Insights of

INSIDER TRADING

Pavan Kumar Vijay

 What Is
INSIDER TRADING?
INSIDER TRADING
It is dealing in the securities
by a Insider,
who has the knowledge of
material “inside” information
which is not known
to the general public
How BAD It Is ???
 How BAD It Is ???
 Used to make profit at the expense of other
investors
 Leads to loss of confidence of investor in stock
market
 The process corrupts the ‘Level Playing Field’
 It is easier to identify the beneficiaries of insider
dealing. But the extent of losses occurred is
impossible to calculate.
Governing Regulations
SEBI (Insider Trading) Regulations, 1992
19.11.1992

SEBI (Insider Trading) (Amendment)

Regulations, 2002
20.02.2002

SEBI ( Prohibition of Insider Trading)

(Second Amendment) Regulations, 2002
29 .11.2002
 Who Is
INSIDER ???
Reg 2 (e) ANY PERSON INSIDER

WHO
IS WAS
OR
CONNECTED WITH THE COMPANY

OR
DEEMED TO HAVE BEEN CONNECTED

AND

WHO IS REASONABLY EXPECTED TO HAVE

ACCESS OR HAS RECEIVED OR HAS HAD ACCESS

TO
UNPUBLISHED PRICE SENSITIVE INFORMATION
 Who Is
Connected Person??
 Connected Person
Reg 2 (c)
ANY PERSON

WHO
Is a director Deemed to be a director
U/s 2(13) of Co Act OR U/s 307(10) of Co. Act

Officer
OR Employee
OR
HOLDS A POSITION INVOLVING

Professional Relationship OR Business Relationship

Whether
Temporary OR Permanent
AND
WHO MAY REASONABLY EXPECTED TO HAVE
ACCESS TO UPSI
Connected Person Explanation :
THE WORD “CONNECTED PERSON”

SHALL MEAN ANY PERSON

WHO IS CONNECTED PERSON

SIX MONTHS
PRIOR TO AN ACT OF

INSIDER TRADING
 Who Is
“Person Deemed
to be
Connected” ?
 Person Deemed to be Connected
Reg 2 (h)

Company under Same Management / Group / Subsidiary

All Intermediaries, Their Employees & Directors

Investment / Trustee / Asset Management Company,

their Employees & Directors

Officials of Stock Exchange / Clearing House / Corporation

Board of Trustee Members & Directors of Mutual Fund

Public Financial Institution, Its Employees & Directors

Relative of any of the aforementioned Persons

 Person Deemed to be Connected Contd.
Reg 2 (h)

Bankers of the company

Relatives of the Connected Persons

Any Concern / Firm / trust / HUF/ Company / AOP

In which

Directors or Deemed Directors / Relatives of Connected /

Deemed Connected Persons or company banker

Have More than 10% of the holding or Interest

Price Sensitive
Information
 Price Sensitive Information
Reg 2 (ha)
ANY INFORMATION

WHICH RELATES

DIRECTLY OR INDIRECTLY

TO A COMPANY
AND
WHICH IF PUBLISHED

LIKELY TO MATERIALLY AFFECT THE PRICE OF

SECURITIES OF THE COMPANY
 Reg 2 (ha) Deemed Price Sensitive Information

 Periodical Financial Results of the company;

 Intended declaration of dividends;
 Issue of securities or buy-back of securities;
 Expansion Plans / New projects;
 Amalgamation, mergers or takeovers;
 Disposal of undertaking;
 Changes in policies of the company
 Listing Price Sensitive Information
As per Clause 36 Listing Agreement Contd.
 Change in the general character or nature of
business

 Disruption of operations due to natural calamity.

 Commencement of Commercial Production/

Commercial Operations

 Litigations/ dispute with a material Impact.

 Revisions in Ratings
 Listing Price Sensitive Information
As per Clause 36 Listing Agreement Contd.

Any other information having bearing on the operation/

performance of the Company as well as price sensitive
information which includes but not restricted to;

 Change in market lot / sub-division ;

 Voluntary delisting by the company ;

 Forfeiture of shares;

 Alteration in terms of any securities ;

 Information regarding securities issued abroad ;

 Cancellation of dividend/ rights/ bonus etc.

Un - Published
Reg 2 (k) Un - Published
Information,
which is not published
by the company or its agents
and
is not specific in nature.

