined the behavior of stock prices prior
to unexpected earnings changes dramatize that the market is remarkably
efficient at accurately anticipating such fluctuations. This evidence indicates
that the marketplace is filled with competent analysts who, as a whole,
accurately forecast earnings. In this extremely competitive arena it is doubtful
that a few superior earnings forecasters consistently beat the market to the
punch.
Dividend information raises a significant challenge to the efficient market
hypothesis. There is evidence to support the contention that dividend changes
mirror managements largely correct assessment of a firms future.
A systematic examination of other levels of the information hierarchy reveals
only isolated exceptions to a purely efficient market setting. There is evidence,
for example, that professional opinions on stocks can cause price movements
and that secondary distributions by sellers, whom the market views as
knowledgeable, precede price declines.

Strong Form Efficiency

In its strongest form, the EMH says a market is efficient if all information
relevant to the value of a share, whether or not generally available to existing
or potential investors, is quickly and accurately reflected in the market price.
For example, if the current market price is lower than the value justified by
some piece of privately held information, the holders of that information will
exploit the pricing anomaly by buying the shares. They will continue doing so
until this excess demand for the shares has driven the price up to the level
supported by their private information. At this point they will have no
incentive to continue buying, so they will withdraw from the market and the
price will stabilise at this new equilibrium level. This is called the strong form
of the EMH.
The strong form is the most satisfying and compelling form of EMH in a
theoretical sense, but it suffers from one big drawback in practice. It is
difficult to confirm empirically, as the necessary research would be unlikely to
win the cooperation of the relevant section of the financial community
insider dealers.
In its strong form, the efficient market hypothesis holds that even investors
with privileged information cannot use that information to develop profitable
5
Essays in Corporate Laws
Balkrishna Parab <balkrishnaparab@jbims.edu>
Jamnalal Bajaj Institute of Management Studies
investing strategies. Not surprisingly, there is little support for this hypothesis.
Management insiders do have extra insight into their companys future. Also,
there is evidence that stock exchange specialists cause abnormal patterns of
fractional price movements.

Investors
Given the importance of incorporating information into prices and providing
liquidity in trading, the question for policymakers is: who should be entrusted
with performing these tasks? There are several groups of market participants
among whom policymakers can choose.

Inside
Traders
Information
Investor Traders
Types Liquidity
Traders
Noise
Traders

Insiders
The first consists of insiders, who possess nonpublic information, and have the
ability to process and analyze general market and firm-specific information.
Insiders have access to inside information due to their proximity to the firm;
they also have the knowledge and ability to price and evaluate this
information. Insiders can produce and price general market information, as
well as inside information.
Insiders narrow focus on their own firm, however, prevents them from
exploiting economies of scale and scope in gathering, evaluating and pricing
general market information. Moreover, due to their proximity to the firm,
insiders cannot objectively assess the value of their own business decisions.

Information Traders
The second group is information traders, who specialize in gathering and
analyzing general market and firm-specific information. Information traders
lack access to inside information, but are willing and able to devote resources
to gathering and analyzing information as a basis for their investment
decisions.
Information traders comprise two subgroups: sophisticated professional
investors and analysts. Sophisticated professional investors comprise a wide
range of institutional investors, money managers, and other market
professional players, all of whom rely, to varying degrees, on some sort of

6
 Rationale for Financial Regulation
Balkrishna Parab <balkrishnaparab@jbims.edu>
Jamnalal Bajaj Institute of Management Studies
financial or business analytical products as a basis for their investment
decisions.
Analysts include three subgroups: Sell-side analysts, buy-side analysts, and
independent analysts. Sell-side analysts are employed by investment banks to
follow and evaluate certain stocks. Sell-side analysts disclose their analytical
work to the market for free, and do not attempt to profit by trading on their
valuations. This coverage of sell-side analysts is essentially a service to the
clients of the investment bank. Sell-side analysts aim at attracting investors to
the covered stocks and firms to the investment bank.
Buy-side analysts are employed by large institutional investors, such as mutual
funds, hedge funds and pension funds, to manage investment portfolios. These
analysts keep their analytical products confidential and profit through trading
based on discrepancies between their valuation and the market price. In
performing their work, buy-side analysts use the analytical products of the
sell-side analysts as one source of information among the other sources they
use.
Independent analysts are not associated with an investment bank and produce
analytical products which they sell to their clients through some method of
subscription to their service.
Sophisticated Sell-Side
Investors Analysts
Information
Traders
Buy-Side
Analysts
Analysts

Independent
Analysts

Liquidity Traders
The third group is liquidity traders, who buy and hold a portfolio of stocks
based on consumption/ saving considerations independently of general market
or firm-specific information.
Liquidity traders dont collect and evaluate information; rather, investment by
this group reflects the allocation of resources between savings and
consumption. Unwilling to devote resources to constant gathering and analysis
of new information, rational utility traders follow a strategy of buying and
holding a portfolio of stocks.

Noise Traders
The final group is noise traders, who act irrationally, falsely believing that
they possess some valuable informational advantage or superior trading skills.

7
Essays in Corporate Laws
Balkrishna Parab <balkrishnaparab@jbims.edu>
Jamnalal Bajaj Institute of Management Studies
Noise traders act irrationally and follow differing methods of investment either
as individuals or as a group. Noise traders often believe that they are in
possession of valuable information, and invest as if they are information
traders. Market participants cannot separate noise traders from true
information traders, a task complicated by the wide spectrum of noise trading
activity. At the lowest level, there exist irrational traders, who follow fads,
rumors, and investment strategies that bear no economic rationale, such as
chasing random price movements in day trading. At the highest level, one
finds stock pickers, who collect and evaluate information similarly to
information traders and attempt to make economically rational and informed
investment decisions. However, they are less efficient than information traders
in performing these

In light of the inability of noise traders to promote market efficiency and the
indifference of liquidity traders to accurate pricing, one must narrow the list to
two groups: insiders and information traders. A comparison of the two groups
reveals that information traders operate in a highly competitive environment,
whereas insiders operate under quasi-monopolistic conditions. In addition,
information traders enjoy economies of scale and scope in gathering and
analyzing general market and firm-specific information; generate positive
externalities for the information market; cannot manipulate business decisions
or take advantage of timing when using firm-specific information; and reduce
corporate governance agency costs. For all these reasons, the policy behind
securities regulation is to protect the interests of information traders over those
of insiders (and other market participants).

Role of Information
In efficient markets, information about the value of firms is incorporated
quickly and accurately into stock prices. This process involves three different
tasks: information search; accuracy verification; and finally, pricing the
information.
Firm-Specific
Search
General

Explicit
Information Verify
Implicit

Analysis
Price
Trading

8
 Rationale for Financial Regulation
Balkrishna Parab <balkrishnaparab@jbims.edu>
Jamnalal Bajaj Institute of Management Studies
Information Search
Information search involves searching for currently unknown information that
affects prices. This involves searching two different types of information:
firm-specific information and general market information.
Firm-specific information includes a firms attributes such as management
quality, business plans and past record, financial position, and research and
development potential. General market information includes information about
the general conditions in which the firm functions, such as the prospect of
competitors, the industry as a whole, and the local and global economy.

Accuracy Verification
Accuracy verification involves actions necessary to confirm the reliability of
the information source and the credibility of the information. Verification of
the accuracy of information involves two kinds of information: explicit and
implicit information.
Explicit information includes all types of direct firm-specific and general
market information, such as financial reports, conference calls and news.
Implicit information comprises all activities that indirectly convey
information, such as price movements, trading volume, trader identity and
order flows.

Pricing Information
Pricing information requires analyzing the information to determine its value,
and then trading based on discrepancies between price and value. Pricing
information consists of two distinct activities: analyzing information and
trading.
Analyzing information requires analyzing both firm-specific and general
market information. Firm-specific information cannot be accurately priced in
isolation because one cannot evaluate the future prospects of a corporation
without knowledge about the estimated course of the local and global
economies. Trading, the act by which information is transmitted to the market,
can take one of two forms: direct trading, or indirect trading through
recommendations and advice to others who trade.

Price Mechanism in Stock Markets

Insiders and information traders detect discrepancies between value and price
based on the information they possess. They then trade to capture the value of
their informational advantage. When they observe an undervaluation, they
buy, thereby raising the price; conversely, when they spot overvaluation they
sell, thereby causing the price to drop. Because price changes are always
assessed against some calculated value, a trade is triggered when the price
change is not justified by currently known information. Given this investment

9
Essays in Corporate Laws
Balkrishna Parab <balkrishnaparab@jbims.edu>
Jamnalal Bajaj Institute of Management Studies
strategy, trading against a party with superior information or based on
fraudulent information will result in a loss.
Liquidity traders, who trade regardless of new informationthey sell for
liquidity or buy for savingwill trade irrespective of the actions of insiders
and information traders.
Market prices result from the actions of all three groups of investors. Insiders
and information traders follow market prices and counter deviations from their
calculated subjective value. Liquidity traders who follow the buy-and-hold
strategy do not distort prices because their trades are mostly random relative to
information flow and price movements. Noise traders, on account of their
irrational investment strategies, distort prices. Thus, the accuracy of stock
prices depends on the ability of insiders or information traders to counter the
actions of

SEBI
Securities and Exchange Board of India (SEBI) was established in 1988 to
regulate and develop the growth of the capital market. It was given statutory
recognition in 1992.
The basic role of SEBI is to protect the interests of investors in securities and
to promote the development of, and to regulate the securities market and for
matters connected therewith or incidental thereto1.
In addition to its general responsibility, SEBI has been assigned the following
specific responsibilities:
Regulating the business in stock exchanges and any other securities
markets;
Registering and regulating the working of stock brokers, sub-brokers,
share transfer agents, bankers to an issue, trustee of trust deeds,
registrars to an issue, merchant bankers, underwriters, portfolio
managers, investment advisors and such other intermediaries;
Registering and regulating working of collective investment schemes,
including mutual funds;
Promoting and regulating self-regulatory organizations (SROs);
Prohibiting fraudulent and unfair trade practices relating to securities
market;
Promoting investor education and training of intermediaries;
Prohibiting insider trading in securities;
Regulating substantial acquisition of shares and takeover of
companies;

1
Preamble to the Securities and Exchange Board of India Act, 1992.

10
 Rationale for Financial Regulation
Balkrishna Parab <balkrishnaparab@jbims.edu>
Jamnalal Bajaj Institute of Management Studies
Calling for information from, undertaking inspection, conducting
inquiries and audits of the stock exchanges, intermediaries and SROs;
and
Conducting research for the above purposes.
SEBI achieves its objectives through proactive supervision and policy
measures. The major policy issues are discussed in public domain through
discussion papers. The decisions arrived pursuant to a thorough examination
are placed on the website along with the agenda papers. The various quasi-
judicial orders passed by SEBI are also posted on the website2.
SEBI helps the information trader in three ways:
Minimising cost of searching information
Minimising cost of verifying information
Protection from Insider Trading

Minimisation of
Search Costs

Minimisation of
SEBI Regulations Verification
Costs

Protection from
Insider Traders

Minimisation of Search Cost

SEBI helps minimising the search cost of information traders by mandating
disclosure of information. This disclosure is required when a company
proposes to raise capital from the public in an initial public offering (IPO), or
a subsequent public offering3.
SEBI mandates that a company proposing to raise capital from the public
should issue an offer document4 containing factual information about various
aspects of the company5. Mandatory disclosure duties reduce the cost of
searching for information. In the absence of mandatory disclosure duties,
information traders would engage in duplicative efforts to uncover nonpublic
information. The cost of these efforts would be extremely high because
information traders, as outsiders, lack access to the management of the firm.

2
<www.sebi.gov.in>
3
Public offerings subsequent to the initial public offering (IPO) are called further public offers
(FPO). In the United States such offerings are called seasoned equity offerings (SEO).
4
Offer document is also known as a prospectus, or a red herring prospectus.
5
Schedule VIII of the SEBI (Issue of Capital and Disclosure Requirements) Regulations,
2009.

11
Essays in Corporate Laws
Balkrishna Parab <balkrishnaparab@jbims.edu>
Jamnalal Bajaj Institute of Management Studies
Disclosure duties pass these costs to the individual firm. For the firm, the cost
of obtaining firm-specific information is rather minimal; indeed, it is a mere
by-product of managing the firm. Moreover, SEBI mandates a specific format
for disclosure, which further reduces the costs of analyzing information and
comparing it to data provided by other firms.
Some of these mandatory disclosures that a company has to make at the time
of a public offer include:
General information about the company and its directors, promoters,
principal shareholders, and key personnel;
Overview of the business of the company and the industry in which it
operates;
Capital structure of the company, that is, the amount and breakup of
the capital in terms of owners contribution (equity) and borrowed
funds (debt);
Objectives for raising money;
Rationale for the price at which securities are offered to the public; and
Financial information of the company, and its group companies.
Subsequent to the IPO a company is mandated to disclose certain information
at periodic intervals. Some of this information is as follows:
Publication of quarterly financial results;
Annual financial statementsbalance sheet, profit and loss account,
and cash flow statement;
Directors report on the activities and progress of the company;
Management discussion and analysis of financial performance; and
Corporate governance report.
SEBI has also mandated the top 100 listed companies6 to include Business
Responsibility Report as part of their annual report with a focus on the
environmental, social and governance issues. The report would also include
compliance with the nine principles for business responsibility reporting to
assess compliance with environmental, social and governance norms7.

Minimisation of Verification Costs

Before they rely on information, information traders must invest resources in
verifying its accuracy. The verification process extends to both explicit
information and implicit information. In the absence of restrictions on fraud
and manipulation, all information traders would expend resources on verifying
the same pieces of information. Of course, such duplicative investigations

6
Listed companies are those whose securities are allowed to be traded on a recognised stock
exchange.
7
This reporting requirement is in line with the National Voluntary Guidelines on Social,
Environmental and Economic Responsibilities of Business notified by the Ministry of
Corporate Affairs, Government of India, in July 2011.

12
 Rationale for Financial Regulation
Balkrishna Parab <balkrishnaparab@jbims.edu>
Jamnalal Bajaj Institute of Management Studies
would be socially wasteful. Moreover, because information traders are
outsiders, the verification process is quite costly. Additionally, information
traders cannot easily detect distortions of implicit information, such as wash
sales8 and matched orders9, on their own. Such a task requires a central
organized detection and enforcement system like the SEBI.
The ban on fraud and manipulation reduces verification costs, because explicit
information cannot be misstated, material facts cannot be omitted, and implicit
information cannot be manipulated. If a misstatement is made or artificial
trading (wash sales, matched orders, etc.) occurs, criminal and civil sanctions
will be imposed.
Apart from severe penalties for misstatements and suppression of material
information, SEBI uses an ingenious method for verification of information
submitted by the companies. SEBI uploads draft offer document on its SEBI
website for public comments. The competitors and rivals of the company are
encouraged to inform SEBI about any suppression and misstatements.
It is cheaper to place the burden of verifying the information on the
information source, and doing so avoids duplicative expenditures by multiple
information traders. Moreover, due to the probabilistic nature of detecting
fraud criminal liability may constitute a better deterrent than civil liability that
is based on actual damages. Improved deterrence reduces the incentive to lie,
which, in turn, further reduces precaution cost.

Protection from Insider Traders

Insider trading is the practice of buying, selling of, or dealing in, a security by
someone who has access to material, nonpublic price-sensitive information
about the security.
Price-sensitive information is any information relating to: (a) periodical
financial results of the company; (b) intended declaration of dividend
interim and final; (c) issue of any class of securities; buy back of securities; (d)
any major expansion plans or execution of new projects; amalgamation,
mergers or takeovers; (e) disposal of whole or substantial part of undertaking;
or (f) any significant change in policies plans or operations of the company are
considered as price sensitive information.
Insider trading is quite different from market manipulation, disclosure of false
or misleading information to the market, or direct expropriation of the
corporations wealth by insiders. It also should be noted that transactions

8
A wash sale is a transaction where an investor sells a losing security to claim a capital loss,
only to repurchase it again for a bargain. Wash sales are a method investors employ to try and
recognize a tax loss without actually changing their position.
9
Matching orders is the process for executing securities trades by pairing buy orders with sell
orders. Matching orders utilize algorithms which determine how orders are matched and in
what order they are filled, which subsequently differ based on the venue to which the trade is
routed.

13
Essays in Corporate Laws
Balkrishna Parab <balkrishnaparab@jbims.edu>
Jamnalal Bajaj Institute of Management Studies
based on unequally distributed information are common and often, legal in
labour, commodities, and real estate markets, to name a few.
Nevertheless, many people still find insider trading in corporate securities
objectionable. One objection is that it violates the fiduciary duties10 that
corporate employees, as agents, owe to their principals, the shareholders. A
related objection is that, because managers control the production of,
disclosure of, and access to inside information, they can transfer wealth from
outsiders to themselves in an arbitrary and hidden way. The economic
rationale advanced for prohibiting insider trading is that such trading can
adversely affect securities markets or decrease the firms value.

