School of Law

DISSERTATION
B.Com. LL.B specialization in Taxation laws
IX Semester
Nishit Bishnoi
R129217057
500059938
Submitted under the Guidance of- Ms. Rukma Lavania

School of Law
University of Petroleum and Energy Studies
Dehradun
November, 2021

Issued from the office of Dean, School of Law in March, 2021

 DECLARATION/UNDERTAKING OF ORIGINALITY

I, …………………Nishit Bishnoi…………………………………… having Enrolment No

R129217057………………. SAP ID…500059938………… declare that the Dissertation
/Synopsis titled “The History and Comparative Analysis Regarding Insider Trading
Regulations in India, United Kingdom and United States of America” is the outcome of my
original work conducted under the supervision of Ms./Mrs./Dr./Prof. Rukma Lavania at
School of Law, University of Petroleum and Energy Studies, Dehradun.

I undertake full responsibility of the contents of this Dissertation/Synopsis complying with

the ‘Academic Integrity’ policy of UPES and I understand that if this work is found in
violation of the same, this may result in rejection of Synopsis/Dissertation and entail
appropriate disciplinary proceedings as per Rules of the University.

Word Count of Synopsis/Dissertation- 19095.

Signature

Nishit Bishnoi

Date-19 November

Place-Sirsa

Endorsement by the Mentor:

Date of final Submission:………………………..
Antiplagiarism Check /Similarity found: ………..
Late Submission………………………………….

Signature
[Name of the Mentor]
Date……………
“Topic: The History and Comparative Analysis Regarding
Insider Trading Regulations in India, United Kingdom and
United States of America”
Contents
SYNOPSIS...............................................................................................................................................5
INTRODUCTION.....................................................................................................................................5
STATEMENT OF PROBLEM.....................................................................................................................6
LITERATURE REVIEW..............................................................................................................................7
REASEARCH METHODOLOGY...............................................................................................................10
RESEARCH OBJECTIVE:.........................................................................................................................10
RESEARCH QUESTIONS........................................................................................................................11
HYPOTHESIS.........................................................................................................................................11
RESEARCH METHOD............................................................................................................................11
RELEVANCE OF STUDY.........................................................................................................................11
CURRENT SCENARIO............................................................................................................................12
CHAPTER – 1: INTRODUCTION.............................................................................................................13
1.1 NEED FOR STRINGENT RULES........................................................................................................17
1.2 EVOLUTION OF INSIDER TRADING.................................................................................................17
1.3 LAWS PREVAILING IN INDIA, U.K. AND U.S.A.................................................................................19
CHAPTER – 2: INSIDER TRADING LAWS PREVAILING IN INDIA.............................................................20
2.1 HISTORY OF SECURITIES MARKET IN INDIA....................................................................................20
2.1.1 INCEPTION PHASE..............................................................................................................21
2.1.2 THE SACHAR COMMITTEE (1979)...................................................................................22
2.1.3 THE PATEL COMMITTEE (1987).......................................................................................23
2.2 PRE-INDEPENDENCE PERIOD OF INDIA..........................................................................................24
2.3 POST-INDEPENDENCE DEVELOPMENT OF THE INDIAN SECURITIES MARKET................................25
2.4 IMPACT OF NEW ECONOMIC POLICY ON THE INDIAN SECURITES MARKET..................................26
2.5 SECURITIES AND EXCHANGE BOARD OF INDIA..............................................................................26
2.6 VARIOUS SCAMS AND CASE-LAWS IN INDIA..................................................................................29
2.6.1 THE MUNDHRA SCANDAL (1958)....................................................................................30
2.6.2 THE HARSHAD MEHTA SCAM (1992)..............................................................................30
2.6.3 THE KETAN PAREKH SCAM (2001)..................................................................................32
2.6.4 HINDUSTAN LEVER LIMITED v. SEBI (1998 SCL 311)..................................................33
2.6.5 SAMIR C. ARORA v. SEBI [(2005) 59 SCL 96]..................................................................34
CHAPTER – 3: INSIDER TRADING LAWS IN THE UNITED KINGDOM.....................................................36
3.1 HISTORY OF INSIDER TRADING LAWS IN THE UK...........................................................................39
3.2 PENAL MEASURES TO RESOLVE INSIDER TRADING........................................................................40
3.3 CASE LAW RELATING TO INSIDER TRADING IN THE UK..................................................................41
3.3.1 WARNER CASE (1988)........................................................................................................41
CHAPTER – 4: LAWS RELATING TO INSIDER TRADING IN THE UNITED STATES....................................42
4.1 HISTORY OF INSIDER TRADING LAWS IN THE U.S..........................................................................44
4.2 PENAL MEASURES TO CURB INSIDER TRADING.............................................................................45
4.3 THEORIES OF INSIDER TRADING....................................................................................................45
4.3.1 CLASSICAL THEORY.........................................................................................................46
4.3.2 TIPPER TIPPEE THEORY....................................................................................................46
4.3.3 MISAPPROPRIATION THEORY.........................................................................................46
4.3.4 SCIENTER THEORY............................................................................................................47
4.4.1 DIRKS V. SEC 463 US 464 (1983)........................................................................................47
4.4.2. S.E.C. v. Rajat K. Gupta and Raj Rajaratnam, Civil Action No. 11-CV-7566 (SDNY) (JSR)
.........................................................................................................................................................49
CHAPTER – 5: CRITITCAL ANALYSIS OF THE INSIDER TRADING LAWS IN INDIA, USA
AND UK.........................................................................................................................................53
5.1 COMPARATIVE STUDY OF INSIDER TRADING LAWS IN INDIA, USA AND UK..................................53
5.2 ROLE OF SEBI IN RESOLVING INSIDER TRADING IN INDIA..............................................................54
CHAPTER – 6: CONCLUSION AND SCOPE OF FURTHER RESEARCH......................................................56
6.1 CONCLUSION.................................................................................................................................56
6.2 SCOPE OF FURTHER RESEARCH......................................................................................................57
REFERENCES AND BIBLIOGRAPHY........................................................................................................58
BOOKS.................................................................................................................................................58
ACTS AND REGULATIONS.....................................................................................................................58
REPORTS..............................................................................................................................................59
REFERENCES........................................................................................................................................59
 SYNOPSIS
INTRODUCTION
In the recent times, India has experienced huge price variations in the shares of public
companies during the periods of merger and unlawful trading based on unpublished price
sensitive information, which has been a major concern for the Indian Stock market. The
authorities who run the companies for the benefit of the Investors and Stakeholders acquire
unjustifiable enrichment at the expense of the company and its investors, which is a heinous
crime. Albeit unlawful insider trading is a worldwide problem, a report by the IMF reports
that it is comparatively high in nations like India, China, Russia, and so forth, causing high
variations in the stock prices. Indian studies additionally have detailed that insider trading
activity is seen amongst companies belonging to the same business group before merger
announcements. As the Indian market does not have a level battleground or perfect
competition, unevenness of information causes an unfavourable impact on the market. In this
way, the adequacy of regulations and a proficient implementation mechanism to check and
stop insider trading turns out to be vital to avoid manipulators and fraudsters exploiting the
information imbalance. The reason behind the study has been to examine the regulatory
framework of the insider trading laws in India and settle on the strategy to enhance the
current infrastructure. With that motive, I have followed through the laws related with insider
trading in the U.S. which are reputed for their effectiveness.

Insider trading is a practice that is prevalent globally. Even the world's leaders regarding the
Securities regulations framework are dealing with this issue till date. There are numerous
instances of insider trading that are happening globally. In India additionally this practice is
happening from a long time. UK has made several changes to its current laws on insider
trading. The Indian Insider trading laws are likewise going through changes from the
different cases that have occurred since 1990s. The current Study plans to study the historical
improvement of Insider Trading Laws in India, UK, and the USA. The study means to
discover the impact of US insider exchanging laws on the laws of UK and India.

Taking into account that this study has broken down in extraordinary detail, the regulatory
and legislative system in U.S. and, has recognized the issues in the Indian regulatory
infrastructure and has additionally recommended certain cures, I trust that the study would
help the lawmakers to in any event consider the requirement for an effective implementation
system.

Hence, a recommended path forward for the expanded effectiveness of the Indian framework
would be to adopt certain legal and other changes to accomplish the critical objectives of the
Insider Regulations and to improve the implementation situation. Ideal objectives for a
securities market regulator shall be maintaining market confidence, promoting awareness
among public about the financial framework, give maximum assurance to investors and
decreasing financial crimes.

STATEMENT OF PROBLEM
Insider Trading is a global alarm and thus, to commonly understand the regulations of
different domains that contribute to challenging this issue is an unavoidable move.
Regardless, a few judicial and other organisations and pecuniary methods fighting insider
trading and despite the moderately heightened expenses of apprehending these actions, the
issue of insider trading continues to appear in several countries. Hence, it becomes significant
to address specific queries, for example, the motivation behind why insider trading is
authorized, regardless of whether it truly represents a danger and if it is unsafe to the
economy and its capability.

Another issue that emerges is whether the authorities have the ability and discretion to assess
entirely the enormous volumes of trading that is occurring in the market before any price
sensitive information is released. Concerning the insider trading laws pervasive in India, there
exists scores of voids in the SEBI Insider Trading Regulations that cover a stringent design to
restrict such practices and re-establish the rights and interests of the investors.

Insider trading is quite possibly the most supreme infringement in securities law since it is a
crime without a victim. In all the ruthlessness over the concept of insider trading, the
sanctions are yet to show any individual who has been agonized attributable to an insider
trade. Traditional insider trading is exploited just a single time, following which the
information opens to the world. In such cycle, the market is alarmed, and circumstances
quickly extract the story and uncover the ground of the act. Regardless, the status quo
regarding the casualty still experiences a similar destiny as the victim is nowhere in
existence.

LITERATURE REVIEW

This study is done to find the development of Insider Trading Regulations in India. A
comparison is also done between Insider Trading regulations in India, UK, and USA. A few
important cases have been discussed at length. An attempt is made to recognise the influence
of Insider Trading Laws of developed countries on the making of Insider Trading Regulations
in India.

According to the book named “Research Handbook on Insider Trading” by Stephen M.

Bainbridge1, the writer talks about the conceptual clarity and understanding of insider trading
in the United States. In this book, the author is maintaining the sequence proceeds to explain
the concept of tipping, misappropriation theory and Rule 14e3 of the Securities Act.

The book by Sandeep Parekh titled “Fraud, Manipulation and Insider Trading in the Indian
Securities Market”2 demands a basic coverage on the concept of the securities regulations
which surrounds a dominating area between the spheres of law and finance. The author
embraces crucial angles of the securities regulations including fraud, manipulation, and
insider trading. Under this book, the author dictates the key powers and authority of the
regulatory body, i.e., Securities and Exchange Board of India and the remedies provided by
SEBI towards the issue of investor grievances.

In the book titled “The Law and Finance of Corporate Insider Trading: Theory and Evidence”
by Hamid Arshadi and Thomas H. Eyssell,3 it contains a detailed assessment of the method
and mechanism by which the evaluation of the practice of insider trading calls for a thorough
combination of the both the fields of finance and law. In it, the author manages to show a
conjectural and practical inspection of insider trading by combining the fusion of the
regulations that govern the securities market with that of the financial theory. Finally, the

1
Stephen M. Bainbridge, Research Handbook on Insider Trading, Edwart Elgar Publishing Limited (2013)
2
Sandeep Parekh, Fraud, Manipulation and Insider Trading in the Indian Securities Market, Wolters Kluwer,
Second Edition, 2015
3
The Law and Finance of Corporate Insider Trading: Theory and Evidence, Hamid Arshadi and Thomas H.
Eyssell, Springer Science and Business Media, New York (1993)
book talks about an argumentation by the authors who declare that the insider trading
regulations and its concurrent enforcement mechanism have been in vain and recommend the
legalization and acceptance of insider trading.

As per the book titled “Securities Analysis and Portfolio Management” by M. Ranganatham
and R. Madhumathi,4 a chapter about the stock market regulation of insider trading deals with
the definition of insider trading which explains whether the information is price sensitive
information as well as unpublished information of the securities. This type of fraud in the
securities materially affects the price of the securities. It has been discussed that the insiders
are prohibited and restricted from dealing in the shares and securities of the company. It also
talks about the concept that the SEBI has given the model code of internal procedure and
conduct for implementation and compliance by companies towards the securities market.

According to the book titled “Insider Trading: Global Developments and Analysis” authored
by Paul U. Ali and Greg N. Gregoriou,5 the author covers the developments in the field of
mergers and acquisitions all over the world and has been globally convoyed by a resurrection
in insider trading area on a platform that was not noticed in the era of the 1980’s towards the
successful rise in the takeover sector. An analytical reading of the book convinces certain
recommendations to the following fundamental questions regarding the quantum of the
relative costs and advantages of insider trading as well as the reasoning for making insider
trading a crime. The author said that this book is a suitable reference piece to evaluate the
relevant zone of insider trading.