Explanation:
Speculative reports in print or electronic media
shall not be considered as published information
Dealing in Securities
Reg 2 (d) Dealing in Securities

"Dealing in Securities"
means an act of
subscribing
buying,
selling
or agreeing subscribe to buy, sell
or deal in any securities
by any person
either
as principal or agent;
 Prohibition on
Dealing,
Communicating or
Counseling
Reg 3 NO INSIDER
Prohibition
On Insider
SHALL
Either on his own behalf On Other’s behalf
OR
DEAL IN SECURITIES OF THE COMPANY

WHEN
IN POSSESSION OF ANY UPSI

OR

COMMUNICATE / COUNSEL / PROCURE

Directly OR Indirectly

ANY UPSI TO ANY PERSON

Reg 3 Exemption to Prohibition
For Insider

For any communication

which is required in the
ordinary course of business
or profession
or employment
or under any law.
Reg 3A Prohibition
On Company
NO COMPANY

SHALL

Deal in Securities of

Associate of that
Other company OR other company
WHEN
IN POSSESSION OF ANY

UNPUBLISHED PRICE SENSITIVE INFORMATION

Reg 3B Exemption
Exemption to
to Prohibition
Prohibition
For Company
 The decision of transaction or agreement was not taken
by officer or employee of the company who is in
possession of UPSI; AND

 Adequate Procedures in place to demarcate the persons

having UPSI & persons dealing in securities; AND

 Proper arrangement in place to block the dissemination

of UPSI; AND

 The information was not so communicated and no such

advice was so given; OR.

 The acquisition was in line with SEBI SAST Regulations

Violations
of Provisions
Relating to
Insider Trading
Reg 4 Violation

Any insider,
who
deals in securities
in contravention of the
provisions of Regulation 3 or 3A
shall be
guilty of Insider trading.
Power of SEBI To
Make Inquiries &
Inspections
Reg 4A Power to make Inquiries &
inspection
If the Board suspects
that any person has violated
any provision of these regulations,
it may make inquiries
OR appoint persons to inspect books & records
of such persons OR any
Stock Exchange / Mutual Fund / Intermediaries/
Any other person
as deemed fit,
to form a prima facie opinion
as to whether there is
any violation of these regulations.
Right of SEBI
To
Investigate
Reg 5 Right to Investigate

The Board may appoint investigating authority

to investigate
into the complaints received from investors,
intermediaries or any other person
on any matter having a bearing on the
allegations of insider trading;
AND
To investigate suo-moto
upon its own knowledge or
information in its possession
to protect the interest of investors in securities
against breach of these regulations.
Procedure
for
Investigation
Reg 6 - 9 Procedure for Investigation

On Complaints Appointment of
Notice Issued
/ Suo-moto Invtg. Auth.

On Conclusion To provide Investigation

Report to Board all assistance Started

Findings to Shall Reply Board will

suspected person within 21 days Issue directions
Directions
By
SEBI
 Reg 11 Directions by Board
INDEPENDENT
of right to Initiate Criminal proceedings
OR any action under
Chapter VIA of the Act (Penalties & Adjudication) ,
May Direct
• Not to deal in securities
• Prohibition on Disposal
• Restraining to Communicate or Counsel
• Declare transaction as null & void
• To deliver securities back to the seller
• Or market price equivalent be paid to the seller
• To transfer the proceeds to the
Investor Protection Fund of Stock Exchange
Disclosures
To be
Made
Reg 13(1) Disclosures To be Made

TO BE
SUBMITTED
PARTICULARS To PERIOD
Initial disclosure by within 4 working days
person who holds of receipt of
more than 5% information of
Company
shares/ voting allotment or the
rights in any acquisition of
listed company shares/voting right
To Intimate
The number of shares held by such persons
Reg 13(2) Disclosures To be Made

TO BE
SUBMITTED
PARTICULARS To PERIOD
Initial disclosure by within 4 working days
person who is of becoming the
either director or officer
Company
director or officer of company
of
listed company
To Intimate
The number of shares held by such persons
Reg 13(3 & 5) Disclosures To be Made

TO BE
SUBMITTED
PARTICULARS To PERIOD
Continual within 4 working days
disclosure by of receipt of
person who holds information of
more than 5% Company allotment or the
shares/ voting acquisition of
rights in any listed shares/voting right
company
To Intimate
The number of shares held & any Change
exceeding 2%
Reg 13(4 & 5) Disclosures To be Made

