Professional Documents
Culture Documents
Insider Trading
Insider Trading
Introduction
o Who is insider?
o What is Inside Information?
o Price sensitive information
o How does Insider Trading Work
o Who does insider-trading affect?
o Transactions, which gives indication of insider trading
o SEBI‘s efforts to curb insider trading
o The Difficulty in framing insider trading Laws
o Various case studies
Objective
Scope
Research Methodology
Finding and Analysis
Recommendation and suggestions
Conclusion
Bibliography
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INTRODUCTION:
Insider trading is one of the most violent crimes on the faith of fair dealing in a capital market.
The scope and stringency of the violation and penalties differ wildly from country to country.
Trading by an insider of a company in the shares of a company is not per se a violation of law.
For instance, a person (an investigative journalist for example may interview an insider and thus
become one) may come across insider information by his perseverance in uncovering a corporate
fraud and disclose the fraud. A person can create inside information by his future actions, for
instance a future tender offer bidder knows that the price of the target company will go up by his
actions. In fact trading by insiders, including directors, officers and employees of the company in
the shares of their own company is a positive feature, which companies should encourage
because it aligns its interests with those of the insiders. What is prohibited is the trading by an
insider in breach of a duty of trust or confidence in the stock of a company on the basis of non-
public information to the exclusion of others. Insider trading violations may also include
"tipping" such information and securities trading by the person "tipped". If insider trading is
allowed unchecked in the capital markets, persons with insider information will have a consistent
edge in trades executed with such information and those without the information will be
consistent losers on the market. The latter category of people, which includes the vast majority of
investors, would slowly realize the loser game they are playing in this ‗market for lemons‘ and
would believe that all transactions are thus biased against them. Slowly the typical investor
would desert the market, retarding or destroying important functions of the stock market like
capital formation.
In layman's language, the term "Insider Trading" is about trading with the use of inside
information i.e. information that has not yet been disclosed to the public. In the fastest growing
capital market system, stock exchanges occupy a very crucial position by enabling the corporate
sector to mobilise capital from household savings and channelize such savings into productive
areas of investment. The growth of securities market has brought the single most unfair and
unhealthy practice viz, Insider Trading, by which persons connected with companies use
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unpublished price sensitive information to deal in the securities of a company with a view to
make profits or avoid losses by use of such information. Although the precise explanation of
Insider Trading is very difficult to define, the following activities of an insider constitute insider
trading:1) Taking advantage of inside information with full knowledge of the facts by dealing for
his own account or for the account of a third party, either directly or indirectly, in transferable
securities to which the inside information relates;2) Disclosing inside information to a third party
unless such disclosure is made in the normal course of the exercise of his employment,
profession or
duties.Recommending or procuring a third party to deal in transferable securities.Transferable
securities include shares; debt securities; securities equivalent to shares and debt securities;
contracts or rights to subscribe for, acquire or dispose of such securities index contracts (i.e. a
contract the purpose of which is to secure a profit or avoid any loss by reference to fluctuations
in an index); future options and financial futures in respect of such securities.
Who is An Insider?
The concept of 'Insider' is very important one, and on this concept only, the whole play of insider
trading rests. Broadly, there are two types of insiders—Primary Insiders and Secondary Insiders,
A primary insider is a person who has access to inside information by virtue of his relationship to
an issuer of securities. While a secondary insider is person who acquires inside information from
a primary insider. The characterizations of an insider as any person who possesses inside
formation because he has access to it by virtue of the exercise of his employment, profession or
duties, brings out two types of insiders. One is internal insider who obtains inside information in
the exercise of his duties as officer or employee of the company. The other one is external insider
who obtains information because his connection with the company on account of his
employment and profession.
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Above explanations of an insider, bring a concluding definition of the insider and
that is what explained by Greek law, "a person becomes an insider if he acquires
confidential information as a result of offering services under any capacity on a
permanent or temporary basis to an issuer or for an issuer". The Securities
Exchange Board of India has given a very wide definition, which merely defines an
insider as:
The term "insider" is defined in clause (e) of regulation 2 as: "insider means any
person who, is or was connected with the company or is deemed to have been
connected with the company, and who is reasonably expected to have access, by
virtue of such connection, to unpublished price sensitive information in respect of
securities of the company, or who has received or had access to such unpublished
price sensitive information. ―The definition has two limbs. The two limbs form the
two essential ingredients of the definition, both of which may be split and presented
as follows:
Or
Or
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Who has received or had access to such unpublished price sensitive information.
In order to brand a person an insider any one of the two tests stipulated in the first
limb,and one of the three tests stipulated in the second limb, of the definition must
be established.
Clause (c) of regulation 2 defines the expression " connected person" and the
following persons will be treated as connected persons:
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Asset Management Company of a mutual fund or is an employee thereof who have a
fiduciary relationship with the company;
MALE FEMALE
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⇒ Daughter's Son ⇒ Son's Daughter
⇒ Daughter's Son ⇒ Daughter's Sons' wife
⇒ Daughter's Daughter's husband ⇒ Daughters 's Daughter
⇒ Brother (Incl.-step-Brother) ⇒ Brother's wife
⇒ Sister's husband ⇒ Sister (Incl. step-sister)
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related with the concept materiality. The information must be something more than a simple
rumor, and must have a minimum degree of certainly.
Price sensitive information‖ means any information, which relates directly or indirectly to
accompany and which if published is likely to materially affect the price of securities of
company. The following shall be deemed price sensitive information:
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a) Issue of any class of securities;
b) Acquisition, merger, de-merger, amalgamation, restructuring,
scheme of arrangement, spin off or setting division of the
company, etc;
c) Change in market lot of the company's shares, sub-divisions of
equity shares of the company;
d) Voluntary delisting by the company from the stock exchange(s);
e) Forfeiture of shares;
f) Any action which will result in alteration in the terms regarding
redemption/cancellation/retirement in whole or in part of any
securities issued by the company;
g) Information regarding opening, closing of status of ADR. GDR or
any other class of securities 1o be issued abroad) Cancellation of
dividend/rights/bonus, etc; Price sensitive information is required
to be disseminated to the stock exchange on an immediate and
continuous basis.
In an insider trading case in 1989, a former stockbroker was convicted of trading based on
insider information. He received the insider information about a company ―after its president told
his sister, who told her daughter, who told her husband,‖ who in turn told the defendant who
traded on the information. This is an example of just how far removed insider information can
get.
It is very difficult to express opinion on the extent and magnitude of insider trading in India.
During the last five years or so, this practice has almost been perfected so well by the regular
players that today it is accepted as part and parcel of the day to day stock exchange operations.
Promoters of several new ventures admit, albeit off-1he-record,that they are forced to play into
the hands of big brokers by participating in modified forms of insider trading to brighten the
market prospects for their issues. Advance knowledge "of an imminent take-over bid.