The article by the Press Trust of India in The Times of India on October 31 st, 2017,6 talks
regarding 19 entities settling their seven cases with the Securities and Exchange Board of
India relating to violation of insider trading norms and regulations. A total sum of upto Rs
30.48 lakh was paid by the entities towards their cases’ settlement to the SEBI.

The article in Investopedia on 5th January 2018,7 gives a brief idea about the concepts of
unlawful insider trading in the United States and it is carried out. It talks about how the

4
M. Ranganatham and R. Madhumathi, Securities Analysis and Portfolio Management, Dorling Kindersley
(India) Pvt. Ltd. (PEARSON), 2nd Edition, 2014, pg. 63
5
Paul U. Ali and Greg N. Gregoriou, Insider Trading: Global Developments and Analysis, CRC Press (2009)
6
Press Trust of India, SEBI settles Seven Insider Trading cases with 19 entities, The Times of India, Oct 31, 2017,
available at
https://timesofindia.indiatimes.com/business/india-business/sebi-settlesseven-insider-trading-cases-with-19-
entities/articleshow/61373587.cms
7
Elvis Picardo, CFA, How the SEC tracks Insider Trading, Investopedia, January 5, 2018, available
https://www.investopedia.com/articles/investing/021815/how-sec-tracksinsider-trading.asp
United States Securities Exchange Commission function to keep a track on the activities
relating to insider trading in the nation.

According to the article in The Indian Express by ENS Economic Bureau, Mumbai on 25 th
March,20178, the SEBI barred the Reliance Industries Ltd. to access the equity derivatives
market for a year and imposed a fine of Rs. 447.27 crores with an interest of 12% from 29 th
November 2007, thus making the total amount of fine upto Rs.1300 crores. According to the
SEBI, the Reliance Industries Ltd. had carried out a fraudulent scheme relating to the merger
of Reliance Petroleum with itself and made illegal gains through manipulative and fraudulent
patterns and strategies.

An article by Tanya Pahwa, Simone Reis, Pratibha Jain and Nishchal Joshipura on the
website Mondaq dated 2nd February, 20159, talks about the enforcement of the Securities and
Exchange Board of India (Prohibition of Insider Trading Regulations) 2015 on 15 th January
2015 replacing the old insider trading norms and regulations in India.

According to an article on 20th November,2017 by the Press Trust of India in The Times of
India10, the seven respective entities settled their cases with the Securities and Exchange
Board of India by paying the settlement charges and penalties towards the allegations of
insider trading regulations by the entities. This settlement done by the entities prevented
certain adjudication proceedings to be initiated against the respective entities. In this regard,
the settlement charges that were borne by the respective seven entities were upto Rs.50 lakh.

According to an article on 18th July, 2013 by the Press Trust of India in The Hindu 11, former
Goldman Sachs Director Rajat Gupta, who is convicted of Insider Trading, was ordered to

8
ENS Economic Bureau, Mumbai, ‘Insider Trading’ Case: SEBI bars Reliance Industries Ltd from equity
derivatives market for a year, The Indian Express, March 25, 2017, available
http://indianexpress.com/article/business/companies/sebi -bars-ril-fromequity-derivatives-market-for-a-year-
4584307/
9
Tanya Pahwa, Simone Reis, Pratibha Jain and Nishchal Joshipura, Nishith Desai Associates, India: SEBI
Tightens Rope: New Insider Trading Norms Introduced, Mondaq, Feb 2, 2015, available
http://www.mondaq.com/india/x/371002/Securities/SEBI+Tightens+Rope+N
ew+Insider+Trading+Norms+Introduced
10
Press Trust of India, Seven Entities Settle Insider Trading Case with SEBI, The Times of India, Nov 20, 2017,
available at
https://timesofindia.indiatimes.com/business/india-business/seven-entitiessettle-insider-trading-case-with-
sebi/articleshow/61726730.cms

11
Press Trust of India, Rajat Gupta fined $13.9 million for insider trading, The Hindu, July 18, 2013 available at
https://www.thehindu.com/news/international/world/Rajat-Gupta-fined-13.9-million-for-insider-
trading/article12010778.ece#
pay $13.9 million as a civil penalty and was permanently barred from acting as an officer or
director of a public company for spilling boardroom secrets.

REASEARCH METHODOLOGY
RESEARCH OBJECTIVE:
The motive behind this research paper is to analyse the regulatory framework of the insider
trading legislations in India and find the changes that can be made to these laws. Hence, the
insider trading laws in the U.K. & U.S. have been analysed as the laws of both these
countries are reputed for their efficacy.

This research paper intends to the study the following:

1. The concept of Insider Trading

2. Development of Insider Trading Laws in India, U.K. & U.S.A.
3. The influence of US & UK Insider trading Laws on Insider Trading regulations in
India.
4. Comparison of Insider Trading laws in India, UK, and USA.

RESEARCH QUESTIONS
 Whether the Insider Trading Laws in India, U.S. and U.K. are efficient and effective
and how did the historical evolution of the laws of these countries take place?
 Whether there are any relevant changes that can be done to the currently implemented
Indian legal framework regarding the fundamentals of Insider Trading Regulations?
 How can the U.S. laws on Insider Trading be used for setting up fundamentals of
Insider Trading Regulations in India and how it can be implemented?

HYPOTHESIS
 Despite having borrowed a lot from the Insider Trading regulations in the United
Kingdom and the United States of America, India still does not have an effective and
efficient legal system regarding Insider Trading and it is still prevalent at a large scale
in the country.
RESEARCH METHOD
This research is based on the Doctrinal Method of Research and the method in which the
study is carried out is descriptive study method. The methodology strategy is case-based
research. This method is used to describe the types of fraudulent cases which have happened
in securities market. As it is a descriptive study in nature, so it will go through theoretical
data collection and its analysis.

This study is largely based on secondary data that has been gathered from various
newspapers, journals, magazines, and websites for this purpose to know insights about the
securities market and the role of regulator on securities market. There are places where
primary data is also used such as Acts, Statutes which help in fighting violations in securities
market.

RELEVANCE OF STUDY

Over the last few years, India has been a spectator to huge price fluctuation in the shares of
public companies during the rise and fall of mergers or acquisition and banned trading at the
center of unpublished price sensitive information, which has huge apprehension to the Indian
securities market.

Similarly, the repetition of the uncontrollable insider trading has raised a concern that if the
guardians who manage and run the affairs of the business, for the advantage of the
shareholders, yield unmerited action at the cost of the company and its shareholders, then it is
well understood that this practice is an offensive wrongdoing.

Despite the fact that illegal Insider Trading is a global issue, a study by the IMF reports that it
is relatively high in countries such as India, China, Russia, etc., resulting in high fluctuation
in share prices. Indian studies also have reported that insider trading activity is observed
amongst companies belonging to the same business group prior to merger announcements.
The significance of this study is also inclined to hold the multiple orders and treaties binded
by the numerous countries to eradicate this practice from its roots.

CURRENT SCENARIO
Insider trading sustained no reduction until 1970, which in whole would explicitly point
towards the fact that it was clever for around a hundred and twenty-five years in a country
like India. Accordingly, the seriousness of this crime witnessed a spectacular boost that
compelled a rigid enforcement of law. Therefore, the Securities and Exchange Board of India
imposed the 1992 Regulations in context to Insider Trading.

The U.S. Securities Exchange Commission has, in recent years, displayed an encouraging rise
to track insider trading enforcement actions with extensive international aspect. A substantial
figure of the SEC’s insider trading matters have occupied significant foreign conduct and as a
result a large number of foreign defendants.

The United Kingdom is one of the prominent financial centers of the world. In
acknowledgement to the insignificance in efficient impeaching the offenders, the Parliament
ratified the Financial Services and Markets Act, 2000. The FSMA, 2000 recognized a
regulatory body, the Financial Services Authority, together with which it strengthened and
refurbished the UK’s financial services law. The FSMA reinforced the law against insider
trading by initiating a new crime of market abuse and by vesting the Financial Services
Authority with the capacity to take action to check market exploitation and to indict an
unprincipled person for insider dealing. Consequently, the UK’s insider trading law has both
a civil and a criminal piece in a probable insider trading case. The Criminal Justice Act, 1993
is a UK Act of the Parliament that sets out unique and innovative rules regarding criminal
activities which include drug trafficking, proceeds and profits of crime, financing of terrorism
and insider trading. This light hope to enlighten the usefulness of laws against insider trading.
 CHAPTER – 1: INTRODUCTION
India's strong position as a worldwide economic force necessitates a stringent regulatory
framework for its securities market in order to increase domestic and international investors'
confidence that their investments are secure in an efficient and transparent securities market.
Major price changes in the shares of public firms have been observed in recent years during
periods of mergers and unlawful trading on the basis of undisclosed price sensitive
information, causing tremendous anxiety in the Indian securities market. Companies that
work for the benefit of their shareholders obtain an unfair advantage at the expense of their
stakeholders and shareholders, which is a heinous crime.

Since 1991, India has been one of the world's major growing economies, with enormous
economic growth during the last 24 years. The transfer of resources from those with
investable resources to those who have a productive need for them is a major concern and
importance of the modern market that led to the development of economics. The securities
market helps investors realise their objectives. The securities market offers a diverse set of
options for allocating savings to investments over a broad spectrum of securities. The purpose
of a security market is to attract new capital into the economy and to transform real assets
into financial assets. It also assists investors in making short or long-term investments with
the goal of making a profit.
"A negotiable or non-negotiable investment or financing instrument that can be sold and
bought on the financial market, is termed as a security" according to Black's Law Dictionary.
Bonds, stocks, debentures notes, and options are all part of the package." 12 A security is a
proof of ownership or debt that has been given a monetary value and may be sold. A security
indicates an investment as an owner, creditor, or right to ownership that a person wants to
profit from in the future for the holder.13

The concept Insider Trading is only depend upon the person who is known as ‘Insider’ and an
insider can be a “Corporate Insider”, also referred to as “Classical Insider”, and is typically a
director or an official of a company. Other category of Insider includes “constructive
insiders” who are acquainted with the corporate information undoubtedly due to their
honourability towards the company. For example, an underwriter, an accountant or a lawyer
who is working for a company and the company’s inside information is revealed to such
person are regarded as the constructive insiders. This implies that if any corporate or
constructive insider of a company trades in the company’s securities, such insider will be
regarded as carrying on insider trading.

The concept of insider trading is a statement that is subject to several definitions denotations
and it incorporates both legal and forbidden activity. However, in ordinary words, insider
trading is purely referred to as a misconduct wherein the dealings of the corporation’s
securities is assumed by persons who by virtue of their work gain admission to the otherwise
non-public information that can be critical for undertaking investment decisions.

Insider trading is based on the principle of ‘quid pro quo’ denoting that a return on such
information is an important requisite to construct the offence of insider trading. Insider
trading violations may also include ‘tipping’ such information, securities trading by the
person ‘tipped’, and securities trading by those who misappropriate such information.14

Tipping is defined as “the act of providing material non-public information about a publicly-
traded company to a person who is not authorized to have the information. This is an illegal
12
The Law Dictionary, What is SECURITIES? available at https://thelawdictionary.org/securities/
13
The Street, What are Securities (in Finance)? available at
https://www.thestreet.com/topic/47042/securities.html
14
Mark J. Astarita, Insider Trading – The Legal and Illegal, available at http://www.seclaw.com/insidertrading/
act, as it involves leading to ill-gotten gains for the tippee(s), or those who receive the
information, and in most cases the tipper because of arrangements to share in trading profits.15

The Securities and Exchange Board of India has divided the term ‘insider trading’ into three
parts. Under Section 2(1)(g) of the SEBI (Prohibition of Insider Trading) Regulations, 2015,
the term ‘insider’ is defined as – “any person who is:

i. a connected person; or

ii. in possession of or having access to unpublished price sensitive information.”16

Section 2(1)(d) of the SEBI (Prohibition of Insider Trading) Regulations, 2015 gives an
impression about the term

‘connected person’ which is defined as – “any person who is or has during the six months
prior to the concerned act been associated with a company, directly or indirectly, in any
capacity including by reason of frequent communication with its officers or by being in any
contractual, fiduciary or employment relationship or by being a director, officer or an
employee of the company or holds any position including a professional or business
relationship between himself and the company whether temporary or permanent, that allows
such person, directly or indirectly, access to unpublished price sensitive information or is
reasonably expected to allow such access.”17

Section 2(1)(n) of the SEBI (Prohibition of Insider Trading) Regulations, 2015 gives an
outline on the concept of Unpublished Price Sensitive Information. This is defined as –
“any information, relating to a company or its securities, directly or indirectly, that is not
generally available which upon becoming generally available, is likely to materially affect the
price of the securities and shall, ordinarily including but not restricted to, information relating
to the following: –

i. financial results;

ii. dividends;

15
Investopedia, What is Tipping? available at https://www.investopedia.com/terms/t/tipping.asp
16
Section 2(1)(g) of the SEBI (Prohibition of Insider Trading) Regulations, 2015.
17
Section 2(1)(d) of the SEBI (Prohibition of Insider Trading) Regulations, 2015.
 iii. change in capital structure;

iv. mergers, de-mergers, acquisitions, delistings, disposals and expansion of business and
such other transactions;
v. changes in key managerial personnel; and

vi. material events in accordance with the listing agreement.”18

Because illegal insider trading is a global concern, the IMF found that it is relatively
prevalent in countries like India, China, Russia, and others, resulting in substantial share price
volatility. Insider trading activity has also been documented among companies belonging to
the same corporate group prior to merger announcements, according to Indian studies.