TO BE
SUBMITTED
PARTICULARS To PERIOD
Continual within 4 working days
disclosure by of receipt of
person who is information of
either Company allotment or the
director or officer acquisition of
of shares/voting right
listed company
To Intimate
The number of shares held & any Change exceeding
Rs. 5 Lakh OR 25000 Shares OR 1%
whichever is Lower
Modal
Code
of Conduct
 Reg 12 Code of Conduct
To be Abide By
All Listed Companies
Organizations Associated with Securities Markets including:
All intermediaries
AMC and trustees of mutual funds;
The Self Regulatory Organizations;
The Stock Exchanges / Clearing House / Corporations;
The Public Financial Institutions
The Professional Firms
Such as Auditors, Accountancy Firms, Law Firms,
Analysts, Consultants, etc.,
Assisting or Advising Listed Companies
Schedules Model Code of Conduct

SCHEDULE I

MODEL CODE OF CONDUCT

FOR PREVENTION OF INSIDER TRADING

PART A - FOR LISTED COMPANIES

PART B – FOR OTHER ENTITIES

SCHEDULE II
CODE OF CORPORATE DISCLOSURE PRACTICES
FOR
PREVENTION OF INSIDER TRADING
Important Terms
In
Code of Conduct
 Model Code of Conduct
IMPORTANT TERMS

NEED TO KNOW

 PSI should be disclosed only to those within the

company who need the information to discharge their
duty.

 Limited access to confidential information

 Files containing confidential information shall be kept

secure.

 Computer files must have adequate security of login

and pass word etc.
 Model Code of Conduct
IMPORTANT TERMS
PRE CLEARANCE OF TRADES

 All D/O/E of the Co who intend to deal in the securities

beyond a limit should pre-clear the transactions.

 An application to the Compliance officer indicating

 The estimated number of securities that the D/O/E

intends to deal in,

 The details as to the depository with which he has a

security account,

 The details of securities in such depository mode.

 Other details as may be required by any rule made by

the company in this behalf.
 Model Code of Conduct
IMPORTANT TERMS
TRADING WINDOW

 Company shall specify a trading period, to be called

"Trading Window", for trading in the company’s securities.

 The trading window shall be closed during the time the

Price Sensitive information is un-published.

 When the trading window is closed, the D/ E /O shall not

trade in the company's securities in such period.

 The trading window shall be opened 24 hours after the

Price Sensitive Information is made public.
 Model Code of Conduct
IMPORTANT TERMS
RESTRICTED /GREY LIST

 To restrict trading in certain securities and designate such

list as restricted / grey list.

 Client Companies for which any assignment or appraisal

report or credit rating assignments are going on.

 Any security which is purchased or sold by the

organisation / firm on behalf of its clients / schemes of
mutual funds, etc. shall be put on the restricted / grey list.

 As the restricted list itself is a highly confidential

information, It shall be maintained by CO.
 Model Code of Conduct
IMPORTANT TERMS
CHINESE WALL

 "Chinese Wall" policy demarcates “inside areas” from

"public areas".

 Those areas having access to confidential information,

considered “inside areas” and areas which deal with
sales / marketing / investment considered "public areas".

 The employees in the inside area shall not communicate

any PSI to anyone in public area.

 In exceptional circumstances employees from the public

areas may be brought "over the wall" and given
confidential information on the basis of "need to know"
criteria, under intimation to the CO
 Model Code of Conduct
IMPORTANT TERMS
COMPLIANCE OFFICER (CO)

 Compliance Officer ‘Senior Level Employee’ who shall report to the

MD / CEO.

 The CO shall be responsible for

- setting forth policies, procedures
- monitoring adherence to the rules for the preservation of “PSI”,
- pre-clearing of designated employees’ and their dependents’ trades
- monitoring of trades and the implementation of the code of conduct
under the overall supervision of the Board of the listed company.

 The CO shall maintain a record of the designated employees and any

changes made in the list of designated employees.

 To Provide clarifications regarding the SEBI (Prohibition of Insider

Trading) Regulations, 1992 & the company's code of conduct to the
Company’s employees..
 Model Code of Conduct
IMPORTANT TERMS
PENALTY FOR CONTRAVENTION
OF CODE OF CONDUCT

 Code provides Penalty and Appropriate action by the

company for violations of code.

 Disciplinary action by the company, include wage

freeze, suspension, ineligible for future participation in
ESOP etc

 The action by the company shall not preclude SEBI

from taking any action incase of violation of SEBI
(Prohibition of Insider Trading), Regulations, 1992.
Action By SEBI
Against
Violations
 Reg 14
GENERAL ACTION
AGAINST VIOLATIONS

 Take actions to Prohibit Insider Trading – U/s 11.

