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insider Trading

insider Trading

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Published by: Arun Shokeen on Apr 10, 2011
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04/10/2011

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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. The Bill became an Act on 4th April 1992 the date on which it is received the Presidents assent. and who is reasonably expected to have access. to unpublished price sensitive information in respect of securities of the company. However for the purposes of regulating insider trading. and providing false. The SEBI is the primary federal regulatory agency for the securities industry. 1992 and was passed by both houses of parliament on 1st April 1992. 1992. 1992 under Regulation 2(e) that: Any person who. accounting fraud.e. or who has received or has had access to such unpublished price sensitive information. However. as defined by the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations. shareholders. Typical infractions that includes in SEBI is insider trading. 1992 define an insider to mean: An insider. whose responsibility is to promote full disclosure and to protect investors against fraudulent and manipulative practices in the securities markets. Thus the directors of the company. i. which are: insider or who is an insider Who is a connected person . This definition has three important elements.An insider is understood as a person having control over the management of affairs of the corporation. etc would be the insiders of the company. The SEBI is concerned primarily with promoting disclosure of important information. is or was connected with the company or is deemed to have been connected with the company. and protecting investors who interact with different organizations and individuals. and providing false or misleading information about securities and the companies which need to be protected and prevented by SEBIs rules and regulation. employees. 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. this Act is to be deemed to have come into force on 30th January. Insider:. 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. by virtue of such connection. enforcing the securities laws. The SEBI (insider trading) regulations. the date on which the SEBI ordinance was promulgated. as provided for in Section 1(3). insider has been given a relatively specific definition.

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. 2(ha) of SEBI (Insider Trading) (Amendment) Regulations.Price Sensitive Information. The words connected person shall any person who is a connected person six months prior to an act of insider trading. which relates directly or indirectly to a company and which if published. 1. portfolio manager or. 1992. as defined in clause (13) of section 2 Companies Act.Regulation. share transfer agent. officials of stock exchange. (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. its sequence relating to insider trading Price Sensitive Information means any information. Deemed connected person :. 1956 (1 of 1956) of a company.5. 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. clearing house.What are price sensitive information (i) Is a director. 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 . relative of any of the above persons. Reg. or is deemed to be a director of that company by virtue of sub-clause(10) of session 307 of that Act or. merchant bankers. intermediary as specified in under section 12 of Act 1992 . and registrar to an issue.

To abide by the Code of Corporate Disclosure practices as specified in Schedule II to the SEBI (Prohibition of Insider Trading) Regulations. 1992. mergers or takeovers Disposal of the whole or substantial part of the undertaking .The SEBI had given a list of such price sensitive information which is to be informed to the stock exchange by the companies.Role of SEBI relating Insider Trading To appoint a senior level employee generally the Company Secretary. To set up an appropriate mechanism and to frame and enforce a code of conduct for internal procedures. 1992 To initiate the information received under the initial and continual disclosures to the Stock Exchange within 5 days of their receipts. Intended declaration of dividends. 1.back of securities Any major expansion plans or execution of new projects. To ensure adequate data security of confidential information stored on the computer. Issue or buy. To specify the close period. To identify the price sensitive information To ensure adequate data security of confidential information stored on the computer. Amalgamation. as the Compliance Officers. To prescribe the procedure for the pre-clearance of trade and entrusted the Compliance Officers with the responsibility of strict adherence of the same. Periodical financial result of the company.6. The penalties/ punishments can be imposed in case of violation of SEBI (Prohibition of Insider Trading) Regulations.

Special courts should be set up for faster and efficiencies disposal of cases. SEBI (Insider Trading) Regulations 1992. In the USA. countries like Germany reply on a voluntary code of conduct. So. SEBI now should take the role of a regulator only.Judicial pronouncements relating to insider trading The case of insider trading (HLL-BBLIL Merger). 1993. framed under Section 11 of the SEBI Act.Any significant change in policies.7. are intended to prevent and curb the menace of insider trading in securities. 2003. 1984 to impose civil penalties in addition to criminal proceedings. While the US and the UK has comprehensive legislations and monitoring bodies in this regard. Different countries have diverse enactments and codes of conduct to curb the ill practice of Insider Trading. 2007 and recently in 2008. 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. 1992. In the UK insider trading is dealt with in Criminal Justice Act. [27] . the Securities and Exchange Commission is empowered under the Insider Trading Sanctions Act. amended in 2002. 1. In India.