Indian stock market does not have an efficient playing field or perfect competition,
irregularity or insufficiency of information causes an adverse impact on the market.
Therefore, the adequacy of regulations and an efficient enforcement mechanism to curb
insider trading becomes very important to avoid manipulators and fraudsters taking
advantage of the information insufficiency. The idea of this project is to analyze and witness
the market of other countries to implement different regulation which will help in restricting
insider trading or illegal gain in companies and decide on the strategy to improve upon the
existing framework. With that objective, the author has viewed the laws relating to insider
trading in the U.S. which is reputed for their efficacy.

Insider trading is a topic that has been debated worldwide and there has been a lot of research
on this subject that has been done especially in the USA. The USA is considered to be the
pioneer of the Insider Trading Regulation all over the World. Most of the authors are of the
opinion that the USA has been the founding father of the Insider trading regulations and some
also point out why insider trading regulations of USA are admired all over the world. Some
authors are of the opinion that the USA insider trading regulations are far from ideal and that
there are still some loop holes in the law. There are some authors who point out the difference
between the United States Law on Insider Trading and other countries like UK and India.

1.1 NEED FOR STRINGENT RULES

18
Section 2(1)(n) of the SEBI (Prohibition of Insider Trading) Regulations, 2015.
The rise in transactions involving derivatives, shares, bonds, and other financial instruments
is due to the expansion of the commercial domain in the global market. Insider trading is one
type of such trade that has gotten a lot of attention in recent years. Insider trading, like every
coin, has two sides: one that is legal and one that is unlawful.

When company directors, officials, workers, insiders, and large shareholders buy and sell
stocks in their own companies, this is known as legal form relating to insider trading. This
technique of buying and selling stocks is legal as long as they declare the transaction to the
regulatory authority and the transaction is based on publicly available information. When a
trade is made with the advantaged possession of company information that is not available or
at the disposal of the participants, it is referred to as illegal insider trading.19

In a transparent market, information is disseminated in such a way that all market players
receive it at roughly the same time. In such a case, it is perfectly acceptable and obvious for
one investor to gain an advantage over the other purely through the requisite experience in
assessing and comprehending the available data. As a result, trading should take place on a
level playing field, with knowledge gaps tilting the field towards one participant and away
from the other.

Competing against corporate insiders with superior knowledge increases the risk of another
loss. Ordinary traders will be hesitant to stand up to insiders, and insider trading will
undermine the confidence in the securities market and disturb investment, resulting in an
increase in the price a firm must pay to raise capital and limiting both a firm's and society's
economic advancement.

1.2 EVOLUTION OF INSIDER TRADING

19
U.S. Securities Exchange Commission, Insider Trading Fast Answers, available at https://www.sec.gov/fast-
answers/answersinsiderhtm.html
The practice of insider trading came into existence ever since the very concept of trading of
securities of a company became prevalent among the investors worldwide and has now
become a formidable challenge for investors all over the world.20

The birth of the United States investment securities marked its traces way back in the year
1790. In the year 1789, upon the development of the U.S. Department of the Treasury,
William Duer was appointed Assistant Secretary, under the first Secretary of Treasury,
Alexander Hamilton.21 William Duer had the distinction of being the first individual to use
knowledge gained from his official position to become entangled in speculative trading, in
effect, he was the first insider trader. The market first crashed in 1792, soon after the nation's
birth, thanks to a merchant prince named William Duer. He presumed that he would manage
to execute his insider connections to Alexander Hamilton to craft a mass killing by gambling
in the newly issued debt of the infant government.22

The New York City economy crashed along with him, and Duer was nearly drawn by an
enraged mob that chased him through the streets. He further died in the debtors' prison a few
years later.23

On May 17, 1792, the Buttonwoods Agreement set the stage for the creation of the New York
Stock Exchange. Consequently, the Buttonwoods Agreement instituted a history of self-
regulations in the U.S. Securities Market.

The history of insider trading in India relates back to the 1940’s with the formulation of
government committees such as the Thomas Committee of 1948, which evaluated inter alia,
the regulations in the U.S. on short swing profits under Section 16 of the Securities Exchange
Act of 1934.24

20
Comparative Study on the Insider Trading Regulations prevailing in the different countries e.g. USA & UK,
available at https://wircicai.org/downloads/BFSIcM-Comparative-study-of-the-Insider-regulation.pdf
21
Robert E. Wright and David J. Cowen, ‘Financial Founding Fathers – The Men Who Made America Rich’,
University of Chicago Press, 2004
22
Steve Fraser, The Genealogy of Wall Street Crime, Los Angeles Times, January 30, 2005, available at
http://articles.latimes.com/2005/jan/30/opinion/oe-fraser30
23
Supra note 11
24
Himanshu Chahar and Sumeer Sodhi, Insider Trading, Legal Service India, available at
http://www.legalserviceindia.com/article/l199-InsiderTrading.html
1.3 LAWS PREVAILING IN INDIA, U.K. AND U.S.A.

The current scenario of the laws prevailing in India, U.K. and U.S.A. in context to insider
trading is given in the table below:

Sr. Issue India U.S.A. UK

No

1. Governing Laws Securities and 1. Securities Act, Financial Services

Exchange 1933. and
Board of India 2. Securities Markets
Act, 1992. Exchange Act, 2000.
Act, 1934.
2. Sanctions Both a Civil and Both a Civil and Both a
a a Civil and a
Criminal Offence. Criminal Offence. Criminal Offence.
3. Regulatory Securities and Securities Financial Services
Authority Exchange Board Exchange Authority.
of Commission.
India.
4. Punishment Fine upto 20 years Seven years
Rs.25 crores or imprisonment and a imprisonme nt and
three times the fine of 5 million US no limit fine.
profit made out Dollars.
of
Insider
Trading.

As per the tabular data shown above, it is understood that in India, the law that governs the
principle of insider trading is the Securities and Exchange Board of India Act, 1992 that is
regulated by the Securities and Exchange Board of India. The offence under this concept is
either a civil offence or a criminal offence and the offender is punished with a fine of up to
Rs.25 crores or three times the profit made out of insider trading.
In U.S.A., the regulatory body, i.e., the Securities Exchange Commission has made out the
Securities Act, 1933 and the Securities Exchange Act, 1934 to govern the principles of
insider trading in the country. The punishment for such offence is an imprisonment of up to
20 years and a fine of 5 million Dollars.

According to the above data, the principles of Insider Trading in the UK are regulated by the
Financial Services Authority under the Financial Services and Markets Act, 2000. The
regulatory body in the UK has mentioned the offence under such trading as a civil offence as
well as a criminal offence. The punishment for such offence is an imprisonment of up to 7
years with no limit on the fine.

CHAPTER – 2: INSIDER TRADING LAWS PREVAILING IN INDIA

The Securities and Exchange Board of India law was passed by the Indian Parliament in 1992
with the goal of preserving the interests of investors in securities and promoting the
development and regulation of the securities market. Section 11(2)(g) of the Securities and
Exchange Board of India Act, 1992 empowered the Securities and Exchange Board of India
to instigate measures prohibiting insider trading in securities. 25 The Securities and Exchange
Board of India (Prohibition of Insider Trading) Regulations, 1992 were enacted in accordance
with this. An insider who has unpublished price sensitive knowledge is prohibited from
dealing, communicating, or counselling in securities under Regulation 3 of the Insider
Regulations.26 Since its creation, the Securities and Exchange Board of India has taken
various steps to tighten the enforcement of the Insider Regulations, but it has been difficult
for the S&E Board of India to persuade judges of the complexities of insider trading cases.

2.1 HISTORY OF SECURITIES MARKET IN INDIA

From the beginning of the securities market in India till the First World War (1875-1919),
India's securities market has had a long and illustrious history. It is the stage in which the
25
Section 11(2)(g) of the Securities and Exchange Board of India Act, 1992, available at
https://www.sebi.gov.in/sebi_data/attachdocs/1456380272563.pdf
26
Regulation 3 of the SEBI (Prohibition of Insider Trading) Regulations, 2015, available at
https://www.sebi.gov.in/legal/regulations/jan-2015/sebiprohibition-of-insider-trading-regulations-2015-
issued-on-15-jan-2015_28884.html
securities market's first development is revealed. The second phase began in 1920, when
India was still under British dominion and the industrial sector had grown throughout a huge
portion of the world. This period was limited till 1947, when India gained independence. The
third phase occurred from 1947 and 1990, during the implementation of the New Economic
Policy, when the country experienced significant growth in the securities market. The last and
last phase began in 1991, during which time the policy in co-operation was implemented.

2.1.1 INCEPTION PHASE

In India, the securities market has been around for about 200 years. The Indian stock
exchange is one of Asia's oldest. There were some signs of a stock market in the country in
the early 18th century. The trading of securities was not well understood until the 19th
century, when the East India Company became a significant player in the loan securities
market. The trading of shares and stocks in banks began in India in the 1830s, primarily in
Bombay (now called as Mumbai). Between 1840 and 1850, there were only about six brokers
on the market who were known by banks and merchants. In the year 1850, the first joint stock
corporation was formed.27

The number of brokers on the stock exchange was expanded to 60 in 1860. Furthermore, the
commencement of India's Share Mania triggered the American Civil War, putting an end to
cotton exports from the United States to the European Union. This led to a tremendous
increase in the number of brokers, which now stands at 250. The Bombay Stock Exchange
was formally established in 1875, following the formation of an informal group of
stockbrokers known as The Native Share and Stockbrokers Association. The parcel of land
on which the BSE building now sits (at the intersection of Dalal Street, Bombay Samachar
Marg, and Hammam Street in Downtown Mumbai) was purchased in 1928, and a structure
was built and occupied in 1930. Premchand Roychand, a prominent stockbroker at the time,
was instrumental in establishing traditions, conventions, and processes for stock trading at the
Bombay Stock Exchange, which are still followed today.28

Several stockbroking firms in Mumbai were run by families and were named after the
families' heads. The following is a list of some of the exchange's founding members who are
still active in their respective businesses:

27
Sree Rama Rao, History of the Indian Capital Market, Citeman, September 6, 2008, available at
https://www.citeman.com/3730-history-of-the-indiancapital-market.html
28
Shodhganga, History and Evolution of Stock Exchanges in India, History of Indian stock market, pg. 13,
available at http://shodhganga.inflibnet.ac.in/bitstream/10603/2027/7/07_chapter%202.pd f
 • D.S. Prabhudas & Company (now known as DSP, and a joint venture partner with
Merrill Lynch).
• Jamnadas Morarjee (now known as JM).

• Champaklal Devidas (now called Cifco Finance).

• Brijmohan Laxminarayan.

Many other stock exchanges arose in the same way as the BSE. The concept originated in
Ahmedabad, which has grown in importance in this regard. Cotton was a frequent and major
enterprise, and it served as the foundation for the growth of security trading between Bombay
and Ahmedabad. Due to the start of textile factories in the state in 1894, the need of having a
stock market was recognised. Following that, in the late nineteenth century, from 1880 to
1900, there was a boom in the tea industry in Calcutta, followed by a boom in the coal sector
from 1904 to 1908. The trading of jute, tea, and coal in Calcutta exploded in the 19th century,
prompting the founding of the Calcutta Stock Exchange Association by the city's prominent
brokers.

The Tata Iron and Steel Company was founded in 1907, paving the way for the country's
economic development. The number of Indian industries rose during the First World War.
Cotton, jute textiles, sugar, steel, paper, and other industries benefited from their dominance
and supplied raw materials to the established markets of the European Union.

2.1.2 THE SACHAR COMMITTEE (1979)

In June 1977, the High-Powered Expert Committee on Companies and Monopolies, as well
as the Restrictive Trade Practices Act (MRTP) (Sachar Committee) was established to study
the Companies Act of 1956 and the MRTP Act of 1969.29 The Sachar Committee issued their
report in 1979. The Committee issued two recommendations: one, complete disclosure of
transactions by people who have made price sensitive information, and the other, restriction
of transactions by such persons for a defined period unless extraordinary circumstances exist.
A company director, statutory auditor, accountant, tax and management consultant or advisor,

29
The Institute of Company Secretaries of India, “Prohibition of Insider Law and Practice ”, New Delhi, (2007),
p-9
and legal advisor, among others, could be involved. They were not allowed to buy or sell
shares before or after the end of the accounting year unless the Board gave them permission.