Knowledge of a forthcoming placement of new shares in combination with the implementation
of financial recovery programmes, and knowledge of a significant change in the investment
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policy of a unit trust are some of the examples of insider trading. There are many types of ways
of insider trading. Let us take a simple case of bonus issue vis-à-vis insider trading. Suppose A
Ltd. is coming out with a bonus issue. The share price of A Ltd. will definitely be affected by
such an action of the company. The management personnel who are privy to this information
may contract to buy large quantity of the company's shares directly in their own names or
indirectly in the names of their main family members or friends. After this, the information is
'leaked out' so that the general public enters into the market, which will ensure the price to rise.
Moreover, advise of brokers, saying to their customers that one must buy the shares of A Ltd.,
because management of the company is also buying. Such practices bring more and more buy
orders and thus lead to substantial increase in prices, and that is what the original 'tip makers'
wait for. When this happens, the insiders unload and depart with the cream of appreciation
safely. The early investors who had taken the plunge also make some money but, most of the
investors have entered the market rather late, the yare left in the lunch holding large chunks of
shares purchased at high prices. Thus, the majority of the new investors do not gain at all.
Motivated reports strategically published in newspapers and magazines are also one form of
insider trading. Several investors act on the motivated reports and suffer their own fate, by the
time they realise their mistake the insider has got away with the benefits. Insider trading also
takes the form of manipulation. Under the listing agreements entered into by the companies with
the stock exchange concerned, the publication of half yearly working results are mandatory. Now
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the normal practice of dressing the half yearly results in such a manner so as to show a result
contrary to the general trend is very common feature of companies. Suppose, A Ltd. is expected
to do reasonably well at the year end, the management of A Ltd. shows almost a break picture for
the half year. The individuals close to the management will unload all their holdings a few days
before the publication of the results. The common investor of A Ltd. will be watching the share
prices coming down. Then the poor half yearly results will be published which will further bring
down the prices. After a few months, the insiders will slowly buy back the holdings and spread
the news that the company has started doing well and the prospects of (he company are bright.
Yet another form of insider trading takes the form of market support provided by the
management by resorting to very heavy purchases of its company's shares through various
intermediaries. Such practice is particularly used when the company is coming out with a big
right issue and the management cannot afford the price to fall below a specified minimum.
Generally, after the issue is over subscribed the price comes down and the investor who has
subscribed for the new issue realise that the issue was not worth the price paid by him. This
aspect of insider trading has almost become a permanent feature of the share market operations
of today's corporate world. Such unfair practices are more common and frequent during or near
the time of declaration of annual or half yearly profits, bonus or rights issue or issue of
convertible debentures, new profits schemes of amalgamations or takeovers etc. Sometimes,
insider trading is resorted to by connected persons through speculators or brokers under the
benami transactions. Whatever form insider trading may assume, it is obvious that the common
investors are the ones who always lose.
For understanding the effects of insider trading, it is helpful to categorize the agents involved or
affected into several groups. Economic analysis of insider trading typically considers the
following parties: insiders, market professionals, liquidity traders, and Investors, who are
defined as follows. Insiders, as defined earlier, are the officers, directors, and other key
employees of a firm who, by the nature of their employment, obtain or possess confidential
information regarding the firm‘s prospects. An example of an insider is the chief executive
officer or the chief engineer of the firm. Market professionals are informed non-insiders,
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including securities analysts, brokers, or arbitrageurs, who have acquired private information
regarding the firm‘s prospects by spending their own resources and who do not have any
fiduciary relationship with the firm. For example, a security analyst may have called the firm‘s
major customers and learned that they are not interested in buying its new product line. Liquidity
traders, sometimes referred to as ―noise‖ traders, are short-term stock market participants
whohave some, usually negligible, holdings of the firm‘s shares and trade in order to hedge risk
or balance their portfolios without consideration of a firm‘s prospects. An example of a liquidity
trader is a large pension fund that buys and sells the firm‘s shares from time to time in order to
meet the investment and redemption needs of its clients. Investors may be small or large
shareholders who have a long-term investment objective such that they ―buy and hold.‖ While
not privy to management‘s private information, investors have a significant beneficial interest in
the firm‘s actual performance. For instance, the heir to a substantial holding of the firm‘s stock
who does not take an active role in its daily management is an investor. Insider trading involves
and affects each of the above classes of agents. If insiders were allowed to trade on their
privileged information, they would of course reap trading profits. At the same time, insiders who
are professional managers may receive reduced compensation from investors to reflect the profits
managers can earn from trading. Insider trading also affects liquidity traders, who face the
prospects of incurring losses when trading with agents possessing superior information. On the
other hand, if they avoid trading, they will lose the diversification/hedging benefits that prompt
them to trade in the first place. In addition, insider trading implies that informed non insiders or
market professionals face informed competitors in the financial marketplace. The rivalry
between informed insiders and informed no insiders may drive the latter out of the market,
making prices less informative, or, by furthering competition, increase the speed with which
information is released to uninformed traders. Insider trading has an impact on investors through
its effects on both investors ‗trading profits (when they buy and sell holdings for liquidity
reasons) and managerial incentives to create value. If insider trading were not prohibited by law,
investors, especially large shareholders, would need to decide their firm‘s policy toward insider
trading. The legal and economic literature on insider trading attempts to weigh the trade-offs
discussed above to formulate optimal policies. Different authors focus on different classes of
actors and different types of effects. Given the number of classes of actors involved in and
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affected by insider trading and the multiplicity of effects, differences in focus have led to rather
discordant assessments of insider trading and conflicting policy recommendations.
Certain types of transaction can alert securities regulators that the investor who initiated them
must have been acting based upon inside knowledge -- in other words, knowing some significant
piece of news before the general public. A transaction will be considered suspicious based upon
a combination of criteria:
The timing is just a little too good. Anyone can make an investment at any time, but
someone who buys soon-to-be profitable put options or sells a stock short in the few
trading days immediately before a major decline in the stock's price will seem to have
been more than ordinarily lucky. This criterion is suggestive when present, but is not
mandatory. For example, a short sale could have been made quite some time before it
would turn out to be profitable. But the longer in advance a short sale or put-option
purchase is made, the more uncertainty there will be as to whether events will play out
according to plan; so generally the inside trader doesn't make illicit trades very long in
advance.
The transaction itself is too specific. For example, if someone bought puts on United
Airlines and American Airlines but not on Delta Airlines, investigators will be sure that
the
trader knew in advance that these two airlines were targets of the attack. (On the other
hand, this works both ways: If there were similar trades in a third airline but not in others,
investigators can conclude that one or more flights of that airline were supposed to have
been hijacked as well.)
