INSIDER TRADING: A BRIEF OVERVIEW OF LEGAL REGIME IN USA, UK, INDIA AND NEPAL

Authoress: Rojina Thapa Kathmandu School of Law LL.B 4th Year Publisher: Mirmire-Economic Article Special Issue, Vol. 38, No. 293, Jan/Feb 2010 Nepal Rastra Bank- Central Bank of Nepal

Electronic copy available at: http://ssrn.com/abstract=1599212

1. Introduction

Insider trading per se is obtaining information from non-public sources—private acquaintances, friends, colleagues—and using it for purposes of enhancing one's financial advantage. Sometimes such a practice can be conducted fraudulently, as when one who has obtained the information has a fiduciary duty to share it with clients but fails to exercises.1

Insider trading as defined by the Black’s Law Dictionary is -“The use of material non public information in trading the shares of the company by a corporate insider or any other person who owes a fiduciary duty to the company”. Insider trading has been defined generally to mean trading in the shares of a company for making a gain or for avoiding a loss by manipulation of prices by persons who are in the management of the company or are close to them, on the basis of undisclosed price sensitive information regarding the working of the company which they possess but which is not available to others.2 Every country in the world with a major stock exchange had made this practice illegal because of its potential to destroy public confidence in the stock exchange. 3 However the definition and sanction vary form state to state.

This article aims to put light on the legal regime of USA, UK, India and Nepal because USA was the first jurisdiction to enact insider trading regulation and today it continues to lead the world in the regulation and enforcement, UK takes into consideration Directive of the European Parliament too that represent EC legal regime on insider dealing, India being the country whose statutory provisions on insider trading does not have a long history nevertheless amendments are being made to make this offence more punitive and preventive and only recently Nepal has enacted legislation prohibiting insider dealing.

1

Machan, Tibor R., ‘What is Morally Right with Insider Trading’, Public Affairs Quarterly, Vol. 10 (April 1996), available at http://mises.org/etexts/insidertrading.pdf (accessed on 28 September, 2009).
2

Sharma, L. M., Amalgamations Mergers Takeovers Acquisitions: Principles, Practices and Regulatory Framework (1st Edn., Company Law Journal, Taj Press, 1997) 299.
3

Dignam, Alan and Lowry, John, Company Law (4th Edn., Oxford University Press, 2006) 74.

2
Electronic copy available at: http://ssrn.com/abstract=1599212

2. Historical Development of Laws Prohibiting Insider Trading

2.1. USA

Before the adoption of Securities Exchange Act of 1934, there was no codified rule in United States that regulated insider trading. Section 17 of the Securities Act of 1933 contained prohibitions of fraud in the sale of securities which were greatly strengthened by the Securities Exchange Act of 1934.4 The Securities and Exchange Act, 1934, enumerates the provisions relating to the protection of interest of investors against Insider Trading. The 1934 Act addressed insider trading directly through Section 16(b) and indirectly through Section 10(b). 5 In practice Section 16 is rarely invoked. However the real role of Section 16 is to tell us what types of persons might be covered by any inside trading inferred from Section 10b.6With the mark of early and mid 1980s by some interesting cases on insider trading, Congress in order to curb this practice of insider trading promulgated Insider Trading Sanction Act 1984. The major change that this act brought was to allow the SEC to bring a civil suit directly rather than first having the Department of justice bring a criminal suit and then a civil suit. Then in 1988 Congress enacted another legislation to combat insider trading with much deterrent effect, which was the Insider Trader and Securities Fraud Enforcement Act 1988.7 In the Act, ‘Congress enacted Section 20A of the Exchange Act to provide an express right of action on behalf of “contemporaneous traders” who were trading the same class of securities on the opposite side of transaction during the time that the allegedly illegal inside trader(s) occurred’8. More recently, the U.S. has developed a number of supplementary statutory rules, such as The Securities Enforcement
4

See, American Insider Trading Law, available at http://www.stocks.gl/American-insider-trading-law2.html (accessed on 1 October, 2009).
5

See, Insider Trading – A U.S. Perspective, available http://www.sec.gov/news/speech/speecharchive/1998/spch221.htm (accessed on 1 October, 2009).
6

at

Engle, Eric Allen, ‘Insider Trading in U.S. and E.U. Law: A Comparison’ (September 22, 2008) 15, available at SSRN: http://ssrn.com/abstract=1271868.
7

Sharma, Vaibhav, ‘Prohibition on Insider Trading: A Toothless Law’ (May 7, 2009). Law School Research Paper No. 996. 27, available at SSRN: http://ssrn.com/abstract=1400824.
8

Steinberg, Mark I., Understanding Securities Law (Matthew Bender and Company Incorporated, 1989) 177.

3

Remedies and Penny Stock Reform Act of 1990; Rule 14e-3 Tender Offer Rule, Regulation FD, as well as the Sarbanes-Oxley Act of 2002.9

2.2. UK

It was only with the Companies Act 1980 that there was the first legislative intervention in the United Kingdom to combat insider dealing 10. [T]he relevant UK legislation was contained in the Companies Securities (Insider Dealing) Act 1985 and the Financial Services Act 1986. New legislation has altered the law on insider dealing to take account to the EC Directive on Insider Dealing (89/592).11 A number of useful and welcome changes to the law on insider dealing in the United Kingdom have been affected by the Criminal Justice Act, 1993. The earlier law, namely, the Company Securities (Insider Dealing) Act, 1985, has been wholly superseded, in relation to offences allegedly committed on or after 1 March, 1994, by Part V of the Criminal Justice Act, 1993.12 The law against insider trading has been strengthened further by Financial Services and Markets Act 2000 (FSMA), which introduces a new offence of market abuse13. The FSMA introduced the wider offence of market abuse; this covers ‘insider dealing’, ‘disclosing inside information’, ‘dissemination of false’ and ‘misleading information’, ