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Introduction :- Man amongst all species has proved himself to be the greediest creature

since times immemorial. His greed has made him stop as low as possible in utter
disregard for all principles of fair play, honesty, morality, etc. In the past and particularly
in the last two decades we have witnessed many instances not only at National level but
even across the globe where some genius brains have been able to use the vulnerable
platform of stock market to their own advantage by enriching themselves enormously at
the cost of unprecedented financial losses to thousands of others. A common tool used by
these manipulative brains is what in common parlance is known as Insider trading.

With the vast developments in trade and commerce all


over, every person has become very materialistic. That is the reason why people in
general and particularly those in business have developed profit motives. And it is quite
often that to fulfill their own monetary expectations, such people employ illegal or
immoral means. One such illegal method used by some vested interests in area of
corporate business is insider trading.

Thus, when an insider of a company uses its


price sensitive confidential information to buy or sell its securities thereby making a
personal profit, he commits acts to the detriment of the interests of bona fide investors of
the company. However, in reality, insider trading can be both legal and illegal.

Legal in the sense when the corporate insiders officers, directors, and employees buy and
sell stock in their own companies, whereas illegal insider trading refers to buying and
selling of stock by corporate insiders not within their own company.

UK and USA had long back created separate


boards for the regulations of the securities market. UK has the securities and investment
Board (SIB) and USA has the Securities and Exchange Commission (SEC). And the
Indian Governments intention to set up a separate board for the regulation and orderly
functioning of the capital market was first declared in the Budget speech by Shri. Rajiv
Gandhi, the then Prime Minister and Minister of Finance, while presenting the budget for
the year 1987-88. He stated the capital markets in India have shown tremendous growth
in the last few years and the approvals for capital issues have exceeded Rs. 5000 crores in
1986-1987, as earlier in 1980-81 it was only Rs. 500 crores. So for a healthy growth of
capital markets, investors must be fully protected and trading malpractices must be
prevented. Therefore, government has decided to set up a separate board for the
regulation and orderly functioning of stock exchange and the securities industry. Finally,
a notification was issued on 12th April1988 and Securities and Exchange Board of India
(SEBI) was constituted as an interim administrative body to function under the overall of
the Ministry of Finance of the Central Government.

The SEBI was given a statutory status on 30th January, 1992 by an ordinance to provide
for the establishment of SEBI. A Bill to replace the Ordinance was introduced in
parliament on 3rdMarch, 1992 and was passed by both houses of parliament on 1st April
1992. The Bill became an Act on 4th April 1992 the date on which it is received the
Presidents assent. However, as provided for in Section 1(3), this Act is to be deemed to
have come into force on 30th January, 1992, i.e. the date on which the SEBI ordinance
was promulgated.

The SEBI is the primary federal regulatory agency for the securities industry, whose
responsibility is to promote full disclosure and to protect investors against fraudulent and
manipulative practices in the securities markets. The SEBI is concerned primarily with
promoting disclosure of important information, enforcing the securities laws, and
protecting investors who interact with different organizations and individuals. Typical
infractions that includes in SEBI is insider trading, accounting fraud, and providing false,
and providing false or misleading information about securities and the companies which
need to be protected and prevented by SEBIs rules and regulation.

One of the principles that is


the cornerstone of the regulation of our capital markets is that insiders of public issuers
and others who are in a special relationship with the issuer who have undisclosed material
information about the issuer should not be permitted to.

The accountants of a company supervising the financial operation in any company have
the furthermost prospect of gaining knowledge to any kind of confidential price sensitive
information.

Insider:- An insider is understood as a person having control over the management of


affairs of the corporation. Thus the directors of the company, shareholders, employees,
etc would be the insiders of the company. However for the purposes of regulating insider
trading, insider has been given a relatively specific definition. The SEBI (insider trading)
regulations, 1992 define an insider to mean: An insider, as defined by the Securities and
Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992 under
Regulation 2(e) that: Any person who, is or was connected with the company or is
deemed to have been connected with the company, and who 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.

This definition has three important elements, which are:

insider or who is an insider

Who is a connected person


What are price sensitive information

(i) Is a director, as defined in clause (13) of section 2 Companies Act, 1956 (1 of 1956)
of a company, or is deemed to be a director of that company by virtue of sub-clause(10)
of session 307 of that Act or;

(ii) Occupies the position as an officer or an employee of the company or holds a position
involving a professional or business relationship between himself and the company
whether temporary or permanent and who may reasonably be expected to have an access
to unpublished price sensitive information in relation to that company.

The words connected person shall any person who is a connected person six months
prior to an act of insider trading.

Deemed connected person :- Regulation- 2(h) says person deemed to be connected


means if such person is a company under the same management or group or any
subsidiary company, intermediary as specified in under section 12 of Act 1992 , officials
of stock exchange, clearing house, merchant bankers, and registrar to an issue, share
transfer agent, portfolio manager or, relative of any of the above persons.