All public firms are required to keep a record of all dealings in the company's shares by the
following individuals, including their spouses and dependent children, as well as those who
are employed full-time by the company and earn a monthly income of three thousand rupees
or more.30 Sections 307 and 308 of the Companies Act of 1956 were also amended by this
committee. It includes regulations prohibiting and restricting certain interactions by insiders
and their family, as well as fines for those who misuse corporate information and remedies
for those who can demonstrate that they suffered loss as a result of such misuse. The
committee also recommended that an insider be held liable to the firm for profits obtained
through insider trading.

2.1.3 THE PATEL COMMITTEE (1987)

In May 1984, the Indian government formed a High-Powered Committee (Patel Committee)
to conduct a complete evaluation of the operation of stock exchanges and give suggestions.
The committee's final report expressed grave concern about the lack of particular regulation
in India to prevent the misuse of insider knowledge and advocated harsh penalties for insider
trading. Insider trading is common in the country's stock exchanges, according to the
research, and is one of the main causes of excessive speculative activity. 31 Even lawyers'
offices, auditors' offices, financial consultants' offices, and financial organisations with secret
price sensitive information have been accused of engaging in such behaviour. Most stock
brokers participate in speculative trading in their accounts while conducting transactions for
their insider clients, which is harmful. The stock exchange should take immediate action to
address this threat. Any news or events impacting the companies that may be price-sensitive
should be quickly communicated to the stock exchanges as soon as they are placed on the
board's agenda and circulated to the directors. To develop a healthy and transparent stock
exchange practise and maintain investor confidence, such trading should be regulated by
legislation.

30
Sachar Committee Recommendations, No-18.104 (iv)
31
Patel Committee Recommendations, No-7.26
The Securities Contracts (Regulation) Act of 1956 should also be changed to make stock
exchanges free of manipulations such as curb trading, insider trading, and other unwanted
practises. Individuals who do not comply with the regulations should face a financial penalty
of Rs. 1 lac or five years in prison, or both, while bodies corporate and trusts should face a
penalty of Rs. 5 lacs. Furthermore, in a departure from the Sachar Committee's
recommendations, it was proposed that anyone who profited from inside information be
obliged by law to surrender to the stock exchanges the profit they made or the amount
comparable to the losses they avoided.

2.2 PRE-INDEPENDENCE PERIOD OF INDIA

The city of Madras (now known as Chennai) faced the experience of having a stock market
operating in the city in the year 1920. In the year 1920, the Madras Stock Exchange was
established, with an estimated 100 members. The state's boom came to an end within a brief
period of time, and the number of members was reduced from 100 to only three.
The Madras Stock Exchange ceased to exist as a result of this.

When there was a tremendous and massive expansion in the number of textile mills and many
plantation companies in the southern region of India in the year 1935, the stock market was
restarted in Madras as the Madras Stock Exchange Associations Pvt. Ltd. in 1937. The name
of the stock exchange was changed to Madras Stock Exchange Limited in the latter. The
Lahore Stock Exchange was founded in 1934, and it eventually amalgamated with the Punjab
Stock Exchange Limited, which was founded in Ludhiana in 1936.

In addition, the Uttar Pradesh Stock Exchange and the Nagpur Stock Exchange were created
in 1940, and the Hyderabad Stock Exchange Limited was established in 1944. The two stock
exchanges founded in Delhi, namely the Delhi Stock and Share Brokers Association Limited
and the Delhi Stock and Share Exchange Limited, were floated during WWII. The stock was
not well structured and developed during British rule in the country, and as a result, the
British government was uninterested in the country's economic growth. Many overseas
corporations grew reliant on the London stock market for funds rather than the Indian stock
market as a result of the stock market's demise.
2.3 POST-INDEPENDENCE DEVELOPMENT OF THE INDIAN SECURITIES
MARKET

Following the partition of Pakistan in 1947, the Lahore Stock Exchange was relocated to
Delhi, where it later merged with the Delhi Stock Exchange. The stock market remained
limited and unable to expand even after the country's independence.

The Securities Contracts (Regulation) Act, 1956, was the first act to regulate and recognise
the exchange. There were several recognised exchanges, including Mumbai, Ahmedabad,
Calcutta, Madras, Delhi, Hyderabad, and Indore. The registration of the Bangalore Stock
Exchange was completed in 1957, and the exchange was recognised in the southern part of
India in 1963. By that time, only few stock exchanges were recognized by the Central
Government.32

Thereafter, in the year 1980’s, many more stock exchanges were established which are listed
under:

• Uttar Pradesh Stock Exchange (1982) at Kanpur.

• Pune Stock Exchange Limited (1982) at Pune,

Maharashtra.

• Ludhiana Stock Exchange Limited (1983) at Ludhiana, Punjab.

• Guwahati Stock Exchange Limited (1984) at Guwahati, Assam.
• Kannara Stock Exchange Limited (1985) at Mangalore, Karnataka.

• Magadha Stock Exchange Association (1986) at Bihar, Patna.

• Jaipur Stock Exchange Limited (1989) at Jaipur, Rajasthan.

• Bhubaneswar Stock Exchange Limited (1989) at Bhubaneswar, Orissa.
• Saurashtra Kutch Stock Exchange Limited (1989) at Rajkot, Gujarat.
• Vadodara Stock Exchange Limited (1990) at Baroda, Gujarat.
32
Ajay Shah and Susan Thomas, The Evolution of the Securities Markets in India in the 1990’s, Indian Council
for Research on International Economic Relations, December 2002, available at
https://pdfs.semanticscholar.org/fca6/ad51604d55b172f4cf6ab99e1fa9421705fb.pdf
 • Coimbatore Stock Exchange Limited (1990) at Coimbatore, Tamil Nadu.
• Meerut Stock Exchange Limited (1990) at Meerut, U.P.
Thus, until 1990, there were 21 recognised stock exchanges, resulting in a significant increase
in the number of registered firms and their capital. Furthermore, following 1985, the stock
exchange grew at an incredible rate as a result of favourable policies for the securities
markets.

2.4 IMPACT OF NEW ECONOMIC POLICY ON THE INDIAN SECURITES

MARKET

Following independence, the securities market continued to grow rapidly. Many stock
exchanges grew after 1985, and the Indian market experienced significant growth. During
this time, Benami transactions became popular, resulting in an increase in securities fraud and
infractions.

The Securities and Exchange Board of India Act of 1992 and the SEBI (Prohibition of Insider
Trading) Regulations, 1992 were enacted in response to an increase in securities market
frauds and violations, which harmed small participants in the market.

2.5 SECURITIES AND EXCHANGE BOARD OF INDIA

The Controller of Capital Issues Act of 1947 was designed to create a regulatory agency to
manage the securities market and ensure that it grows in a methodical and stable manner in
India. The Controller of Capital Issues was the name of this regulatory organisation.

Following that, in 1956, the government passed the Companies Act, which included
restrictions relating to insider trading. The restrictions were designed to prevent market
abuses such as insider trading by requiring disclosures regarding corporate directors and their
stock ownership. Sections 307 and 308 of the Companies Act of 1956 imposed these
disclosure requirements.
The Controller of Capital Issues Act was repealed in the 1980s when it failed to achieve its
goals. As a result, the Securities and Exchange Board of India was given legislative authority
to supervise the securities market in India in order to ensure its smooth operation. Finally, in
1988, the SEBI Act was enacted, and on January 30, 1992, it was legalised through an
Ordinance.

The SEBI Act of 1992 was enacted to protect the interests of investors in securities, to
develop the securities market, to regulate the securities market, and to deal with problems
related to and incidental to the securities market.
Schedule B of the SEBI (Prohibition of Insider Trading) Regulations, 2015 has the following
Minimum Standards for Code of Conduct to regulate, monitor, and report insider trading:

“SCHEDULE B

Minimum Standards for Code of Conduct to Regulate, Monitor and Report Trading by
Insiders

1. The compliance officer shall report to the board of directors, in particular, to the Chairman
of the Audit Committee, if one exists, or to the Chairman of the board of directors at such
intervals as the board of directors may specify.

2. All information will be managed on a need-to-know basis within the organisation, and no
unpublished price sensitive information will be shared with anyone unless it is for the
insider's legitimate reasons, execution of duties, or fulfilment of legal obligations. The code
of conduct must include guidelines for proper Chinese Walls procedures as well as
procedures for allowing any designated person to "cross the wall."

3. An internal code of conduct for dealing in securities governs employees and linked persons
identified in the organisation based on their functional position ("designated persons"). On
the basis of their role and function in the organisation, the board of directors, in cooperation
with the compliance officer, shall determine the designated persons to be covered by such
code. In addition to seniority and professional designation, due consideration should be given
to the access that such a role and function would provide to unpublished price sensitive
information.
4. Trades may be executed by designated persons as long as they follow these rules. A
notional trading window will be utilised to monitor trading by the designated persons in order
to achieve this goal. When the compliance officer believes that a designated person or class
of designated individuals might reasonably be expected to have access to unpublished price
sensitive information, the trading window will be closed. Such a closure will be implemented
in connection to the stocks in question that have unpublished price sensitive information.
When the trading window closes, designated persons and their immediate relatives are not
permitted to deal in securities.

5. The compliance officer will determine when the trading window will reopen, taking into
account various factors such as the unpublished price sensitive information in question
becoming generally available and capable of assimilation by the market, which in any case
will not be earlier than 48 hours after the information becomes generally available. The
trading window will also apply to anyone assisting or advising the company who has a
contractual or fiduciary relationship with the corporation, such as auditors, accounting firms,
legal firms, analysts, consultants, and so on.

6. Trading by designated people is subject to pre-clearance by the compliance officer when

the trading window is open, if the value of the planned trades exceeds such thresholds as the
board of directors may specify. Even though the trading window is open, no designated
person may seek for pre-clearance of any proposed trade if the designated person has
unpublished price sensitive information.

7. The compliance officer shall keep a "restricted list" of such securities on a secret basis,
which will be used to approve or deny applications for pre-clearance of trades.

8. Before allowing any trades, the compliance officer has the right to request statements that
the applicant for pre-clearance does not have any unpublished price sensitive information. He
must also consider whether any such declaration can be rendered erroneous in a reasonable
amount of time.

9. The code of conduct shall define any reasonable timeframe, not to exceed seven trading
days, during which pre-cleared transactions must be completed by the designated person,
failing which new pre-clearance will be required for the trades to be conducted.

10. A designated person who is entitled to trade shall not execute a counter transaction within
the term specified in the code of conduct, which shall not be less than six months. The
compliance officer may be able to issue a waiver of the restriction's stringent application for
reasons that must be documented in writing, as long as the waiver does not violate the
regulations. If a contra transaction is conducted unintentionally or otherwise in violation of
such a prohibition, the proceeds from the trade must be disgorged and remitted to the Board
for credit to the Investor Protection and Education Fund established by the Act.

11. The code of conduct shall specify the formats that the board of directors deems necessary
for submitting preclearance applications, reporting trades executed, reporting decisions not to
trade after obtaining preclearance, recording reasons for such decisions, and reporting the
level of securities holdings at such intervals as may be determined as necessary to monitor
compliance with these regulations.

12. Without prejudice to the Board's powers under the Act, the code of conduct shall specify
the sanctions and disciplinary actions that may be imposed by the persons required to
formulate a code of conduct under sub-regulation (1) and sub-regulation (2) of regulation 9
for violations of the code of conduct, including wage freezes, suspensions, and the like.

13. The code of conduct must state that if the people required to create a code of conduct
under sub-regulations (1) and (2) of regulation 9 witness a breach of these regulations, they
must immediately notify the Board."33

2.6 VARIOUS SCAMS AND CASE-LAWS IN INDIA

A succession of scams, both minor and large, have rocked India, involving large sums of
money. Top executives of huge nationalised banks, international banks and financial
institutions, brokers, bureaucrats, and politicians have all been caught up in the schemes. The
money market and the stock market have both been thrown into disarray.

2.6.1 THE MUNDHRA SCANDAL (1958)

The Mundhra Controversy, as it is called, was India's first significant scandal after
independence. Under pressure from the government, the government-owned Life Insurance
Corporation of India (LIC) bypassed its investment committee and purchased Rs.124 lakh
worth of shares in six companies held by Calcutta-based industrialist Haridas Mundhra in
33
Schedule B of the SEBI (Prohibition of Insider Trading) Regulations, 2015, pg. 19, available at
https://www.sebi.gov.in/legal/regulations/jan-2015/sebiprohibition-of-insider-trading-regulations-2015-
issued-on-15-jan-2015_28884.html
order to bail him out. Only after the deal was completed was the committee notified of this
decision.

The government formed a committee led by Justice M.C. Chagla, a retired Chief Justice of
the Bombay High Court, to investigate the matter. He initiated a quick and transparent public
investigation that resulted in the guilty being sentenced to two years in prison. Unlike the
Joint Parliamentary Committee hearing into the 1992 securities fraud, Justice Chagla
determined that a public inquiry is "a very crucial protection for guaranteeing that the
conclusion will be fair and unbiased." The public has a right to know what evidence was used
to make the decision.'