India is host to one of the most stringent laws on insider trading. (b) For the offence of insider trading price sensitive information must come to an insider by virtue of his being an insider. In India. L&T was not even aware of this deal and in fact was not supposed virtue of his being an insider. adjudication proceedings and also directed him to deposit a sum of Rs. 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. as it strikes at the root of the principle of good faith in corporate dealing. However SAT overruled the case. if the accused does not have the requisite knowledge that the information is either inside information or that it is from an inside source. 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. even if he deals in securities based on that information. . the investors have been disenchanted by the regulatory mechanisms employed by SEBI in controlling insider trading. [33] Corporate governance is very vital in a profit-driven market and regulation of insider trading is essentially a part of corporate governance. 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. 34 lacs with the Investor Protection Funds of NSE & BSE to compensate any investor who is aggrieved by the said act of insider trading.(a) The information of the impending deal was not supposed to emanate from L&T and in fact did not emanate from L&T. 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. 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. Rakesh Agrawal v. Market manipulation strategies to ones own advantage are welcome provided they are not illegal. Hence. SEBI [30] SEBI found RK guilty of insider trading and directed his prosecution. Whereas insider trading is an illegal market manipulation mechanism. he will be held guilty of insider trading under Indian law.

There is a lot to be done to make the insider trading meaningful and effective. as defined in section 2(13) of the Companies Act. “Connected person” means any person who(i). 1956 or is deemed to be a director of that company by virtue of section 307(10) of that Act or (ii). officers. lawyers. 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. the directors. 1956 including Auditor of the company or . is an officer of a company as defined in section 2(30) of the Companies Act. 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). selling and dealing in shares and securities of a listed company by insiders such as directors. Meaning of Insiders The term ‘insider’ is defined in Regulation 2(e) SEBI (Prohibition of Insider Trading) Regulations. bankers’ etc. INSIDER TRADING REGULATIONS AND SEBI For regulating the insider trading the SEBI (Prohibition of Insider Trading) Regulations. consultants. lawyers. has received or has had access to such unpublished price sensitive information. 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. designated officers of management team. as (i). 1992. 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. is a director of a company. analysts who possess material inside information which is not available to general investors. 1992 has been passed. employees of the company or any other connected persons such as auditors. The main aim of insider trading regulation is to prevent misuse of any unpublished price sensitive information by the insiders viz. and to stop taking unfair advantage by the aforementioned persons over other common investors of securities of a listed company. auditors.

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. Price Sensitive Information Price Sensitive Information means any information.is an official or an employee of Self regulatory Organization. STA. or AOP. (v). is an intermediary such as Investment Company. intended declaration of dividend – interim and final. or A person is deemed to be inter-connected person if such person (i). (ii). firm. . HUF. Asset Management Company or is an employee or director thereof or an official of a stock exchange or of clearing house or corporation. or member of the Board of trustee of mutual fund or of the Asset Management Company. is a relative of any of the aforementioned persons. Trustee Company. (iii). is a company under the same management or group or any subsidiary company thereof. any major expansion plans or execution of new projects. Registrar to an issue. (vi). amalgamation. buy back of securities. (iv) is a member of Board of Directors or an employee of a public financial institution.(iii). trust.is a banker of the company. (iv). debenture trustee. (vii). The information relating to · · · · · periodical financial results of the company. is likely to materially affect the price of securities of such company. issue of any class of securities. 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. relatives of the connected person or (ix) is a concern. wherein the aforementioned person has more than 10% of the holding or interest. which relates directly or indirectly to a listed company and which if published. mergers or takeovers. is a merchant banker.

Similarly Regulation 3A prohibits a company from dealing in securities of another company or associate of that other 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. It mandates all directors. They should not take position in derivative transactions in the share of the company at any time. Regulation 4.1992 in sections – 11.general powers of SEBI to protect the interests of investors in securities and to promote the . on dealing. speaks about initial and continual disclosures of holdings or interest of Director or officer and substantial shareholders in a listed company. 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. he must pre-clear the transaction again. SEBI is empowered to invoke powers enshrined in Securities and Exchange Board of India Act.2 was fully substituted in lieu of earlier provision.November-2008.e. Regulating Provisions ü Regulation 3 prohibits the insiders of listed companies either on his own behalf or on behalf of any other person. ü Regulation 13 (6) mandates the Company to inform the stock exchanges where the shares of the company are listed. officers. communicating or counselling matters relating to insider trading. while in possession of price sensitive information. the information as received under initial disclosure and/or continual disclosure. POWERS OF SEBI IN CASE OF VIOLATIONS Regulation 14 was substituted by the amendments made on 19. In the case of IPO. The period of 30 days must be reckoned from the date of actual allotment. the aforementioned persons shall have to hold their investments for a minimum period of 30 days. Regulation 4.1 requires that all directors.· 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. If he does not clear within one week. 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. within 2 working days* of receipt of the information from the aforementioned persons. designated employees who buy or sell any number of shares of the company shall not enter into an opposite transaction i. ü Regulation 13 of SEBI Insider Trading Regulation. sell or buy any number of shares during the next 6 months following prior transaction. Apart from initiating actions under Regulation 11.

development of and to regulate securities market.25 Crores or with both. 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.

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