1.5.Price Sensitive Information, its sequence relating to insider trading

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. Reg. 2(ha) of SEBI (Insider Trading) (Amendment) Regulations, 1992, deals
with 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. Examples: The following shall be deemed to be price sensitive
information

- Death/ Imprisonment of promoter

- Family dispute over ownership

- Accident and loss of contracts

- Court decisions and Judgments


The SEBI had given a list of such price sensitive information which is to be
informed to the stock exchange by the companies.

1.6.Role of SEBI relating Insider Trading

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 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.

The penalties/ punishments can be imposed in case of violation of SEBI (Prohibition of


Insider Trading) Regulations, 1992.

Periodical financial result of the company.

Intended declaration of dividends.

Issue 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


Any significant change in policies, plans or operation of the company

A mere perusal of the list gives an impression that a price sensitive information would be
any information that has direct nexus with the performance of the company in percent
and future time.

The importance of policing insider trading has also assumed international significance as
overseas regulators attempt to boost the confidence of domestic investors and attract the
international investment community. So, SEBI now should take the role of a regulator
only. Special courts should be set up for faster and efficiencies disposal of cases.

Different countries have diverse enactments and codes of conduct to curb the ill practice
of Insider Trading. While the US and the UK has comprehensive legislations and
monitoring bodies in this regard, countries like Germany reply on a voluntary code of
conduct.

In India, SEBI (Insider Trading) Regulations 1992, amended in 2002, 2003, 2007 and
recently in 2008, framed under Section 11 of the SEBI Act, 1992, are intended to prevent
and curb the menace of insider trading in securities.

In the USA, the Securities and Exchange Commission is empowered under the Insider
Trading Sanctions Act, 1984 to impose civil penalties in addition to criminal proceedings.
In the UK insider trading is dealt with in Criminal Justice Act, 1993.

1.7.Judicial pronouncements relating to insider trading

The case of insider trading (HLL-BBLIL Merger). [27]


(a) The information of the impending deal was not supposed to emanate from L&T and
in fact did not emanate from L&T. The RIL nominees on the Board of L&T were aware
of the impending deal not because of their directorship but due to their position as
potential sellers as Managing Directors of RIL. The Ambanis were not the directing mind
and will of L&T since they were only two in number as compared to the total number of
seventeen;

(b) For the offence of insider trading price sensitive information must come to an insider
by virtue of his being an insider. L&T was not even aware of this deal and in fact was not
supposed virtue of his being an insider. L&T was not even aware of this deal could not be
classified to fall within the ambit of the Insider Trading Regulations

Dilip Pendse v. SEBI [29]

This was perhaps the simplest case of insider trading which was handled by SEBI and it
had no difficulties in punishing the offenders.

Rakesh Agrawal v. SEBI [30]

SEBI found RK guilty of insider trading and directed his prosecution, adjudication
proceedings and also directed him to deposit a sum of Rs. 34 lacs with the Investor
Protection Funds of NSE & BSE to compensate any investor who is aggrieved by the
said act of insider trading. However SAT overruled the case.

India is host to one of the most stringent laws on insider trading. The insider trading
regulations do not require any knowledge or intention on the part of the accused in order
to sustain a conviction for insider trading. Hence, if the accused does not have the
requisite knowledge that the information is either inside information or that it is from an
inside source, even if he deals in securities based on that information, he will be held
guilty of insider trading under Indian law. [33] Corporate governance is very vital in a
profit-driven market and regulation of insider trading is essentially a part of corporate
governance. Market manipulation strategies to ones own advantage are welcome
provided they are not illegal. Whereas insider trading is an illegal market manipulation
mechanism, as it strikes at the root of the principle of good faith in corporate dealing.

In India, the investors have been disenchanted by the regulatory mechanisms employed
by SEBI in controlling insider trading.
There is a lot to be done to make the insider trading meaningful and effective. This
demands concerted efforts at the hands of both

INSIDER TRADING AND ITS REGULATION IN INDIA

INSIDER TRADING AND ITS REGULATION IN INDIA

Insider Trading implies buying, selling and dealing in shares and securities of a listed
company by insiders such as directors, designated officers of management team,
employees of the company or any other connected persons such as auditors, consultants,
lawyers, analysts who possess material inside information which is not available to
general investors.

INSIDER TRADING REGULATIONS AND SEBI

For regulating the insider trading the SEBI (Prohibition of Insider Trading) Regulations,
1992 has been passed. This Regulation contains 15 regulations and 3 schedules with 4
Forms portraying 2 model codes of conduct for prevention of insider trading in listed
companies. The main aim of insider trading regulation is to prevent misuse of any un-
published price sensitive information by the insiders viz. the directors, officers, auditors,
lawyers, bankers’ etc. and to stop taking unfair advantage by the aforementioned persons
over other common investors of securities of a listed company. Insider information is one
which is likely to have impact on the company’s shares and other securities in the market
and trading based on such information is unfair and also legally and economically
undesirable.