One of the LIC's major flaws was that they promised Haridas Mundhra that the shares would
be purchased at the Calcutta Stock Exchange's closing price on June 24. This was revealed to
Parliament by then-Finance Minister T.T. Krishnamachari, further complicating the situation
because the LIC paid Mundhra more than his quoted price for the three scrips concerned.

As a result of his role in the incident, Mundhra was sentenced to 22 years in prison and
compelled to pay a fine of Rs.6,65,492 to the British India Corporation Limited, Kanpur.34

2.6.2 THE HARSHAD MEHTA SCAM (1992)

Harshad Shantilal Mehta was an Indian stockbroker who snatched features for the infamous
1992 BSE security heist.

Mehta was born into a lower-middle-class Gujarati Jain family and spent his early years in
Mumbai, where his father worked part-time as a businessman. After specialists advised
Mehta's father to relocate to a drier area for his health, the family relocated to Raipur,
Chhattisgarh.

Mehta and his associates were accused of orchestrating the rise of the Bombay Stock
Exchange (BSE) in 1992. They took advantage of the numerous caveats in the saving money
framework and emptied assets in the midst of bank swaps. As a result, they purchased
massive amounts of offers at a premium across a variety of industrial verticals, causing the
Sensex to skyrocket. In any event, it was not going to happen. The implementation of Mehta's
normal methods prompted banks to want their money back, forcing the Sensex to plummet

34
Indian Kanoon, LIC v. Hari Das Mundhra, February 14, 1962, available at
https://indiankanoon.org/doc/1450436/
after previously rising. Mehta was later charged with 72 criminal charges and had over 600
civil activity suits filed against him. Overall, the Harshad Mehta security scandal was made
into a Bollywood-style film with Sameer Hanchate's Gafla.

By 1990, Mehta had established himself as an identifiable name on the Indian stock
exchange. He began buying shares in a frenzy. The offers of India's leading concrete
producer, Associated Cement Company (ACC), drew him in the most, and the con artist is
said to have increased the cost of the bond organisation from 200 to 9000 (approx.) in the
share trading system, implying a 4400 percent increase. It was then discovered that Mehta
used the substitution cost concept to explain the aberrant state offering. The substitution cost
hypothesis basically states that more established companies should be valued based on the
amount of money required to create a comparable firm. By the final half of 1991, Mehta had
earned the moniker of 'Big Bull,' as people credited him with initiating the Bull Run.

On April 23, 1992, renowned feature writer Sucheta Dalal published an article in India's
national daily The Times of India that exposed Mehta's illicit techniques for controlling the
share trading system. "The fundamental instrument via which the trick was accomplished was
the prepared forward (RF) bargain," Dalal's part read. The RF is a secured here-and-now
(normally 15-day) advance that starts with one bank and moves to the next. To put it another
way, a bank lends against government securities in the same way that a pawnbroker lends
against gem specialists. The acquiring bank sells the securities to the lending bank and
receives them back near the end of the credit period, usually at a slightly higher cost." A
merchant often joins two banks for which he is paid a commission in a prepared forward
arrangement. Despite the notion that the expert does not deal with money or securities, this
was not the case in the run-up to the Mehta con. Mehta and his associates were able to
channel money via banks using this RF management system with great success.35

In the settlement procedure, the securities and instalments were sent through an intermediary.
The representative served as a middleman, receiving securities from the vendor and
delivering them to the buyer, as well as receiving the check from the buyer and transferring it

35
FLAME, Harshad Mehta Scam, available at http://flame.org.in/knowledgecenter/scam.aspx
to the dealer. As a result of such a settlement procedure, both the purchaser and the vendor
may not be aware of the personality of the alternate, as only the representative was aware of
the two. The intermediaries were well-versed in this strategy since they had recently
progressed toward being business sector producers and had begun trading for them. They
stated they were attempting the transactions under the name of a bank in order to maintain a
credible facade.

Another tool used by Mehta and his associates was the bank receipt (BR). In a prepared
forward arrangement, securities were not swapped in actuality, but the vendor handed the
buyer a BR, which is a confirmation of the offer of securities. A BR is a receipt for the
money received by the pitching bank, as well as a promise to deliver the securities to the
buyer. Meanwhile, the securities are held in trust by the buyer at the dealer.36

Mehta made a brief comeback as a securities exchange master a few years later, and began
giving enterprise suggestions on his website and in a weekly newspaper column. He
collaborated with the owners of a few businesses and essentially prescribed the services of
those businesses. When he died in 2002, Mehta had only been sentenced in one of the 27
cases that had been filed against him. Mehta's propel impose instalment of Rs 28 crore for the
financial year 1991-92 drew the attention of the taxman.

His opulent lifestyle was another eye-catcher.

2.6.3 THE KETAN PAREKH SCAM (2001)

Ketan Parekh is a former stockbroker from Mumbai who was indicted in 2008 for his role in
the development of the innovation stocks scheme on India's securities exchange between
1999 and 2001. Parekh, a contract bookkeeper by way of preparation, comes from a family of
brokers and is currently prohibited from trading on the Indian stock exchanges till 2017.

Ketan Parekh's deception was initially exposed by veteran journalist Sucheta Dalal, much like
Harshad Mehta's deception. "It was again another shopping bonanza for the capital market
following Thanksgiving," Sucheta's section read. The BSE fragile record dropped another
147 points, and the Central Bureau of Investigation (CBI) finally put an end to Ketan
36
Supra note 32.
Parekh's two-year market domination by apprehending him in connection with Bank of India
scandal. Many people in the market are unsurprised by Parekh's demise since his theoretical
activities were too extensive, he stayed with questionable people, and he managed an
excessive number of dodgy scrips."

Ketan Parekh utilised bank and promoter funds to manipulate the markets, according to SEBI
investigations into his money laundering activities. It subsequently proceeded to close the
market's numerous loopholes. From a week to a day, the trading cycle was shortened. The
'BADLA' carry-forward system in stock trading was banned, although operators may still
trade using it. To maintain a well-regulated futures market, SEBI legally introduced forward
trading in the form of exchange-traded derivatives. Broker control over stock exchanges was
also abolished. The SEBI found prima facie evidence that KP fixed prices in the stocks of
Global Trust Bank, Zee Telefilms, HFCL, Lupin Laboratories, Aftek Infosys, and Padmini
Polymer in his case.

Furthermore, according to information provided by the RBI to the Joint Parliamentary

Committee (JPC) during the investigation, financial institutions such as the Industrial
Development Bank of India (IDBI Bank) and the Industrial Finance Corporation of India
(IFCI) gave loans totaling Rs 1,400 crore to companies linked to Parekh.37

2.6.4 HINDUSTAN LEVER LIMITED v. SEBI (1998 SCL 311)

In this case, Hindustan Lever Limited bought 8 lakh shares in Brooke Bond Lipton India
Limited two weeks before the two businesses announced their merger. On this account, SEBI
conducted investigations and issued a 15-month notice to HLL's Chairman, executive
directors, and company secretary, alleging insider trading.

In this case, the key issue was that the HLL was regarded an insider. HLL, according to
SEBI, satisfies both insider criteria, such as a link to the company and the expectation of
having reasonable access to unpublished price sensitive information.

HLL contends that it acquired the BBLIL shares so that its parent company, Unilever, could
maintain a 51 percent ownership in the merged entity. Prior to the merger, Unilever owned 51
37
Supra note 32
cents for every penny in HLL, but just 50.27 cents for every penny in BBLIL. As a result, the
HLL administration believes that the SEBI should investigate if it had any more data that it
should not have had as a transferee organisation in the merger.

The Appellate Authority cited to squeeze reports that designated "early market learning of the
merger" to assist in its administration. However, according to its own admission, there were
just a few reports "before to the true buy (of UTI offers)." The Authority cited 21 news
reports in support of its contention that the potential of a merger between HLL and BBLIL
was widely recognised.

The Appellate Authority stated in its decision that SEBI was not qualified to begin exams and
then respond to authorities under the Act for issuing pay without first passing a request under
the previously specified control under Regulation 11B.38

2.6.5 SAMIR C. ARORA v. SEBI [(2005) 59 SCL 96]

Mr. Samir C. Arora was the fund manager for Alliance Capital Management (Singapore)
Ltd.'s Asia Emerging Markets, and he was responsible for all investment decisions for
ACMF's equity and balanced funds, as well as ACM's Indian allocation. As a result, Mr.
Arora was aware of ACMF and PAC's combined holdings.39

The Alliance Capital Mutual Fund (ACMF) is a mutual fund registered with the Securities
and Exchange Board of India, according to the case's summary facts (SEBI). Alliance Capital
Management Corporation of Delaware, whose parent business is Alliance Capital
Management LP (ACM), USA, has sponsored this Fund. ACMF's asset management
company is Alliance Capital Asset Management (India) Limited (ACAML). Alliance Capital
(Mauritius) P. Ltd. (ACMPL), ACAML's parent company, is Alliance Capital (Mauritius) P.
Ltd. (ACMPL). ACM appears to have chosen to sell its India operation in the second half of
2002. The appellant, Samir C. Arora, was managing equity funds for many ACM group
firms, including ACMF, while working as Head, Asian Emerging Markets with Alliance
Singapore - an affiliate of ACM. He was also in charge of ACM's FII (Foreign Institutional
Investments) investments in India. When the appellant learned of ACM's plans to sell its
38
Case of Insider Trading, Hindustan Lever Limited – Brooke Bond Lipton India Limited, February 2, 2012,
available at https://corporateinsiderstrading.wordpress.com/2012/02/02/case-of-insidertrading-hindustan-lever-
limited-hll-brooke-bond-lipton-india-limitedbblil/
39
Indian Kanoon, Samir C. Arora v. SEBI, October 15, 2004, available at https://indiankanoon.org/doc/14926/
India business, he submitted a report advising that the India business not be sold. However,
during October-November 2002, news of the proposed sale appeared in various Indian
newspapers, and the appellant received the final copy of the confidential information
memorandum (CIM) prepared by merchant banker Blackstone Group for the proposed sale of
ACAML, the asset management company for the Indian Fund ACMF.

The appellant objected again in writing, but it appears that ACM had already decided to sell.
It is thus common fact that ACM's decision to sell its India business was made
notwithstanding the appellant's strong and persistent opposition. On November 28, 2002, the
appellant entered into an indicative memorandum of understanding with Henderson Global
Investors and informed ACM management that, despite his opposition to the proposal, he
would be bidding for the Indian Fund alongside Henderson Global Investors because their
decision to sell the Indian business appeared to be final. The news of Mr. Samir Arora's
proposal also made its way into Indian newspapers, notably the Economic Times on
December 17, 2002. From January 13, 2003, negotiations with several bidders began, and
even though negotiations were ongoing, the Housing Development Finance Corporation
(HDFC) placed a pre-emptive proposal and urged ACM to halt the bidding process. While
this was going on, there was a lot of redemption pressure on the Fund, which caused
ACAML's assets under management (AUM) to plummet. Finally, the sale did not go through
due to the withdrawal of most bidders and the bids not meeting ACM's expectations, and
ACM announced on February 3, 2003 that it had given up the notion of selling its India
business. Following that, the redemption pressure subsided, and things returned to normal.
On June 6, 2003, SEBI launched an investigation and came to the preliminary opinion that
Shri Samir Arora, the appellant, acted in a manner inconsistent with the standards of
integrity, fairness, and professionalism expected of a fund manager. SEBI then used its
exceptional powers under Section 11 of the SEBI Act to order the appellant, Shri Samir
Arora, to refrain from buying, selling, or dealing in securities in any way, directly or
indirectly, until further orders were issued. The appellant was given a post-decisional hearing
as required by Section 11(4)(b) of the SEBI Act, and the ad-interim orders issued on August
9, 2003 were confirmed by decisions dated September 24, 2003. Shri Samir Arora filed an
appeal with this Tribunal, and on January 12, 2004, the Tribunal issued instructions
instructing SEBI to provide final orders by March 31, 2004. SEBI then served the appellant
with a show cause notice on February 20, 2004, detailing specific charges based on
investigations, and after receiving his response and giving him a hearing, the respondent
issued the impugned orders prohibiting him from accessing the securities market in any way
for a period of five years.40

Whether Shri Samir C. Arora is guilty of professional misconduct warranting action under
Sections 11(4) and 11B of the SEBI Act, 1992 was the question in this case. Whether Shri
Samir C. Arora is in violation of the SEBI (Prohibition of Fraudulent and Unfair Trade
Practices Relating to Securities Market) Regulations, 1995, under Regulations 4(a), 4(b),
4(c), 4(d), and 5? Is Shri Samir C. Arora in violation of the SEBI (Prohibition of Insider
Trading) Regulations, 1992, Regulation 3?41

According to the SAT, Mr. Arora is guilty of misbehaviour under the SEBI Regulations. The
Securities and Exchange Board of India's mandate is to defend the interests of investors as
well as the market's safety and integrity. As a result, if market players, intermediaries, and,
more significantly, experts commit substantial violations, the Regulator should, even on the
basis of preponderance of evidence, impose severe penalties in the public interest.42

CHAPTER – 3: INSIDER TRADING LAWS IN THE UNITED

KINGDOM

The laws and provisions prevailing in the United Kingdom in relation to the concept of
insider trading are discussed below:

Provision Description Statute

Section 52 Insider Trading Prosecution. Criminal

Justice Act,

1993
Section 53 Defenses. Criminal
40
Supra note 37
41
Securities and Exchange Board of India, Samir C. Arora v. SEBI, Appeal
No. 83/2004, available at https://www.sebi.gov.in/satorders/samirarora.html
42
Indian Kanoon, Samir C. Arora v. SEBI, October 15, 2004, available at https://indiankanoon.org/doc/14926/
 Justice Act,

1993
Section 57 Definition of Insider. Criminal

Justice Act,

1993
Section 55 Definition of Dealing. Criminal

Justice Act,

1993
Section 56 Definition of Insider Criminal

Information. Justice Act,

1993
Section 58 Information ‘made public’. Criminal

Justice Act,

1993
Section 2 The Financial Services Financial

Authorities Essential Duties. Services and

Markets Act,
2000
Part VIII Section Penalties for Market Abuse. Financial
118 to 131 Services and
Markets Act,
2000
Section 402 Power of the Authority to institute proceedings. Financial

Services and
Markets Act,
2000

Insider dealing became a specified criminal offence in the United Kingdom in 1980, with the
Company Securities Insider Dealing Act of 1985, which was re-enacted in 1993 and is
contained in Part V of the Criminal Justice Act of 1993. The UK's insider trading regime is
governed by the Financial Services and Markets Act of 2000 and the Criminal Justice Act of
1993.