The transaction is too large. One of the most reliable indicators of illegal insider trading
is that the perpetrator has traded at an abnormally high level. In other words, someone
who normally makes trades of a few thousand dollars now and then, but suddenly begins
to make much bigger plays, may well be doing so because s/he has some form of inside
knowledge. If inside-traders kept their trades to reasonable levels, they would seldom, if
ever, be caught -- since their trades would not seem especially abnormal and they could
be explained as part of their regular investment strategy. However, people typically get
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caught up by their own greed: when they know for certain that something significant is
going to happen to the price of a stock, they cannot resist the temptation to make as much
money as possible on their knowledge.
Transactions deviate from normal trading levels. In the options markets, there is normally
a reasonably even balance between call and put options on any given stock; and there is
normally a reasonably predictable level of activity in options on any particular stock.
When the balance between puts and calls is grossly disrupted and the level of volume in
options trading is far beyond normal, investigators can be pretty sure that something is
up.
The transaction is too speculative. In other words, the transaction is one that would be
unreasonably risky -- if not out-and-out stupid -- were it not that the perpetrator was
trading based upon inside knowledge. For example, a large purchase of stock options that
were both significantly "out of the money" and relatively close to their expiration date,
but suddenly turned out to be valuable based upon some news affecting the underlying
stock, would seem to represent an unreasonable degree of prescience.
Close period means the prohibited period specified for trading and dealing in thesecurities of the
company. The Regulations require that dealing in securities of alisted company be prohibited at
the time of:-
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period' could commence from the time of announcement of the meeting of the Board of
Directors of a company with respect to all price sensitive information and end 24 hour
after the decision of the Board is made public. In case of matters which are not required
to be dealt in the Board meeting, the close period should be from the time the preliminary
discussions in respect of the matters commence and end 24 hours after the information is
made public.
Pre-clearance of trades
Compliance Officer
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The organisation/firm has a Compliance Officer (senior level employee) reporting to the
Managing Partner/Chief Executive Officer. The Compliance Officer shall be responsible for
setting forth policies and procedures and monitoring adherence to the rules for the preservation
of ―Price Sensitive Information‖, pre-clearing of all designated employees and their dependents
trades (directly or through respective department heads as decided by the organisation/firm),
monitoring of trades and the implementation of the code of conduct under the overall supervision
of the partners/proprietors. The Compliance Officer shall also assist all the
employees/directors/partners in addressing any clarifications regarding SEBI (Prohibition of
Insider Trading)Regulations, 1992 and the organisation/firm‘s code of conduct. The Compliance
Officer shall maintain a record of the designated employees and any changes made in the list of
designated employees.
Other restrictions
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Specific information v general information: Generally, inside information is that which is
likely to materially affect the price of securities if it were public. The problem here is
drawing the line between specific information and merehunches based on rumors or
guesswork and research or fact-finding on commercial or economic trends or businesses.
Sanctions:
Sanctions may be civil or criminal or both. Any form of sanction runs into the difficulty
of identifying the insider and obtaining the necessary discovery, especially if the insider
arranged the transactions from abroad through a bank that raises the bank secrecy defense
against foreign. A further problem with civil liability arises from the fact that there is no
relationship between the insider dealer and his counterpart in the market. It is not
practicable to show which counterpart dealt with the insider amongst the many
transactions that may have taken place between the time the insider dealt and the time the
inside information became public. If the insider were to be liable for losses to all
counterparts in the market (e.g. the difference between the price with and without the
information) then the liability could be vast and disproportionate to the offense. In the
Texas Gulf Sulphur case it has been estimated (as opposed to an actual award) that the
liability to sellers of the shares was in the region of US $ 350 million - that isUS$ 150
million more than the net worth of the corporation.
Conflict of duties
Conflict of duties often arises when dealing in securities. When directors told a broker
that the dividend would be
cut. If the broker sold the
company‘s stock for his client‘s
price sensitive information,
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there may be a conflict between his duty not to trade and his duty to act in the best
interests of his customer. The prohibition on insider trading is usually overriding. The
broker was liable notwithstanding that he had a conflicting duty to do his best for his
clients.
Negative profits
Generally, where an insider holding securities is influenced not to sell because of inside
information and thereby avoids a loss, it is impracticable to impose liability because of
the Share price of XYZ co. Will go down because of bad financial results. Therefore, you
sell the stock. difficulty of proving intent to sell which was subsequently doused by the
inside information. Inthe US, the plaintiff must have purchased or sold a security. Thus, a
counter party has no claimwhere he refrains from doing anything but would have dealt if
he had known. Therefore, adefendant who suffers a loss when insiders sell on
unfavorable news and the price falls as aresult may have no standing since he did not sell.
Intent
Intent is usually an important factor in establishing guilt. There must be actual knowledge
by the insider that he is an insider and that the information is inside information, i.e. the
insider dealing must be knowing and deliberate.
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Territoriality
A major problem for the control of insider dealing is the territorial scope of the
prohibition. If the prohibition is strictly territorial it is a simple matter for the insider to
trade from abroad or on a foreign stock exchange - through a dummy company if
necessary. As regards the UK position, the CJA applies (in the case of dealing) where the
individual was in the UK when he did an act constituting or forming part of the offense or
where the regulated market or professional intermediary is in the UK. In the case of
offenses of disclosing inside information, or encouraging insider dealing, the offense is
committed if the individual or the recipient was in the UK when the disclosure or
encouragement took place. The US Rule applies where the fraud is achieved ―by the use
of any means or instrumentality of interstate commerce, or of the mails or of any facility
of any national securities exchange‖. Insider dealing abroad may be subject to US
jurisdiction if the fraud has an effect on the US securities markets.
"...it can be conclusively said that while entering into the transaction for purchase of 8
lakh shares of BBLIL from UTI, HLL was acting on the basis of the privileged
information in its possession, regarding the impending merger of BBLIL with HLL. It
also may be stated that, byits very nature, when it comes to motives and intentions,
there may not always be any direct evidence. However, the chain of circumstances, the
timing of the transaction, and other related factors, demonstrates beyond doubt that
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the transaction was founded upon and effected on thebasis of unpublished price
sensitive information about the impending merger."
Excerpt from SEBI order that tried to establish an insider trading case against HLL
management.
THE BACKGROUND
The HLL-BBLIL merger announcement was made on April 19 1996. But the two stocks
especially that of BBLIL, started seeing heightened activity from February itself. The
BBLIL stock was quoting at Rs. 242.00 in end January, with average daily volumes of
around 16,000shares. By the end of February, the stock had shot up to Rs. 341.00 and
45,250 shares were traded on the last trading day of that month; the average price and
trading volumes that month were Rs. 304 and 30,315 shares respectively. The story was
the same in March, with the average price increasing to Rs. 349.00, but the trading
volumes dipped to 10,000 shares. By the time the merger announcement was made in
April, the stock had reached stratosphere. When the merger was announced on April 19,
1996, the Bombay Stock Exchange had a trading holiday and the market had to wait until
Monday before reacting. But even a couple of days before that, on April 18 1996, the
price dropped marginally to Rs. 402.00 and the trading volume was 88,150 shares. And
here comes the crucial part. When the market opened on April 22, after the formal
announcement, the stock dropped sharply to Rs. 368.00, and, more important, volumes
halved at 35,650 shares, displaying a clear waning of interest in stock. By the end of May
1996, the BBLIL stock had gone out of favour, with the average daily price for that
month dropping to Rs. 338.00 and the trading volumes a mere 8,129 shares. Trading in
the HLL stock too exhibited a similar pattern. The stock closed in January with an
average price of Rs. 628.00 and average volumes of 9,291 shares. By the next month,
interest had heightened and the stock closed in February with an average price of Rs.