Meaning of Insiders

The term ‘insider’ is defined in Regulation 2(e) SEBI (Prohibition of Insider Trading)
Regulations, 1992, as

(i). any person who is or was connected with the company or is deemed to have been
connected with the company and who is reasonably expected to have access 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.

“Connected person” means any person who-

(i). is a director of a company, as defined in section 2(13) of the Companies Act, 1956
or is deemed to be a director of that company by virtue of section 307(10) of that Act or

(ii). is an officer of a company as defined in section 2(30) of the Companies Act, 1956
including Auditor of the company or
(iii). An employee of the company who holds a position involving a professional or
business relationship between himself and the company whether temporary or permanent
and who may reasonably be expected to have an access to unpublished price sensitive
information in relation to that company; or

A person is deemed to be inter-connected person if such person

(i). is a company under the same management or group or any subsidiary company
thereof;

(ii). is an intermediary such as Investment Company, Trustee Company, Asset


Management Company or is an employee or director thereof or an official of a stock
exchange or of clearing house or corporation;

(iii). is a merchant banker, STA, Registrar to an issue, debenture trustee, or member of


the Board of trustee of mutual fund or of the Asset Management Company; (iv) is a
member of Board of Directors or an employee of a public financial institution;

(iv).is an official or an employee of Self regulatory Organization;

(v). is a relative of any of the aforementioned persons;

(vi).is a banker of the company;

(vii). relatives of the connected person or (ix) is a concern, firm, trust, HUF, or AOP,
wherein the aforementioned person has more than 10% of the holding or interest.

Price Sensitive Information

Price Sensitive Information means any information, which relates directly or indirectly to
a listed company and which if published, is likely to materially affect the price of
securities of such company. Regulation 2(ha) defines ‘price sensitive information’ as
any information which relates directly or indirectly to a company and which if published
is likely to materially affect the price of securities of a company. The information relating
to

· periodical financial results of the company;

· intended declaration of dividend – interim and final;

· issue of any class of securities; buy back of securities;

· any major expansion plans or execution of new projects;

· amalgamation, mergers or takeovers;


· disposal of whole or substantial part of undertaking or

· Any significant change in policies plans or operations of the company are


considered as price sensitive information.

Regulating Provisions

ü Regulation 3 prohibits the insiders of listed companies either on his own behalf or on
behalf of any other person, on dealing, communicating or counselling matters relating to
insider trading. Similarly Regulation 3A prohibits a company from dealing in securities
of another company or associate of that other company, while in possession of price
sensitive information. Regulation 4.1 requires that all directors, officers and designated
employees and their dependents – as defined by the company shall execute their order in
respect of securities of the company within 7 days after the approval of pre-clearance is
given. If he does not clear within one week, he must pre-clear the transaction again.
Regulation 4.2 was fully substituted in lieu of earlier provision. It mandates all directors,
officers, designated employees who buy or sell any number of shares of the company
shall not enter into an opposite transaction i.e. sell or buy any number of shares during
the next 6 months following prior transaction. They should not take position in derivative
transactions in the share of the company at any time. In the case of IPO, the
aforementioned persons shall have to hold their investments for a minimum period of 30
days. The period of 30 days must be reckoned from the date of actual allotment.

ü Regulation 13 of SEBI Insider Trading Regulation, speaks about initial and continual
disclosures of holdings or interest of Director or 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.

ü Regulation 13(1) postulates that every person holding more than 5% shares/voting
rights in any listed company shall disclose to the Company in Form – A the number of
shares or voting rights held by such person on becoming such holder within 2 working
days* of the receipt of intimation of allotment of shares or the acquisition of shares or
voting rights as the case may be.

ü Regulation 13 (6) 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 2 working days* of receipt of the information from
the aforementioned persons.

POWERS OF SEBI IN CASE OF VIOLATIONS

Regulation 14 was substituted by the amendments made on 19- November-2008. Apart


from initiating actions under Regulation 11, SEBI is empowered to invoke powers
enshrined in Securities and Exchange Board of India Act,1992 in sections – 11- general
powers of SEBI to protect the interests of investors in securities and to promote the
development of and to regulate securities market, 11B – SEBI’s power to issue directions
to market intermediaries, 11D – power to pass orders requiring a person who violated or
is likely to violate the provisions of the Act to cease or desist from committing or causing
such violation and SEBI may award penalty and imprisonment to a violator of the
regulations. A violator shall be punishable with imprisonment for a term which may
extend to 10 years or with fine which may extend to Rs.25 Crores or with both.

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