The Criminal Justice Act, 1993 defined the term ‘insider’ under Section 57 of the Act as –

1. “For the purposes of this Part, a person has information as an insider if and only if—

(a) it is, and he knows that it is, inside information, and

(b) he has it, and knows that he has it, from an inside source.

1. For the purposes of subsection (1), a person has information from an inside source if
and only if—

(a) he has it through—

(i) being a director, employee or shareholder of an

issuer of securities; or

(ii) having access to the information by virtue of his employment, office or profession;
or

(b) the direct or indirect source of his information is a person within paragraph (a).”43

3.1 HISTORY OF INSIDER TRADING LAWS IN THE UK

The London Stock Exchange (LSE) dominates the money markets in the United Kingdom
(UK) (LSE). It was the world's largest stock exchange until 1960. The London Stock
Exchange was established much earlier than the New York Stock Exchange (NYSE). The
LSE is self-governing, and the Financial Services Authority (FSA) is the primary external
regulator in the United Kingdom. In the year 2000, the Financial Services and Markets Act
(FSMA) was passed.

43
Section 57 of the Criminal Justice Act, 1993, ‘Insiders’ available at
https://www.legislation.gov.uk/ukpga/1993/36/section/57
The United Kingdom was one of the first countries to pass legislation prohibiting insider
trading. The British Common Laws and other organisations' legislation are currently in
constraint in England and Wales, which makes insider exchanging control difficult. The
general standards of corporate securities legislation apply across the United Kingdom, with
minor variations in the various legislative frameworks. There was no differentiation in the
law or practise when it came to the control of insider trading.44

There were no particular regulations relating to insider trading before to 1980, with the
exception of those relating to the disclosure of a director's interest. The Companies Act of
1980 made insider trading unlawful for the first time. Part V of Sections 68-73 of the Act
made insider trading a criminal offence.45 The Companies Securities (Insider Dealing) Act of
1985 re-enacted the provisions. The rules focused on punishing the misuse of confidential
information obtained from a corporation that could affect the price of that firm's stocks if
made public.

A Directive46 was issued in 1989 to establish regulations on insider trading within the
European Union. Part V of Section 52-64 of the Criminal Justice Act 1993 was used to
implement this under UK legislation. On March 1, 1994, these agreements went into effect.
This new law is more concerned with the regulation of financial markets than with the
mishandling of secret information.

Section 56 (1) of the Criminal Justice Act defines inside information. It contains information
about specific securities or issuers of securities. In relation to inside information, securities
that are anticipated to be considerably affected if it is made public are referred to as 'price
affected securities,' and the information is referred to as 'price sensitive information,' [Section
56(3)]. Information about a company must be treated as such not just when it is about the
company, but also when it has the potential to damage the company's business prospects.47

44
Wilson, “Scottish Commercial Laws”, Journal of Business Law, 1967, pg. 120
45
Mayson W. Stephen, French Derek, and Ryan L. Christopher, “Company Law”, Oxford University Press, 2002,
pg. 375
46
EU Directive No. 89/592/EEC available at https://publications.europa.eu/en/publication-
detail/-/publication/40a3726fb61b-4694-a328-15fef81d8f5a/language-en
47
Section 56 of the Criminal Justice Act, 1993, available at
https://www.legislation.gov.uk/ukpga/1993/36/section/56
3.2 PENAL MEASURES TO RESOLVE INSIDER TRADING

According to the Company Securities (Insider Dealing) Act of 1985, each organisation must
keep a list of its directors' stock and debenture interests available for public inspection.
Executives must notify the company within five working days of any exchanges made for
their own records, and the company must respond within three working days. The term
'intrigue' has a very broad definition in the Act. It entails entering into a purchase agreement
and being qualified to exercise investor rights even if he is not a registered holder. Interests of
friends and children are taken into account, but shares owned as a trustee are not. The amount
paid (including any non-monetary thoughts) and the number of offers referred to are among
the details disclosed.

People who misuse data classification may face legal consequences. There was no wide norm
of responsibility from the perspective of insiders exchanging information. Before insider
trading became a criminal offence in 1980, the Stock Exchange Council handled incidents as
'club rules' violations. Between 1975 and 1979, eight open proclamations were issued against
people, but no fines were imposed. Between 1980 and June 1985, the Stock Exchange
examined 251 cases in detail, with over half of them sent to the Department of Trade and
Industry (DTI), the arraigning body. Six cases involving nine people resulted in indictments,
which elicited emotions in four of them.

Private reprimands, public censure and referral of cases to the DTI, referral to professional
disciplinary bodies, and suspension or delisting of securities are among the penalties possible.
Insider trading is also prohibited under the rulebooks of the new self-regulatory
organisations. Short swing trading and dealing through outside corporations on one's own
account are prohibited by companies.

3.3 CASE LAW RELATING TO INSIDER TRADING IN THE UK

The United Kingdom (UK) was one of the first countries to pass anti-insider trading
legislation. Insider trading legislation in the United Kingdom is mostly based on the British
Common Laws and numerous company statutes in England and Wales. The broad principles
of corporate securities law apply across the United Kingdom, albeit the individual statutory
requirements differ slightly. The Company Securities (Insider Dealing) Act of 1985 made
insider dealing a criminal offence in the United Kingdom. The passage of Part VII of the
Financial Services Act of 1986 enhanced this legislation. We've looked into Warner's
situation.

3.3.1 WARNER CASE (1988)48

A vast ring of persons traded on the stock exchanges in the United Kingdom using price
sensitive information obtained from multiple Crown servants. These servants were in charge
of transmitting this price-sensitive information that had not been published. The value of the
shares bought and sold by its members exceeded £10 million due to the number of dealings in
that market. This supposed insider information was gathered by Warner, a financial
journalist. Information from government agencies was leaked. Warner was refused
permission to reveal this material to the investigators. The Secretary of State for Trade and
Industry appointed an inspector to investigate this case under Sections 177 and 178 of the
Financial Services Act, 1986. As a journalist, Warner made fair grounds for not sharing
inside knowledge to the inspector.

A person who fails to comply with any request made by an investigating authority regarding
any matter relevant to determining whether or not any suspected contravention has occurred
is guilty of a punishable offence, according to the Company Securities (Insider Dealing) Act,
1985 and Part VII of the Financial Services Act, 1986. Despite the fact that Warner had spent
£100,000 on legal fees, he was only fined £20,000.

Warner was not a company insider and appeared to be free of any wrongdoing. He didn't
have any price-sensitive information from a corporation that he wasn't aware of. He was,
however, reprimanded for failing to reveal inside knowledge.
48
Tridimas, T., “The Financial Services Act and the Detection of Insider Trading” (1987) The Company Lawyer
VoL-8, p-162 [1988] 2 WLR 33, The Times Law Report, 11 December 1987, (1987), 27.
 CHAPTER – 4: LAWS RELATING TO INSIDER TRADING IN THE
UNITED STATES

The laws and provisions prevailing regarding the insider trading in the United States are
described in the table below:

Provision Description Statute

Section 10 Prohibition of use of manipulative or deceptive Securities

(b) devices. Exchange

Act, 1934.
Rule 10 b-5 Prohibition of employment of manipulative or Regulation under
deceptive devices. Securities
Exchange

Act, 1934.

Rule 10 b- Prohibition of trading on the basis of material Regulation under

5-1 non-public information. Securities

Exchange

Act, 1934.

Rule 10 b- Duties of trust or confidence in misappropriation Regulation under

5-2 insider trading cases. Securities

Exchange

Act, 1934.

Section 14 Especially prohibits insider trading in the Securities

(e) limited context of tender offers. Exchange

Act, 1934.
Rule 14 (e)- Transaction in case of tender offers. Regulation under

3 Securities
Exchange

Act, 1934.

Section Liability for contemporaneous traders Securities

20A for insider trading. Exchange

Act, 1934.
Section 21 Civil Penalties for insider trading. Securities

Exchange

Act, 1934.
Section 16 Disgorgement of short swing profits. Securities

Exchange

Act, 1934.
Section 21 Civil Punishments. Securities

A Exchange

Act, 1934.
Section 32 Penalties. Securities

Exchange

Act, 1934.

4.1 HISTORY OF INSIDER TRADING LAWS IN THE U.S.

The Great Depression, which spanned a decade from 1929 to 1939, was the most severe and
long-lasting economic downturn in the Western industrialised world's history. The Great
Depression in the United States began nearly immediately after the stock market crash of
1929, which sent Wall Street into a state of panic and anxiety, causing millions of investors to
lose money.

In the spring and fall of 1931 and the fall of 1932, bank runs cleared the United States once
more, and by mid-1933, many banks had closed their doors. In any case, in 1932, with the
country mired in the depths of the Great Depression and an estimated 15 million unemployed
people (almost 20% of the population at the time), Democrat Franklin D. Roosevelt won a
landslide victory in the presidential election. Roosevelt also sought to alter the monetary
environment, establishing the Federal Deposit Insurance Corporation (FDIC) to protect
investors' records and the Securities and Exchange Commission (SEC) to oversee the stock
market and prevent the kind of mismanagement that led to the 1929 crisis.49

For the most part, the Insider Trading Sanctions Act of 1984 pertains to insider trading. It
states that anyone who trade on data that isn't available to the general public might be forced
to return their illegal gains and pay a fine of up to three times the amount that their illegal
activities brought in.

4.2 PENAL MEASURES TO CURB INSIDER TRADING

When company insiders trade their own stocks, they must declare their trades to the
Securities and Exchange Commission (SEC). A person who owns more than 10% of a class
of value securities listed under Section 12 of the Securities Exchange Act of 1934 is
considered an insider. He should file a notice of proprietorship with the SEC in connection
with such a security. When a person becomes an executive, an officer, or a gainful proprietor
of a business, he must file Form No. 3 with the Securities and Exchange Commission (SEC)
within 10 days. Any change in responsibility must be reported to the SEC on Form No. 4
within 10 days of the end of the month in which the change occurs.

Infringement can be punished in two ways: civilly and criminally. Infringement of insider
exchanging directions is not a crime that the SEC can prosecute. According to Section 21(d)
(1) of the Securities Exchange Act of 1934, it can only recommend criminal indictment to the
Justice Department. The SEC can file a complaint against an insider and obtain a directive
prohibiting future securities trading or a request mandating the disclosure of benefits gained
by insider trading, as well as a fine of up to one million dollars or three times the benefit
gained or tragedy avoided. A similar arraignment might be brought by the Justice Department

49
The Great Depression, History.com, available at https://www.history.com/topics/great-depression
on its own initiative. In insider trading situations, the SEC may pursue a variety of typical
penalties.

The SEC may issue a perpetual or brief directive if it appears to the commission that a man is
locked in or is about to take part in any demonstrations or works on constituting an
infringement of the demonstration or any standards proclaimed thereunder, according to
Section 21(d) of the SE Act.

4.3 THEORIES OF INSIDER TRADING

Insider trading has numerous theories, each formed by a court of law interpreting the law in
order to protect investors. The following are some of the theories that have emerged as a
result of the history of insider trading:

4.3.1 CLASSICAL THEORY

This theory applies when an insider trades in his business's securities in breach of a fiduciary
responsibility owed to the company or another firm to whom the insider owed a fiduciary
duty, based on material non-public information received as a result of the insider's position.
The shareholders and the corporation owe it to such a traditional corporate insider to either
refrain from trading or disclose such information before trading.