696.00 and trading volumes of 25,085. March witnessed lower volumes at 12,458 but the
price increased marginally to Rs. 698.00. As in the case of BBLIL, the HLL stock
gathered momentum in April. A couple of days before the announcement, the stock price
shot up to Rs. 795.00 and nothing less than one lakh shares were traded on that day
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compared to the average trading volumes of just around 15,000 till then. On April 18, the
stock had declined to Rs. 780.00 while the volumes dropped steeply to 14,950 shares,
possibly anticipating the formal announcement the next day. And once trading resumed
after the merger announcement, on April 22, 1996 the stock dropped to Rs. 755.00 and
the trading volume to just 9,400 shares.
THE SEBI CHARGE :HLL purchased, the BBLIL shares on the basis of unpublished
price-sensitive information which is prohibited under Section 3 of the Regulations.
Section 2 (k) (v)states that unpublished, price-sensitive information relates to "the
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following matters(amalgamations, mergers, and takeovers), or is of concern to a company
and is not generally known or published " According to the SEBI, there can be no dispute
that the information of the overall fact of the merger falls under this definition.
THE HLL DEFENCE: Only the information about the swap ratio is deemed price-
sensitive. And this ratio was not known to HLL-or its directors-when the BBLIL shares
were purchased in March, 1996. The two audit firms, S.S. Billimoria & Co. and M.N.
Raiji & Co., recommended the ratio to the HLL board only in mid-April 1996. Moreover,
HLL argues that the news of the merger was not price-sensitive, as it had been announced
by the media beforethe companies' announcement, April 7, 1996). HLL also points out
that it was a case of a merger between two companies in the group, which had a common
pool of management andsimilar distribution systems. Therefore, the merger information
in itself had little relevance; theonly thing that was price-sensitive was the swap ratio.
HLL made a notional profit of Rs 4.37crore on the transaction.
THE SEBI CHARGE : Why did HLL not follow the route of issuing preferential shares
toallow Unilever's stake to rise to 51 per cent in HLL? As per the SEBI chargesheet:
"Such a stepwould have involved various compliances/clearances, and required Unilever
to bring insubstantial funds in foreign exchange." The implication: HLL depleted its
reserves to ensurethat Unilever did not have to bring in additional funds.
THE HLL DEFENCE: Issuing of preferential shares would have, indeed, been a
cheaper option to ensure that Unilever had a 51 per cent stake in HLL. Had HLL
followed this route, it would have had to pay Rs 282.35, instead of Rs 350.35, per share.
In other words, it would have made a profit of Rs 5.41 crore by doing so. HLL also states
that while the preferential route would have been beneficial for itself, it would have been
dilatory for other shareholders since it would have resulted in an expanded capital base,
leading to a lower earnings per share in the future. HLL was probably worried that the
clearances for a preferential allotment from the SEBI andthe Reserve Bank of India (RBI)
would take their time in coming-or may not be given at all. Ithad already faced a time-
consuming and expensive run-in with the RBI during the HLL-TOMCO merger in 1994.
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THE SEBI CHARGE: Levers cancelled the entire holding of HLL in BBLIL.
THE HLL DEFENCE: HLL was upfront that its entire holding in BBLIL--1.60 per
cent--including the lots purchased from the UTI would be cancelled after the merger in
March, 1997.HLL maintains that this is perfectly legal. In addition, shareholders of both
HLL and BBLIL approved of the cancellation of shares as part of the merger scheme.
Says Iyer "By this process of cancellation, which normally happens in every
amalgamation, the voting rights of Unilever have gone up. However, so have the voting
rights of other shareholders. So, no exclusive benefit--profits or avoidance of loss--has
accrued to HLL or Unilever."
By extinguishing the shares, HLL wanted to maintain Unilever's shareholding at 51 per
cent and not realise any financial gains. However, Section 3 defines insider trading
irrespective of whether profits are made or not.
SEBI’S ORDER
In the first-ever case of insider trading, SEBI has ordered HLL to compensate UTI by
paying Rs. 3.04 crores and launched criminal prosecution proceedings against HLL and
five of its directors, Mr. S.M. Datta, Mr. K.B Dadiseth, Mr. R. Gopalakrishnan, Mr. A.
Lahiri and Mr..M.K. Sharma. After detailed investigations, which included the recording
of the statements of some of the directors of HLL, BBLIL and an officer of UTI, the
findings of the investigation were communicated to HLL and its directors. According to
these findings, prima facie, it appeared that HLL was an insider as it purchased eight lakh
shares of BBLIL prior to the announcement of the merger of BBLIL with HLL on April
19, 1996 on the basis of unpublished price-sensitive information, and HLL had violated
the regulations prohibiting insider trading. Subsequently, a personal hearing was given to
HLL and its directors. Their written submissions were received. In view of this, SEBI had
passed the order that HLL had a profit of Rs. 3.04 crores calculated on the basis of the
difference between the market prices of the shares of BBLIL sold by UTI to HLL after
the announcement of the merger and prior to the announcement of the merger (excluding
premiums)‖. Excluding a premium of around 10 per cent for jumbo deals in shares,the
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pre-merger market price was Rs. 318.00 plus 10 per cent premium and the post-merger
price taken into calculation by SEBI was Rs. 356.00 plus 10 per cent as on December
1996,SEBI officials explained. Later, UTI filed an appeal with the appellate authority,
claiming a higher compensation of Rs. 7.52 crores. It pleaded that it had to incur a
notional loss, as it was not aware that a merger of the two Unilever group companies was
on the cards.
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information involved should not be generally known? On the information about the
merger, the Authority has said that there was a case of merger of two healthy profit
making companies, having a similar management culture. The Appellate Authority orders
neither contest the fact that HLL is an insider nor that the merger‘s information was price
sensitive. HLL has been free from the charge of insider trading on the basis that merger
of HLL and BBLIL was published in number of press reports. The appellate authority
substantiated its order by giving a list of publications, which carried the news during that
period. The authority was of opinion that on basis of press report and market speculation
UTI could have acted more carefully. They were of the opinion that UTI was not market
savvy.
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on March 16. So far,no action has been taken against anyone in this case. Similar patterns
of price increases prior to a public announcement of a merger have been observed in the
UTI Bank-Global Trust Bank merger. Therefore, despite the efforts of the Indian
authorities to combat insider trading, the practice remains extremely common.