Forms of Insider Trading

There are a variety of ways that insider trading can be conducted:
MEMBERS OF COMPANY PURCHASING A SECURITY. Employees or members of
listed companies are in key positions to access information that would not
otherwise be available to the general public. Some of them buy and sell
securities based on this information and hope to profit from it when the news
is eventually released. Employees are given stock options so there are legal
instances where they can purchase shares. However, the rules are complicated
and the line is often blurred between what is a legal form of insider trading
and what is not.
PROFESSIONALS WHO DO BUSINESS WITH THE COMPANY. Bankers, auditors,
lawyers, paralegals, and brokers are but a few of the consultants who have
access to confidential documents of their corporate clients. They may choose
to abuse this privilege as an opportunity to make a quick buck through insider
trading.
FRIENDS, FAMILY, AND ACQUAINTANCES OF CORPORATE EMPLOYEES. Corporate
employees often share information within their own circles that is not shared
with Wall Street and the general public. Sometimes these disclosures are made
innocently, but other times they are made with the intention of allowing their
friends to trade securities with an advantage that other investors would not
have. Employees may give these tips to help out a friend in a tough time or
they may be asking their friends to pay them a small incentive. Employees
may trade through their friends and acquaintances since they are less likely to
be scrutinized by the SEBI than the employees themselves.

Detection and Investigation of Insider Trading

Insider trading is usually identified through market surveillance systems; they
rarely are made through tips or complaints. SEBI monitors securities markets
and tracks them for abnormal trading patterns. Once an abnormal pattern has

10
A fiduciary is an individual in whom another has placed the utmost trust and confidence to
manage and protect property or money. A fiduciary relationship exists when one person has an
obligation to act for another's benefit.

14
 Rationale for Financial Regulation
Balkrishna Parab <balkrishnaparab@jbims.edu>
Jamnalal Bajaj Institute of Management Studies
been identified, the SEBI vigorously pursues anyone they believe may be
involved.
They issue orders for financial records and find any other means to pursue the
evidence that comes their way. If enough evidence is found to indict someone
for insider trading, those individuals will be charged.

Disclosure Requirements
The SEBI regulations in this regard provide initial and continual disclosures of
holdings or interest of director, officer and substantial shareholders in a listed
company. It casts duty on directors or officers holding specified percentage of
shareholding in a listed company to disclose their holdings to the company and
the company in turn intimate to the stock exchange of those disclosed
information.
INITIAL DISCLOSURE. Every person holding more than five per cent shares
(voting rights) in any listed company is required to disclose to the company
the number of shares or voting rights held by such person on becoming such
holder within two working days of the receipt of intimation of allotment of
shares or the acquisition of shares or voting rights as the case may be.
Further, every person who is a director or officer of a listed company is
required to disclose to the company the number of shares or voting rights held
and positions taken in derivatives by such person and his dependents within
two working days upon becoming a director or officer of the company.
CONTINUAL DISCLOSURE. Any person holding more than five per cent shares
or voting rights in any listed company is required to disclose to the company
the number of shares or voting rights held and change in shareholding or
voting rights. Such disclosure are required to be made within two working
days even if such change results in shareholding falling below five per cent, if
there has been change in such holdings from the last disclosure.
Any person who is a director or officer of a listed company is required to
disclose to the company and the stock exchange where the securities are listed
the total number of shares or voting rights held and change in shareholding or
voting rights, if there has been a change in such holdings of such person and
his dependents from the last disclosure.
SEBI also mandates the company to inform the stock exchanges where the
shares of the company are listed, the information as received under initial
disclosure and/ or continual disclosure, within two working days of receipt of
information from the insiders.

BALKRISHNA PARAB teaches law, accounting and finance at the Jamnalal

Bajaj Institute of Management Studies, University of Mumbai.
Contact details: Jamnalal Bajaj Institute of Management Studies, 164,
DN House, HT Parekh Marg, Backbay Reclamation, Mumbai 400 020.
Cell: 9833528351. E-Mail: balkrishnaparab@jbims.edu

15