4.3.2 TIPPER TIPPEE THEORY

Insider trading may be committed by corporate insiders who do not trade on inside
information themselves but 'tip' others to do so. The 'tippee' trades on such knowledge,
despite the fact that his source's revelation of such information violates both a duty and
federal securities laws. Any personal gains or losses saved by trading in such securities,
whether by a tipper or a tippee, are deemed a breach of fiduciary responsibility, and the
person can be held accountable on insider trading charges.

4.3.3 MISAPPROPRIATION THEORY

The courts used this idea to support insider trading liability. Misappropriation of another
person's information is considered unacceptable under this method. Trading on the basis of
such information is considered misappropriation since it entails the improper disclosure of
information that belongs to someone else in order to gain a profit or prevent a loss.

According to this view, providing material non-public knowledge to a third party, who then
utilises the information to trade in securities, violates a fiduciary obligation due to the source
of the information.

This notion relates to persons who are not insiders in and of themselves, but who obtain
material non-public information from an insider who trusts them to keep it private.

4.3.4 SCIENTER THEORY

A defendant must act with scienter in both the classical and misappropriation theories of
insider trading.

Scienter is defined as "a mental condition characterised by a desire to deceive, manipulate, or

cheat others."50 In the tipper-tippee interaction, the scienter criterion is crucial.

4.4 CASE LAW RELATING TO INSIDER TRADING IN THE U.S.

4.4.1 DIRKS V. SEC 463 US 464 (1983)

Facts of the Case: Raymond Dirks, the petitioner, obtained substantial information from
insiders who wanted him to reveal their company's fraudulent conduct. By exposing the
information to clients and investors, the petitioner tipped them. Petitioner was notified by an
insider at Equity Funding of America that the company was overstating its assets and that he
should investigate the fraud. Petitioner was an officer who conducted investment analysis for
a broker-dealer firm. Other employees interviewed by the petitioner corroborated the
fraudulent charges. The petitioner contacted a Wall Street Journal bureau head and offered
his information in the hopes of exposing the deception. Fearing a libel suit, the bureau chief
declined to pursue it. Petitioner informed investors and clients about the fraud at this time,
and they responded by selling their shares in the company. The New York Stock Exchange
50
Black’s Law Dictionary, what is Scienter? available at https://thelawdictionary.org/scienter/
halted trading after the stock dropped from $26 to $15, and Respondent, The Securities and
Exchange Commission, investigated and discovered fraud. Petitioner was then sued by
Respondents for violating Section 10(b) of the Securities and Exchange Act of 1934 by using
insider knowledge and perhaps receiving commissions from those clients. The trial court and
the appellate court both agreed with Respondent, stating that whenever a tippee gets inside
information, they should either openly reveal it or stop from acting on it. Secrist, an employee
who was fired from a company that Equity Funding had bought, notified Dirk, an analyst,
that sales figures were inflated by manufacturing bogus insurance policies and that they were
selling partnerships in non-existent real estate. Dirks began his own inquiry, speaking with a
number of other investors, some of whom shared his worries and sold their shares. He even
spoke with the Securities and Exchange Commission and the Wall Street Journal. In this
instance, it was decided that a person dealing with insider knowledge is only accountable if
he has breached a fiduciary obligation by disclosing the information and has benefited from
it.

Rule of Law: In this matter, the rule of law states that if a tippee receives material non-public
information from an insider who breaches his fiduciary responsibility by exposing the
information and the tippee is aware of the violation, the tippee owes a fiduciary duty to
shareholders.

Issue of the Case: Whether there is a violation of Rule 10b insider trading when the
information is made public to expose the fraud and then traded on when it isn't.

Held by the Supreme Court: The existence of a relationship affording access to inside
information intended to be available only for a corporate purpose, as well as the unfairness of
allowing a corporate insider to take advantage of that information by trading without
disclosure, were found to be two elements for establishing a violation of Section 10(b) and
Rule 10b-5 by corporate insiders. The mere possession of non-public market information
does not imply a responsibility to disclose or refrain. Rather, the existence of a fiduciary
connection gives rise to such an obligation. To pursue a violation of fiduciary responsibility
in connection with a securities transaction within the scope of Rule 10b-5, there must also be
"manipulation or deception." As a result, an insider is only responsible for inside trading
under the Rule if he fails to disclose material non-public knowledge before trading on it,
resulting in hidden profits. Petitioner had no need to refrain from using the inside knowledge
he got under the above-mentioned inside-trading and tipping laws, and hence he committed
no actionable breach. He had no prior fiduciary duty to the stockholders of the insurance
company. Furthermore, by supplying information to petitioner, the insurance company's
personnel did not breach their duty to the company's owners. There was no derivative breach
by petitioner in the absence of an insider breach of duty to shareholders. The Supreme Court
of the United States ruled that Section:10(b) should not be interpreted too broadly to make
tippees accountable when they use inside knowledge obtained from insiders who did not
violate their fiduciary obligations in their disclosure. The insider must first breach a fiduciary
responsibility, according to the Court, and then the tippee's actions will be evaluated to see if
they also breached a duty. With a 6-3 majority, the Supreme Court ruled that the Petitioner,
Raymond Dirks, is not guilty of fraud. The Court concluded that the insider's actions must be
assessed first to see whether the tippee exceeded his or her fiduciary obligation, and then the
tippee's actions must be assessed to determine whether he or she breached a duty. If the
tippee gets relevant insider knowledge from a person with a fiduciary obligation to
shareholders and a duty to disclose (an insider). However, the tippee must be aware that there
has been a breach of fiduciary duty. As a result, if the tippee is willfully aiding the insider's
concealing of material non-public information and/or continuing the distribution of material
non-public information, he will be held accountable.

Dissenting Opinion: In his dissenting opinion, Justice Harry A. Blackmun stated that Dirks
acted as a proxy to transmit insider knowledge to those who did have a financial stake in
Equity Funding and could act on it. He is accountable as a result of his performance in this
job. He further contended that the majority's decision effectively rewards Dirks for his role in
the scandal, which is unhelpful to enforcing the federal securities laws. The dissent was
joined by Justices William J. Brennan, Jr. and Thurgood Marshall.

4.4.2. S.E.C. v. Rajat K. Gupta and Raj Rajaratnam, Civil Action No. 11-CV-7566 (SDNY)
(JSR)
Facts of the Case: McKinsey, Goldman, and AMR all had faith in Rajat Gupta. The SEC, on
the other hand, claims he gave insider information in order for a hedge fund to profit illegally
in the market. McKinsey's, the world's most prominent consulting firm, has created a
reputation on the belief that its high-priced consultants are the brightest and most trustworthy
people on the planet. Rajat Gupta, the worldwide managing director of McKinsey for nearly a
decade, is now embroiled in Wall Street's greatest insider trading scandal. Warren Buffett's
Berkshire Hathaway, as well as the boards of directors of Goldman Sachs and Procter &
Gamble, are the latest alleged victims of a massive insider trading ring that swept through
Wall Street over the previous decade. The charge that Rajat K. Gupta, the now 62-year-old,
much-heralded international business executive who led McKinsey from 1994 to 2003,
abandoned the royal court of corporate America amid the economic turbulence of late 2008 is
perhaps the most alarming. Yolande Daeninck, a spokeswoman for McKinsey, issued a
statement that reads like a spiritual obituary and plainly places Gupta in McKinsey's past
tense: "We were heartbroken to learn about our former colleague's civil allegations."
According to a Securities and Exchange Commission administrative filing, Gupta learned on
Sunday, Sept. 21, 2008, as a board member of Goldman Sachs, that Berkshire Hathaway
chairman Warren Buffett was planning to pump $5 billion into Goldman during Wall Street's
dark hours, barely a week after Lehman Brothers' collapse. In a statement, SEC head of
enforcement Robert Khuzami stated, "Mr. Gupta was honoured with the utmost trust of top
public corporations, and he abused that trust by revealing their most sensitive and valuable
secrets." Thanks to Gupta's information regarding the Berkshire acquisition and Goldman's
quarterly reports, Galleon generated more than $14 million in profits and avoided more than
$3 million in losses. Gupta "most likely" had a phone contact with Galleon Hedge Fund
founder Raj Rajaratnam—the alleged insider-trading ring's Sri Lankan-born leader—on
Monday morning, Sept. 22, 2008, according to the SEC. Galleon bought over 80,000
Goldman Sachs shares shortly after the call. Rajaratnam called Gupta for 14 minutes the next
morning, before the Berkshire purchase was officially announced. Galleon bought 40,000
more Goldman shares "less than a minute after the call began," according to the SEC. Galleon
generated more than $14 million in profits and saved more than $3 million in losses as a
result of Gupta's knowledge of the Berkshire deal and Goldman's quarterly earnings,
according to reports. Galleon allegedly made another half-million dollars from Gupta's
insider knowledge of P&G's earnings. The SEC case was unusual in that it was brought as an
administrative process before an administrative judge rather than a civil suit that could be
tried before a jury in federal court. Many SEC civil cases are backed by criminal charges
brought by Justice Department prosecutors, who frequently claim a similar set of
circumstances, if not identical. Although there have been indications of calls involving Gupta
in the Galleon criminal investigation—dubbed the largest insider trading case ever by
prosecutors—possible it's that none of the calls referenced in Tuesday's petition were
recorded. The evidence appears to be based on telephone records that reflect the timing and
duration of calls rather than what was spoken on them, at least according to what has been
published thus far. Gupta is represented by Gary Naftalis, a former federal prosecutor who
has been a top-ranked defence counsel for more than three decades. Gupta, who was born in
Calcutta, India, received a mechanical engineering degree from the Indian Institute of
Technology in New Delhi and an M.B.A. from Harvard before joining McKinsey in 1973.
"The SEC charges are absolutely unfounded," Naftalis stated in a statement. Mr. Gupta has a
40-year track record of ethical behaviour, integrity, and a commitment to keeping his clients'
secrets safe. Mr. Gupta has committed no wrongdoing... Mr. Gupta is not accused of trading
in any of these securities or sharing in any profits as part of a "quid pro quo." Rajaratnam is
due in federal court in New York on March 8, and his lawyer, John Dowd, was quoted by
multiple news outlets as stating that the SEC's attack on Gupta was "just an effort to eliminate
a favourable witness." There isn't a single case to be made. There were no discussions, no
advantages, nothing." No criminal charges have been filed against Gupta, and if he loses the
administrative hearing and chooses not to appeal, he will face a fine. Although Naftalis
claims his client lost $10 million in a Galleon Fund, the SEC claims Gupta had money
invested with Galleon's founder, showing that insider trading was not driving his activities.
Gupta and Rajaratnam were also partners in an investment venture called "New Silk Route
Partners," according to the SEC. Gupta was praised as "the first-ever India-born CEO of a US
transglobal firm" by the Indian journal Business Today when he was appointed Managing
Director of McKinsey in 1994. Gupta spent four years as a senior partner after stepping down
as Managing Director in 2003, before leaving McKinsey and joining the boards of Goldman
Sachs, P&G, and AMR, the parent company of American Airlines. Other notable non-profit
institutions to which he served as a trustee or advisor were the University of Chicago, the
Rockefeller Foundation, and the United Nations. According to a high-ranking consultant to
CEOs and Fortune 100 company boards, Gupta had extraordinary access in the highest circles
of international business, from the ski slopes of Davos to the maharajahs of Indian commerce.
"He is exceptional in the faith they had in him because there aren't many consultants on
significant boards like that." "A consultant's reputation is very much founded on their ability
to keep confidential information secret," he adds of the damage this claim may cause to
business chieftains' impressions of McKinsey. What can you trust a strategy consultant to do
if you can't trust them to do that?" In the 1990s, Gupta met Rajaratnam, a major benefactor,
as a co-founder of the Indian School of Business in Hyderabad. Anil Kumar, another co-
founder of the school, was a partner at McKinsey from 2003 until 2009, when he aided the
insider-trading scheme by providing inside information on technology companies. He
pleaded guilty to two counts in the Galleon case in January 2010 and is still awaiting
punishment. Kumar might be a vital witness if Gupta is accused in a criminal case. The
charge of insider trading levelled against Gupta has reverberated across the small, tight-knit
community of Indian-born CEOs running multinational firms in the United States. Two of
them, Citigroup CEO Vikrim Pandit and Pepsi CEO Indra Nooyi, who was a former
consultant for two of McKinsey's competitors, both head firms that have been McKinsey
customers. Ajit Jain, a highly regarded Berkshire Hathaway executive who is also a Harvard
Business School alumnus and former McKinsey consultant, is another example. Even though
Gupta was no longer the global CEO of McKinsey at the time of his alleged tipping to insider
traders, the allegations against him cast a pall over the firm's culture. Gupta was the man who
promulgated corporate culture for three three-year periods as the elected top executive of a
firm that operates in more than 50 countries. Even today, the corporate website quotes Gupta
complimenting Marvin Bower, the guy recognised as the creator of modern McKinsey, in a
section about "preserving clients' trust." It's unclear how the charges against Gupta will effect
McKinsey. The consultants there make a large portion of their multimillion-dollar fees by
assisting companies like Goldman Sachs and P&G in three stages: 1. Formulating plans that
lead to the purchase or spin-off of assets. 2. Putting the merger and acquisition deals together

Judgement The final judgment orders Rajaratnam to pay $1,299,120 in disgorgement and
$147,738, in prejudgment interest, for a total of $1,446,858.