In the wake of the terrorist attacks, which caused the destruction of the Twin Towers of New
York's World Trade Center, damaged the Pentagon, and destroyed four large airliners with all
aboard, securities-exchange investigators on three continents are poring over trading records to
determine whether one or more parties profited by their advance knowledge of the disaster. An
26
event as dramatic and large in scale as the Black Tuesday attacks had a severe and far-reaching
effect on worldwide stock markets. This effect is somewhat like the impact of a stone thrown
into a pond: There are certain specific companies which are strongly and immediately affected
by the attacks; others which are affected more weakly and indirectly; some which decrease in
value only because of a general feeling of pessimism rather than because of any direct impact on
their bottom line; and some which may even increase in value because they are seen as a "safe
haven" in uncertain times, or because they may gain business from an upcoming armed conflict.
Another way of looking at this "ripple" effect of insider trading is that the farther away a
company is from the center of the impact the greater the odds that it would emerge unscathed
had the attacks' impact been less horrendous than it was. The obvious members of the "first
circle" of companies strongly affected by the attacks are American Airlines and United Airlines,
the two companies whose planes were hijacked and used as flying bombs in the attacks on New
York and Washington. These companies' stocks would have decreased invalue as a result of any
hijacking incident involving their planes, even one with a peaceful resolution. The same is true to
a lesser extent of other airline companies, Boeing (the principal private manufacturer of
airliners), and other companies that provide equipment and services to the air-transportation
industry. The next circle includes companies that would weather a" normal" hijacking incident
relatively unscathed, but would be significantly affected by a more violent attack. These include
the insurance and reinsurance companies, which must cover the damage, as well as firms with a
major presence in or near the Twin Towers. The general stock market -- the "third circle" in our
analogy -- would not be strongly affected by a "peaceful" hijacking, but would be by a more
violent one. It could be argued that even the Black Tuesday attacks as they occurred were not
sufficient to cause a really bad "market break" -- while the decline of the Dow Jones Industrial
Average on the first day of trading after the disaster was the largest on record in absolute terms,
it was not one of the top ten historical declines in relative terms. Had the attacks been more
completely successful -- for example, had the fourth plane preceded to Washington and crashed
into the White House or the Capitol -- the overall market would surely have suffered a much
worse crash. To understand what might have happened, it is worth comparing the market's
performance immediately post-Black Tuesday, when the Dow Jones Industrials dropped by
about seven percentage points, and the 1987market crash, when the Dow dropped by over 22
percent in one day even though there was no obvious external reason for it to so. Investigators
27
will be looking at transactions starting with those that can be most easily identified as suspicious.
Already enough has emerged to indicate that some trades were almost certainly made based upon
advance knowledge of the Black Tuesday attacks:
Between September 6 and 7, the Chicago Board Options Exchange saw purchases of
4,744 put options on United Airlines, but only 396 call options. Although there was no
news at that time to justify so much "left-handed" trading, United Airlines stock fell 42
percent, from$30.82 per share to $17.50, when the market reopened after the attacks.
Assuming that 4,000of the options were bought by people with advance knowledge of the
imminent attacks, these" insiders" would have profited by almost $5 million.
On September 10, 4,516 put options on American Airlines were bought on the Chicago
exchange, compared to only 748 calls. Again, there was no news at that point to justify
this imbalance; but American Airlines stock fell 39 percent, from $29.70 to $18.00 per
share, when the market reopened. Again, assuming that 4,000 of these options trades
represent "insiders, ―they would represent a gain of about $4 million.
No similar trading in other airlines occurred on the Chicago exchange in the days
immediately preceding Black Tuesday.
Morgan Stanley Dean Witter & Co., which occupied 22 floors of the World Trade
Center, saw 2,157 of its October $45.00 put options bought in the three trading days
before Black Tuesday; this compares to an average of 27 contracts per day before
September 6.Morgan Stanley's share price fell from $48.90 to $42.50 in the aftermath of
the attacks. Assuming that 2,000 of these options contracts were bought based upon
knowledge of the approaching attacks, their purchasers could have profited by at least
$1.2 million.
Merrill Lynch & Co., with headquarters near the Twin Towers, saw 12,215 October
$45.00 put options bought in the four trading days before the attacks; the previous
average volume in these options had been 252 contracts per day. When trading resumed,
Merrill‘s shares fell from $46.88 to $41.50; assuming that 11,000 option contracts were
bought by" insiders," their profit would have been about $5.5 million
European regulators are examing trades in Germany's Munich Re, Switzerland's S wiss
Re, and AXA of France, all major reinsurers with exposure to the Black Tuesday
28
disaster.(Swiss Re estimates that its exposure will be $730 million; Munich Re expects to
pay out as much as $903 million.) It is not clear if any trades in these stocks ring alarm
bells; and some negative earnings news announced shortly before the attacks means that a
certain amount of unusual selling may have been a normal market reaction and not
anything more sinister.
Amsterdam traders have noted that there was unusual trading activity in KLM Royal
Dutch Airlines put options before the attacks. This is very much a developing story, and
we can be sure that more and more accurate numbers will emerge soon. Investigators will
be examining transactions starting with the few days immediately before the attack, and
then working backwards; and similarly, they will belooking first at trades in the most
obviously affected securities.
Assuming that investigators are convinced that trades were made based upon advance
knowledge of the attacks, they will obviously try to trace these trades back to determine who
initiated them. Obviously, anyone who had detailed knowledge of the attacks before they
happened was, at the very least, an accessory to their planning; and the overwhelming
probability is that the trades could have been made only by the same people who
masterminded the attacks themselves. The difficulty, of course, will be in tracing the
transactions to their real source. The trading is sure to have been done under false names,
behind shell corporations, and in general to have been thoroughly obfuscated. If in fact the
Black Tuesday attacks – and the associated securities transactions -- were made under orders
from Osama bin Laden, then we are dealing with an expert in masking ownership of
corporations and making covert deals. This does not mean that unraveling the threads of
these transactions will be impossible, but it probably will not be quick or easy. The matter
still is under investigation and none of the government investigating bodies-including the
FBI, the Securities and Exchange Commission (SEC) and DOJ -are speaking to reporters
about insider trading. Even so, suspicion of insider trading to profit from the Sept. 11attacks
is not limited to U.S. regulators. Investigations were initiated in a number of places including
Japan, Germany, the United Kingdom, France, Luxembourg, Hong Kong, Switzerland and
Spain. As in the United States, all are treating these inquiries as if they were state secrets.
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BoM-ICICI Bank merger
In1999-2000 Bank of Madura and ICICI Bank merger was preceded by some interesting
trading patterns that suggested the possibility of informed trading in the homestretch to the
corporate action. The Bank of Madura's (BoM) stock had been hitting circuit-breaker for
quite a few days and in a short period of time, it had appreciated more than 50 per cent. The
news driving the price was the BoM's proposed merger with the ICICI Bank and the market
expectation of a minimum swap ratio of around 1:1. These were the swing in the share prices
of the BOM, ICICI bank which was showing high variation.