 Issue directions in Interest of Investors & Securities

Market – U/s 11B

 Impose Penalty ( 25 Crore) / Imprisonment (10 Years) U/

s - 24
 Sec 15 G of SEBI
SPECIFIC ACTION
AGAINST VIOLATIONS
APPLICABILITY :

 Any Insider Who

 Deals in Securities based on any UPSI.

 Communicates any UPSI to any person, with or
without his request
 Counsels / procures to deal in Securities Based on
UPSI.

PENALTY :
 Rs. 25 Crore OR
 3 times the amount of profit made
 Whichever is HIGHER
Interesting
Judgements on
Insider Trading
 MATTER OF DEBATE

WHETHER AN ACTION UPON ANY PRICE SENSITIVE

INFORMATION WHICH TURN OUT TO BE INCORRECT
FALLS UNDER INSIDER TRADING

HELD

INFORMATION WHICH FINALLY TURNS OUT TO BE

FALSE OR AT LEAST UNCERTAIN CANNOT EVEN BE
LABELED AS INFORMATION.

SAMEER ARORA VS. SEBI

 MATTER OF DEBATE

WHEN AN PRICE SENSITIVE INFORMATION WILL BE

TREATED AS MADE PUBLIC

HELD

THE DAY ON WHICH THE INFORMATION IS SENT TO

THE STOCK EXCHANGE AS PER THE LISTING
AGREEMENT.

DSQ HOLDINGS VS. SEBI

2. DSQ HOLDINGS VS SECURITIES & EXCHANGE BOARD OF INDIA.

BRIEFINTERNATIONAL
ISSUES & DECISIONJUDGEMENT
The appellant was charged for indulging in the insider trading in the
FACTS
shares of the Company via DSQ Biotech Ltd.(DSQB). The Transaction
Relates to the period from 1/08/1994 to 30/09/1994. The respondent has
Disclosure
held of confidential
that appellant information
is an insider and by sonshares
it had purchased to hisonfather
the basis
concerning
Of adverse
UPPSI relating to RIGHT Corporate
ISSUE. Thedevelopments at guilty
appellant is found the Company
of violating of
because regulation
the a new3(I) of the Insider
drug jointlyRegulations.
being developed by the
company along with Other Company. Father used the
The impugned order states that the information on the right issue
information and purchased the Co’s “PUT” Options.
Becomes public only on 309/94 when the AGM was held. The notice of
AGM was dispatched to the shareholding on 25/08/94.
Father sold the put options on Co’s JV termination
The Appellant an
generating states that the right
overnight issue
profit was first
of more discussed
than in the
$ 55,000.
Board Meeting of the Co. held on 30/7/94. The Company send the
HELD to the Stock exchange as per the Listing Agreement on the
Information
Very same day. The concerned public was aware of the company’s
Proposal the very
Both Father same
& Son day
was charged of the GUILTY OF INSIDER TRADING

Thus the ingredients of insider trading not found in the case and hence
S E C VS TIMOTHY J.POTTER & GEORGE R.POTTER
The appeal was dismissed.
 INTERNATIONAL JUDGEMENT
FACTS
Alfred Teo a major shareholder of a company learned about
the tender Offer for the company and then purchased the
stock on the basis of this Information prior to the
Company’s Public announcement of the Acquisition. Teo
also tipped eight other defendants. Thereupon made illicit
profits of approximately $22 Million.

It was proved that the defendants use the inside information

and also Give tips to others and earned illicit profits.
HELD
The exchange ordered for disgorgement of all illicit
profits, Civil penalties, permanent injunctions also.
S E C VS ALFRED S.TEO, SR, ET AL
 INTERNATIONAL JUDGEMENT

FACTS

Arjun Sekhri, a former investment banking associate

having An inside confidential information about the
Company tipped Various other persons in advance of
six major corporate Announcements

HELD

The offence of insider trading was proved against the

defendants and they were sentenced for Imprisonment
and were asked for disgorgement of the Trading profits.

S E C VS ARUM SEKHRI, AMLOLAK SEHGAL, & PRATIMA RAJAN

Lastly…
It is easier to identify the beneficiaries
of insider dealing.
But
the extent of losses occurred to the
general investor is
impossible to calculate.
Thus…
Let’s we knowingly not
involved in this practice
and
put in place proper measures
so would not get involved in
Insider Trading.

Thanks…