The SEC’s complaint, filed October 26, 2011, alleges that, among other things, Rajat K.
Gupta tipped his business associate Raj Rajaratnam, Galleon Management’s founder and
managing general partner, to confidential information Gupta learned in the course of his
duties as a member of the Board of Directors of The Goldman Sachs Group, Inc. The
complaint alleges that Gupta disclosed material nonpublic information concerning Berkshire
Hathaway Inc.’s $5 billion investment in Goldman Sachs in September 2008, and concerning
Goldman Sachs’s financial results for both the second and the fourth quarter of 2008.
Rajaratnam used the information he learned from Gupta to trade profitably in certain Galleon
hedge funds. By engaging in this conduct, Gupta and Rajaratnam violated Section 10(b) of
the Securities Exchange Act of 1934, Exchange Act Rule 10b-5, and Section 17(a) of the
Securities Act of 1933.

On June 15, 2012, in a parallel criminal case arising out of the same facts, Gupta was
convicted of one count of conspiracy to commit securities fraud and three counts of securities
fraud. On October 24, 2012, Gupta was sentenced to two years in prison and one year of
supervised release and ordered to pay a $5 million criminal fine.

The Final Judgment in the SEC’s case orders Rajaratnam to disgorge his share of the profits
gained and losses avoided as a result of the insider trading plus prejudgment interest on that
amount. The SEC’s claims against Gupta remain pending.51

CHAPTER – 5: CRITITCAL ANALYSIS OF THE INSIDER TRADING

LAWS IN INDIA, USA AND UK

5.1 COMPARATIVE STUDY OF INSIDER TRADING LAWS IN INDIA, USA AND

UK

We compare distinct features of insider trading legislation in India, the United States, and the
United Kingdom in our research.

51
http://www.sec.gov/litigation/litreleases/2012/lr22582.htm
According to the findings of the above-mentioned critical investigation, it is clear that in The
Securities and Exchange Board of India Act, 1992, which is governed by the Securities and
Exchange Board of India, rules the principle of insider trading in India. Under this idea, an
insider trading offence is either a civil or a criminal offence, and the perpetrator faces a fine
of up to Rs.25 crores or three times the profit obtained from insider trading.

The Securities Exchange Commission, a regulatory agency in the United States, has enacted
the Securities Act of 1933 and the Securities Exchange Act of 1934 to oversee the principles
of insider trading in the country. The Insider Trading Sanctions Act of 1984 is in place to
govern insider trading offences in the country. The penalty for such an offence is a maximum
sentence of 20 years in jail and a fine of $5 million dollars. Dealing, soliciting another person
to deal, and disclosing are all considered civil offences under such statutes.

According to the report, the Financial Services Authority regulates insider trading in the
United Kingdom under the Financial Services and Markets Act of 2000. The offence of such
trading has been described as a civil as well as a criminal infraction by the UK regulating
agency. The penalty for such an offence is up to 7 years in prison and an unlimited fine. The
Department of Justice in the United Kingdom has the authority to recommend criminal
prosecution.

5.2 ROLE OF SEBI IN RESOLVING INSIDER TRADING IN INDIA

The role of a stock market regulatory organisation in a country is defined by the level of
development of that country's stock market. Given the growing character of the Indian
market, the regulatory body must play a dual function of development and regulation.
Regulatory and development roles are inextricably intertwined and share nearly identical
goals. In most cases, well-regulated structures result in rapid and healthy development. The
Securities and Exchange Board of India (SEBI) is a statutory organisation that works under
the Securities and Exchange Board of India Act 1992. Section 11 of the SEBI Act discusses
the SEBI's powers and functions. The SEBI's job is to protect investors' interests and regulate
the securities market. Insider trading is prohibited, and it is one of the SEBI's most essential
regulatory measures in the securities market.52
52
Section 11(g) of the SEBI Act 1992.
The SEBI's Expert Group, led by Justice M.H. Kania, proposed in its report that Section
11(2)(i) of the SEBI Act be changed to allow SEBI to request information from professionals
while respecting the professionals' rights (for not parting with the privileged information in
their possession). It was also recommended that if a professional engages in malpractices
such as certifying fraudulent information while providing services, restrictions such as
prohibiting him from appearing before SEBI might be considered. 53 In addition, the
committee submitted certain suggestions for modifying Section 11 of the SEBI Act.

The SEBI may waive its right to file a criminal complaint under Section 24 of the SEBI Act
in order to preserve the interests of investors and the market, as well as to ensure that the act's
provisions are followed. SEBI may issue any of the following orders54:
(a) Directing the insider or such person not to deal in securities in any particular manner;
(b) Prohibiting the insider or such persons from disposing of any of the securities acquired in
violation of these regulations;
(c) Restraining the insider to communicate or counsel any person to deal in securities;
(d) Declaring the transaction(s) in securities as null and void;

(e) Directing the person who acquired the securities in violation of these regulations to
deliver the securities back to the seller; and
Directing the person who has dealt in securities in violations of these regulations to transfer
an amount or proceeds equivalent to the cost price or market price of the securities,
whichever is higher to the investor protection fund of a recognised stock exchange.
Regulation 11 merely empowers the SEBI to pass certain interim directions for the purpose of
maintaining the status quo during the course of the investigation and /or immediately
thereafter upon receipt of the said investigative report.

53
CLA (2005) 68.
54
Regulation 11 of SEBI (Prohibition of Insider Trading) Regulations, 1992.
 CHAPTER – 6: CONCLUSION AND SCOPE OF FURTHER
RESEARCH

6.1 CONCLUSION

Despite the fact that insider trading is a global phenomena, its potency is substantially greater
in the developing securities market. Insider trading has occurred on a massive scale in the
ongoing case of Satyam Computer Services Ltd. (2009). The vast majority of those involved
in securities trading see this as one of the most important factors in disrupting the securities
market in the country. Many large companies in India, like Satyam, have set up a convoluted
structure of representatives, venture firms, and syndicates of partners and partners through
which they drive insider trading and create favourable circumstances.

Along with the growth of the global value market, the seriousness, power, and extent of the
insider trading problem is expected to grow with time. Regardless of any natural concerns
they may have, controllers will try to come up with more far-reaching and leadership-based
solutions to these problems. People and organisations, on the other hand, will continue to
advance with improved, e-based, and cross-fringe insider exchange techniques that aim to
address national and international administrative challenges. Consequently, despite the fact
that the vast majority of the sorted out securities market prohibits insider exchanging
directions, the controllers would proceed to better and better govern insider exchanging
construct directions based on a proceeds with premise.

Insider trading is frequently claimed to erode financial professionals' faith in the market.
Many pundits believe that the proximity and stringent enforcement of insider trading
regulations are behind the surge in foreign interest in the United States. Deregulation of the
budgetary market is the best technique to build speculators' confidence if faith in the market
is actually eroded when insider trading departs. More people and organisations will want to
have their stock recorded on stock exchanges that have secret rules prohibiting insider
trading. Without government intervention, the free market can accommodate sensible insider
exchanging rules.

6.2 SCOPE OF FURTHER RESEARCH

The study's limitations were already mentioned in the first chapter. However, by conducting
additional research in the following areas, some of the restrictions may be overcome:

I Another topic that could be researched further is the influence of insider trading on
liquidity. Other possible areas for additional investigation include the impact of insider
trading on the likelihood of a merger's completion. Insider trading has the potential to
increase the cost of a merger by increasing the premium provided to investors. Mergers and
acquisitions are a common sort of key union that opens up the possibility of massive insider
trading consequences. Because of administrative assistance in practically all countries,
including India, the chances of getting subjective and quantitative information are higher.
There are a few possible study findings in this crucial area, particularly in the Indian context.

(ii) The inaccessibility of information relating to insider exchanging volume of insiders or

their family is the main impediment to experimental research on the topic of insider
exchanging. Without a doubt, a similar issue has been largely recognised. It can only be
defeated if information on individual insider share trading is made available to the broader
public. There is a significant amount of experimental study on insider trading, subject to
databank accessibility.

(iii) There is a link between various segments of the financial markets, such as the currency
market, capital market, item market, and remote trade markets, among others. Insiders trading
one piece of the puzzle could have an immediate influence on another. The nature, extent,
and depth of this interaction amongst showcases could be a fascinating area for additional
investigation.

(iv) Insider trading has been found to be closely linked to increased market volatility. In
addition, when compared to the influence of unpredictability arising from other significant
variables, the quantitative impact of insider trading on display instability is found to be
extremely important. It will be useful to discover the particular components by which insider
trading improves promote unpredictability in future study, as well as to investigate whether
the rise in instability has any impact on financial effectiveness.

REFERENCES AND BIBLIOGRAPHY

BOOKS
• Robert E. Wright and David J. Cowen, ‘Financial Founding

Fathers – The Men Who Made America Rich’, University of Chicago Press, 2004

• Stephen M. Bainbridge, Research Handbook on Insider Trading, Edwart Elgar

Publishing Limited (2013)
• CS Bhuvneshwar Mishra, Laws relating to Insider Trading,

Taxmann

• The Law and Finance of Corporate Insider Trading: Theory and Evidence, Hamid
Arshadi and Thomas H. Eyssell, Springer Science and Business Media, New York
(1993)
• Paul U. Ali and Greg N. Gregoriou, Insider Trading: Global Developments and Analysis,
CRC Press (2009)
• Sandeep Parekh, Fraud, Manipulation and Insider Trading in the Indian Securities
Market, Wolters Kluwer, Second Edition, 2015
• M. Ranganatham and R. Madhumathi, Securities Analysis and Portfolio Management,
Dorling Kindersley (India) Pvt. Ltd. (PEARSON), 2nd Edition, 2014, pg. 63

• The Institute of Company Secretaries of India, “Prohibition of Insider Law and Practice
”, New Delhi, (2007), p-9

ACTS AND REGULATIONS

• SEBI ACT,1992

• THE SEBI (Prohibition of Insider Trading) Regulations,

2015

• Companies Act, 1956

• Companies Act, 2013

• Securities Act, 1933

• Securities Exchange Act, 1934

• Financial Services and Markets Act, 2000

• Criminal Justice Act, 1993

• Company Securities (Insider Dealing) Act, 1985

• Companies Act, 1980

REPORTS
• Bombay Stock Exchange Bye Laws and Regulations.

• Calcutta Stock Exchange Bye Laws and Regulations.

• EU Directive No. 89/592/EEC.

• Sachar Committee Recommendations, No-18.104 (iv)

• Patel Committee Recommendations, No-7.26

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29. The Institute of Company Secretaries of India, “Prohibition of Insider Law and Practice
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30. Sachar Committee Recommendations, No-18.104 (iv)

31. Patel Committee Recommendations, No-7.26

32. Ajay Shah and Susan Thomas, The Evolution of the

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34. Indian Kanoon, LIC v. Hari Das Mundhra, February 14,

 1962, available at https://indiankanoon.org/doc/1450436/

35. FLAME, Harshad Mehta Scam, available at

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36. Supra note 32.

37. Ibid

38. Supra note 32

39. Case of Insider Trading, Hindustan Lever Limited – Brooke Bond Lipton India Limited,
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40. Indian Kanoon, Samir C. Arora v. SEBI, October 15, 2004, available at
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41. Ibid

42. Supra note 37

43. Securities and Exchange Board of India, Samir C. Arora v.

SEBI, Appeal No. 83/2004, available at

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44. Indian Kanoon, Samir C. Arora v. SEBI, October 15, 2004, available at
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48. Wilson, “Scottish Commercial Laws”, Journal of Business Law, 1967, pg. 120
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50. EU Directive No. 89/592/EEC available at

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 /publication/40a3726f-b61b-4694-a328-

15fef81d8f5a/language-en

51. Section 56 of the Criminal Justice Act, 1993, available at

https://www.legislation.gov.uk/ukpga/1993/36/section/56
52. In September 1987, two employees of the Financial Times group were dismissed for
trading on advance knowledge of share tips published in the ‘Investors Chronicle’. Two
men worked as clerks and had access to copies of the magazine on the day before
publication. Although the amount of money involved were small (10,000 pound), but
their activities detected by the alert editor because the securities concerned were so
called thinly traded shares whose price had fallen to very low levels with a scarce
potential for recovery. Because the two had no connection with the companies, their
actions did not constitute insider trading in the legal sense, and they were not prosecuted.
They were dismissed for breaching their employer’s code of practice.
53. Tridimas, T., “The Financial Services Act and the Detection of Insider Trading” (1987)
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162 [1988] 2 WLR 33, The Times Law Report, 11

December 1987, (1987), 27.

54. Section 11(g) of the SEBI Act 1992.

55. CLA (2005) 68.

56. Regulation 11 of SEBI (Prohibition of Insider Trading) Regulations, 1992.