The ratio eventually turned out to be 2:1 (two shares of ICICI Bank every share of
BoM).Considering BoM's small equity base of Rs 11.80 crore against ICICI Bank's Rs
196.80 crore, a swap ratio of 2:1 would have little impact on the ICICI Bank's equity, but it
would considerably improve the bottom line. When the announcement of merger was made,
the market had no clue about the swap ratio. After all, the merger of two banks is not unusual
and the stock price responding to such news is also a sign of market efficiency. However,
insiders and those connected with the merger play the game of insider trading on such
occasions. Certain unusual trading before the formal announcement of the swap ratio, and the
role of regulating agencies assumes importance in examining the issue in the context of
insider trading, and develop public investors' confidence.
The Securities and Exchange Board of India (SEBI) had a regulation to prevent and punish
insider trading. While efforts were made to fine-tune the regulation, as SEBI till the data did
30
not book any major case on insider trading. Its earlier attempts on investigating insider
trading in BBLIL and HLL merger, and Reliance Industries did not yielded any significant
results. Using the available public information on stock price changes, the number of shares
traded, the number of trades and the ratio of swap, it was pointed out the specific dates on
which certain abnormal trading took place at a volume higher than average volume of the
period. The Table gives the details of BSE trading statistics relating to the BoM stock.
The analysis of Table showed a sudden spurt in volume per trade in September and October
along with increased volume of shares for the month. A further analysis of the daily trading
data shows the volume on two days (September 20 and October 6) increased suddenly.
The BoM counter registered a volume of 44,650 shares on these two trading days on the BSE
at an average price of around Rs 74. The issue was who were the investors taking sudden
interest on BoM's stock on those two days. If these investors had known the swap ratio of
two ICICI shares for one BoM share, which the banks would announce on next Monday, the
profit potential would be more than Rs 200 per share. In other words, the net gain available
out of these trades would be Rs 89.30 lakh.
Another important date was December 6, two days before the formal announcement on the
merger. On this day, on the BSE, 58,7970 shares were traded in just 67 trades at an average
price of Rs 98.18. The average volume per trade was 8,775 shares against the normal volume
of 100 per trade. The total volume traded on the BSE from July to November was 90,230
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stocks against the5,87,970 stocks traded on December 6. There was abnormal trading on the
NSE too that day. What was the motive behind such a trade on the BSE? Who were the
buyers and, more particularly, the sellers? Was there any party, which knew of the merger
deal and the swap ratio and influenced a PSU bank or a mutual fund to sell the shares at the
current market price for such a block deal? These were all the questions that lead SEBI to
investigate the case. With the current price of ICICI Bank's share, the profit from this deal is
Rs 13.52 crore.
Insider trading did not stop with the formal announcement of the proposal of a merger. For,
there emerge two sets of investors in the market. The first has only the information in the
public domain about BoM and ICICI Bank. The other has information about the swap ratio,
The profitability due to price differential between the two stocks is known to the second set.
The investor‘s privy to the swap ratio can continue to do such deals. Though SEBI's attention
was particularly drawn to investigate the trades of those periods, no public report is available
if SEBI investigated the deals to examine the insider-trading issue. SEBI action: It is high
time SEBI signaled strongly to the capital market regarding insiders' trading.---It asked the
stock exchange members to furnish the names of investors on whose behalf the buying took
place on days when the volume was higher than the average during a period.---It investigate
these investors' connections with the top management of ICICI Bank/BoM, advisors to the
merger scheme, the independent valuer of the swap ratio and all others specified by SEBI's
insider-trading regulation.
However,SEBI put its hand on this case as early as possible but as and now no outcome has
come and the case is still pending in the court.
Insider trading not only concerns scholars and regulators but also attracts the attention of the
general public. To get a practical idea of insider trading, consider the famous Texas Gulf
Sulphur Company case .Texas Gulf Sulphur Company was established in 1909.In 1959 its
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exploratory prospecting with magnetic surveying equipment produced some evidence that
valuable deposits of copper, zinc, and silver might exist in an area of Ontario.
In 1963, the first drilling confirmed the possibility, and the commercial value of the find
proved to be enormous. The company instituted tight control of the drilling project so as not
toleak the information to outsiders .Meanwhile, various officers, directors, and employees of
the company, knowing this information and the fact that it was not released to the public,
bought shares of, and call options of, Texas Gulf Sulphur Company or were given stock
options by the company and tipped other people to purchase the stock or options of the
company. These activities happened between November 12, 1963, and April 16, 1964, a
period when the stock prices of Texas Gulf Sulphur Company were relatively low due to its
lackluster performance in business. Rumors about the company‘s discovery surfaced and
became rife in mid-April 1964. By then the stock price had risen to $29.375 from $17.375 on
November 10, 1963. On April 12, 1964,the company made an announcement, which the
Security Exchange Commission (SEC) later accused of misleading the public, that the
company‘s drilling had ―not been conclusive‖ and ―the rumors about the discovery were
unreliable premature and possibly misleading,‖ and originated with speculators not
connected with the company. Four days later, on April 16,1964, however, the company
announced ―a major ore discovery‖ of about 25 million tons of copper, zinc, and silver. The
stock price jumped to $71 on April 19, 1964. Those who had purchased or acquired stocks
and options before this date reaped substantial financial gains.
In April 1965, the SEC filed a suit in the United States District Court against a number of
individual defendants who were directors, managers, and employees of Texas Gulf Sulphur
Company. The charges were based on the defendants‘ violation of Rule 10(b)-5 of the
Securities Exchange Act of 1934 for‖ engaging in the purchase and sale of securities on the
basis of information with respect to material facts relating to Texas Gulf acquired by said
defendants in the course of their corporate duties or employment with Texas Gulf which
information had not been made available to Texas Gulf, its stockholders and other public
investors; (b) making available such information, directly or indirectly, to other persons for
the purpose of permitting or allowing such other persons to benefit from the receipt of such
33
information through the purchase and sale of securities; and (c) engaging in other conduct of
similar purport and object.‖ The SEC won the case.
Infosys is not only an IT bellwether; it is also an ethical bellwether. The company, in perhaps
the first instance in India, has fined its CEO Kris Gopalakrishnan for a technical violation of
its insider trading rules. The fine, Rs 5 lakh, would be donated to charity. Besides the CEO,
an independent director, Jeffrey Lehman, also has been fined $2,000 for the same violation.
This is the third time that Infosys has punished a member of its top brass. Earlier, it had
imposed a penalty on its director Srinath Batni. In a notice to the US SEC, Infosys said Mr.
