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Insider Trading

Insider Trading

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Published by Pankaj
full information about insider trading
full information about insider trading

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Published by: Pankaj on Feb 23, 2010
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02/12/2014

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CHAPTER 1: INTRODUCTIONCHAPTER 1: INTRODUCTION
Forces of demand and supply regulate the prices of shares as well. When people buythe shares of a particular company from the stock market, the price of the shares of thatcompany increases. Similarly, it decreases when people sell the shares (supplyincreases than demand).By investing in a company’s share, an share holder becomes an owner of that particular company to the extent of the value of the shares held by him. He therefore is entitled toa share in the profits earned by the company. This share in profits that is distributed to ashareholder is known as dividends. The performance of a company is of primaryimportance to the investors and the general public who might invest in the company.The Indian company law provides that a company should prepare an annual accountshowing the company’s trading results during the relevant year. It also makes itmandatory that the company publishes its assets and liabilities at the end of the period.This has been provided to ensure transparency in the functioning of the company. Also,the company should call at least one meeting of its shareholders each year known as theAnnual General Body Meeting (AGM) and is kept with a view to ensure and review theworking of the company. The information released in Annual Reports and AnnualGeneral Body Meetings plays a valuable role in shaping the minds of existing and prospective shareholders.However persons in the company itself or otherwise concerned to the company are in possession of certain information before it is actually made public. For example, aChartered Accountant, auditing the accounts of the company; directors of the companytaking decisions etc. The knowledge of this unpublished price sensitive information inhands of persons connected to the companies puts them in an advantageous positionover others who lack it. Such information can be used to make gains by buying sharesat a cheaper rate anticipating that it might rise or selling them before the prices falldown. Such transaction entered into by persons having access to any unpublishedinformation is called
Insider Trading.
 
Meaning:
Insider trading is the trading of acorporation's stock or other securitiesby individuals with potential access to non-public information about the company. In mostcountries, trading by corporate insiders may be legal, if this trading is done in a waythat does not take advantage of non-public information. Since insiders are required toreport their trades, others often track these traders & follow the lead. Many investorsfollow the summaries of these insider trades in the hope that mimicking these tradeswill be profitable. Some investors believe corporate insiders may have better insightsinto the health of a corporation.Trades made by these insiders in the company's own stock, based onmaterial non- public information, are considered to be fraudulent since the insiders are violating thetrust or the fiduciary duty that they owe to the shareholders. The corporate insider,simply by accepting employment, has made a contract with the shareholders to put theshareholders' interests before their own, in matters related to the corporation. When theinsider buys or sells based upon company owned information, he is violating hiscontract with the shareholders.For example, illegal insider trading would occur if thechief executive officer of Company A learned (prior to a public announcement) that Company A will be takenover, and bought shares in Company A knowing that the share price would likely rise.Liability for insider trading violations cannot be avoided by passing on the informationin aquid pro quoarrangement, as long as the person receiving the information knew or should have known that the information was company property.For example, if Company A's CEO did not trade on the undisclosed takeover news, butinstead passed the information on to his brother-in-law who traded on it, illegal insider trading would still have occurred.Such trading can prove detrimental to the interests of the shareholders of the company.Consequently, SEBI banned insider trading and issued the SEBI (Prohibition of Insider Trading) Regulations, 1992 on 19
th
November 1992.
 
CHAPTER 2: PRELIMINARY: DEFINITIONS
1. Title:-
These regulations were earlier called the Securities and Exchange Board of India(Insider Trading) Regulations, 1992.In the amendment made on 20
th
February 2002 the words "Prohibition of" were insertedand it was renamed as Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations.
2. Definitions:-
(a) “
Connected person
” means any person who – (i) is a
director
of a company, or is deemed to be a director of that company as definedin the Companies Act, 1956(ii) is an
officer or an employee
of the company or holds a professional or businessrelationship with the company and who may be expected to have an access tounpublished price sensitive information of that company;"Connected person" includes any person who is a connected person six months prior toan act of insider trading."- “
person is deemed to be a connected person
” if such person-(i) is a company under the same management or group or any subsidiary company(ii) is an intermediary, Investment company, Trustee Company, Asset ManagementCompany or an employee or director or an official of a stock exchange or of clearinghouse or corporation.(iii) is a merchant banker, share transfer agent, registrar to an issue, debenture trustee, broker, portfolio manager, Investment Advisor, sub-broker, Investment Company or anemployee, or, is a member of the Board of Trustees of a mutual fund or a member of the Board of Directors of the Asset Management Company of a mutual fund or is anemployee thereof who have a fiduciary relationship with the company;

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