Gopalakrishnan had inherited 12,800equity shares from his mother on December 24, 2007
but had inadvertently failed to notify the company within one business day after the change
in his shareholding. This, according to the company, constituted a violation of its insider
trading rules. But Infosys‘ audit committee believed that Mr. Gopalakrishnan had no
intention of contravening the rules and imposed the penalty of Rs 5 lakh and directed him to
donate theamount to a charitable organisation of his choice. Mr. Gopalakrishnan has made
the donation.
Mr. Lehman was also imposed a penalty of $2,000 for failure to correctly follow the
procedure on sale of shares and that amount, too, has been given to charity.
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OBJECTIVES OF THE STUDY:
35
SCOPE
1. The probhition contained in reguletion 3 of the reguletion apply only when on insider
traders or deals in securities on the basis of any unpublished price sensitive information
and not otherwise.treders or deals in securities.
2. The SEBI reguletion agaainst insider trading were attracted only if the insider trading
on the basis of unpublished price sensitive information(UPSI)
4. SEBI intention in the reguletion appear to be driven by the need to introduce some sort
of strict liability.
5. The SEBI reguletion were amended to make it seeming benificial for SEBI.
36
RESEARCH METHODOLOGY
Research is the process of a systematic and in-depth study or search of any particular topic,
subject or area of investigation, backed by the collection, complication, presentation and
interpretation of relevant details or data. It is a careful search or enquiry into any subject matter,
which is an endeavor to discover to find out valuable facts,
Which would be useful for further application or utilization? The research that involves scientific
theories, the discovery of new techniques, a modifications of old concepts or knocking of an
existing theory, concept or technique. It may develop a hypothesis and test it. It may also
establish relationships between variables and identity the means for problem solving.
The array of questions addressed in this study required multiple approaches for collecting &
verifying information & for capturing the various perceptions that exist. To collect enough
information to analyze ICICI Amc & HDFC Amc
Types of Research
Descriptive research includes surveys and fact – finding enquiries of different kinds. The
major purpose of descriptive research is description of the state of affairs, as it exists at
present. In analytical research, the researcher has to use facts or information already
available, and analyze these to make a critical evaluation of the material.
37
Applied research aims at finding a solution for an immediate problem facing a society or an
industrial/ business organization, whereas a fundamental research is mainly concerned with
generalization and with the formulation of a theory.
Conceptual research is related to some abstract ideas. It is generally used philosophers and
thinkers to develop new concepts or to interpret existing ones. Empirical research relies on
experience or observation alone often with out due regard for system and theory. It is a data
based research, coming up with conclusions, which are capable of being verified, by
observation or experiment.
There may be other type of research such as one time research or longitudinal research from
the viewpoint of time. Laboratory research or simulation research, historical research,
exploratory researches are some of the other type of researchIn the present project work the data
has been collected from available source that is secondary data like websites, Newspapers and
magazines. The sample size taken is of 7 different sect oral funds.
Primary data
It is the Information that researchers gather first hand. It is facts and information collected
specifically for the purpose of the investigation. In terms of the primary data a questionnaire has
been used to interview desire sample units that give accurate and up to date information as well
as better to research problem.
38
Secondary data
All methods of data collection can supply quantitative data (numbers, statistics or financial) or
qualitative data. Quantitative data may often be presented in tabular or graphical form.
Secondary data are those which have already seen collected by others, when it is not possible to
collect data in primary form, the researcher may take the help of secondary data. They are
collected for serving the objectives other than what the researcher might have in mind.
1. Internet
2. Books
3. Website
4. Magazines
5. Annual bulletin
39
Finding and Analysis
On the basis of the experts opinion survey and case study a various world Famous insider
Trading Cases and other source the following are the finding:-
On paper, India's laws on insider trading are more stringent than international ones.
From merely barring insiders from trading on the basis of unpublished price-sensitive
information, the laws have moved on to prohibiting anyone in the possession of such
information from trading. And proof that the information was not shared is no longer
acceptable defense against charges of insider trading; today, an accused needs to
prove that such information could have never been shared. This shifts the focus on to
the accused to prove that there has been no insider trading
"Insider Trading is victimless Crime" the following quote here in suggested that this
crime is not done with an intention to effect the financial position of the General
Investor. But without any intention, the general investor comes into this trap and is
effected largely.
The "Close window Scheme before 24 hr. of SEBI also seems as a failure because all
the parties that trade on the basis of inside information buy or sell the securities well
before 24 hrs. The window is closed for them to trade.
Despite the control and regulation restriction imposed on insider trading at stock
exchange in India or all over the world, these laws have not been effective to curb
these kinds of activities within the stock exchange.
"SEBI" website is also not properly constructed. As insider trading directly, come
under the control of SEBI. Therefore, any person seeking information on this topic
will explore the SEBI's website but will not get any information. With almost full
40
exploration of website, you will get the law on insider trading which will be an
exaustic process and will require lot of time. The website also does not give any
information on the no. of case that are charged under insider Trading and any of the
other default aboutthis topic.
The "Insider Trading Regulation 2002" is also not properly formed. Most of the terms
and expressions used under this law are incomplete and on this basis, only some of
the Companies escape the charges of insider trading. HLL insider Trading, BOM -
ICICI Merger Case are still pending on these ground.
Based on survey and people contacted for insider Trading Questioner shows that there
are very few sub-broker and educated people, who are just acquitted with the word
insider trading. When they are just acquitted with the word then the knowledge about
laws, regulation and its effect on shareholder are doubtful.
There has been a silent battle going on between the various group of people as some
set of researcher wants to legalize the insider trading and so that all the punishment
are curbed. The researcher who wants to legalize this kind of activities also do not
have strong reasons on which basis they want to give insider Trading this platform.
It is very difficult to distinguish which information is price sensitive and which is not.
Because even a very small information can bring large no. of upswing and
downswing in the pries of share.
Round the Globe various cases related to insider Trading has been seen. But nowhere
including SEBI has not been successful to investigate the case before it has occurred.
All the cases reported for insider trading have come to knowledge of SEBI well after
the trading operations have been performed.
Though SEBI keep's the eye on each and every trading activity of people connected
with the Companies but of no use. As the insider Trader are smarter and they perform
their operations so cleanly that even SEBI cannot notice happening of such events in
the stock market.
SEBI's Insider Trading Act and Companies policies and procedures for the insider
trading are not adequate enough to prevent insider trading. Because generally top
level executive frame the policies and they can manipulate or misuse a slight clause
according to them so as to gain the profit.
41
In recent amendments, the SEBI is including insider trading under "Prevention of
Money laundering of Act‖ (PMLA) so that the punishment for the inside Trader are
sever and they are afraid to indulge in such kind of trading activity.
Insider trading such an activity where to prove the charge against the insider isan
arduous task.
In this type of trading generally, the individual investor is the most affected because
the big broker, institutional investor keeps a trap on the market and buy & sell
accordingly. Therefore general investor is most affected and they are not aware of this
slap on there face.
India's first, and most high-profile case of alleged insider trading involved Hindustan
Lever Limited (HLL) and five of its directors just ahead of the company‘s merger
with Brooke Bond Lipton India. SEBI asked HLL to pay Rs 3.04 crore as penalty, but
the Appellate Authority in the Finance Ministry set aside its order. So is the case with
all the other cases, which are under SEBI.
Every body in the share market be it the primary insider, secondary insider, broker,
auditors, general investor would like to take the advantage of the price sensitive
information to make gain in market though they may consider trading on inside
information as illegal. The picture below gives that how the judge who have no link
with the share market and rarely deals in the shares. But when there is a chance of
getting a inside information than the judge also wants to make unfair amount of
profits.
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Suggestions and Recommendation
With the knowledge gained various source and on the basis of finding and analysis of the various
aspect of insider trading some of the suggestion are stated here below.
There should be China's wall constructed between the department having price sensitive
information and other departments of companies and outsider's who deal with the
Company. So that they do not take advantage of price sensitive information and a proper
list of all information, which are "Price Sensitive" should be maintained so that such
information is taken extra care when dealing with such information.
The Companies should disseminate price sensitive information to stock exchange on
continuous and immediate basis and should also improve investor &access to their public
announcements.
SEBI should make a law/or appoint an Committee that can bring in cases of insider
Trading well before such trading take place in the stock market so that interest of general
investor is safe guarded.
43
SEBI should disallow the directors/officer, designated employees of the companies to
buy or sell the shares well before some important announcements are to be made and
which effect the share market.
SEBI should strictly observe that when some price sensitive information declarations are
made, the trading window should be closed so that company member does not take
advantage of such declarations before they are made public.
The Companies should also clearly give details of probable disciplinary the code. Such as
wage freeze, suspension, ineligibility for before participation in employee stock option
plans with holding of promotion.
It is SEBI's responsibility to bring out the cases and investigate charges of insider
Trading but at last power to convict the person lie with the Court which is a long process
The Government should give in the power for the decision to the SEBI so that convict is
punished on time before it is to late.
SEBI should property construct the website where in the general investor can get all the
available information about the insider trading. A Forum should be established where the
general investor can give their views, any complaints, suggestion to stop the riding horse
of insider to make money.
To facilitate compliance with the new reporting of transactions, issuers should either
designate a single broker through whom all transactions in issuer stock by insiders must
be completed or require insiders to use only brokers who will agree to the procedures set
out by the company. A designated broker can help ensure compliance with the company‘s
preclearance procedures and reporting obligations by monitoring all transactions and
reporting them promptly to the issuer. If designating a single broker is not feasible,
issuers should require insiders to obtaina certification from their broker that the broker
will:
1. Verify with the issuer that each transaction entered on behalf of the insider was
pre cleared.
2. Report immediately to the issuer the details of each of the insider‘ stransaction In
issuer‘s securities.
The stock exchanges should take up at least a substantial burden of filing action against
persons violating the regulations. Since the Rules and regulations of the stock exchanges
44
are considered ‗enactment‘, and court judgments have found exchange regulations to
have the force of law – they could easily enforce the requirements of the listing terms or
the rules and regulations by seeking civil action in courts against persons or companies
who violate such regulations. The exchanges should also better coordinate monitoring
and surveillance of listed companies to track unusual activity in the stock of a company
across markets for traces of insider dealings or manipulation.
a) Officer, director and substantial shareholder to disclose their holding on certain events or
at certain intervals.
b) Appointment of a compliance officer
c) Setting forth policies and procedure to restrict the possibility of abuse of insider trading.
d) Monitoring and pre-clearance of trades by the designated persons.
e) Restrict trading by such insiders within a certain period of time i.e. before corporate
announcements, buybacks etc. are made.
f) The company has to convey all the significant insider activity and corporatedisclosure in
a uniform publicly accessible means to the public – and to the stock exchange.
g) Chinese walls within a firm to prevent one part of the firm, which deals insensitive
information from going to other parts of the firm, which have an inherentconflict of
interest with such other parts.
h) Minimum holding period of securities by insiders.i) No selective disclosure to analysts.
Wide dissemination of information.
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Conclusion
According to the recent survey India is the largest hub of insider trading, which has
determent the interest of individual investors and their confidence in the capital market
because of then on-availability of proper monitoring authority to investigate and prosecute
insiders. If such activities continue the basic function of stock exchange i.e. capital formation
will be reduced as general investors trust will be lost on functioning of stock exchange.
―Complaining about insider trading without finding a workable solution is like crying that the
government should do something about smoking as it causes cancer, but doing nothing."
Quote By Trading Guru Same is the situation with the Indian Government and SEBI both
have not been successful to curb insider trading. Though SEBI is now making some efforts to
prevent insider to trade in stock exchange and disturb the main functioning of it. Efforts
made by SEBI are on a slow pace which needs to be fasten up otherwise this kind of
activities will loses the trust of general investors. It is also important to curb the insider
trading other wise it will not show the correct and fair prices of shares of each companies.
Insider trading is a victimless crime, which effect large number of general investors, and they
46
do not even come to know this effect at once. In conclusion it can be said that."It is difficult
to prescribe remedies to each one of the trading malpractice in Indian Stock Market. But the
problem of insider trading and secret take over bids could be tackled to a large extent by
appropriate regulatory measures by authority‖.
Abid Hussain
It is therefore important for there to be markets free from all types of fraud and in particular
insider trading which disenchants the common investor from the workings of the markets as
if he is being invited to play a game of crap with loaded dice. Unfortunately, with the
unearthing of large frauds, even though India is not unique in this, the concept of corporate
good governance has been lost in the war cry for blood. As a result, the government
hasgotten into overregulation and micromanagement by converting good governance into
statutory provisions. We tend to forget that micromanagement cannot stamp out fraudulent
action, it can only be reduced by effective enforcement of the laws, which should prohibit
obvious illegalities. It should not be forgotten that what is sought to be caught is crime and
treating all insiders as inherently tending towards a presumption of unfair dealing should be
avoided. Standards of corporate governance should be left at the helm of the managers of the
company. The regulator should specify in the Schedule to the regulations a list of optional
procedure for limiting the possibilities of insider trading. What should be mandated instead
should be a statement in the annual report of the degree of compliance with the standards of
set forth in the Schedule. Thus companies, which do not follow corporate governance
guidelines in substance, should be penalized by its shareholders. Introduction of corporate
governance ratings, similar to debt ratings, which would pressure management to comply
with such measures. This could be the missing link providing a simple number which can be
appreciated and understood by the masses and would indicate the processes a company has
put in place for the benefit of their non-insider shareholders.
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Bibliography
www.businesstoday.com
www.sebi.com
www.sec.com
www.indiaenews.com
www.infosys.com
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www.hllindia.com
www.brookebond.com
www.9/11trading.com
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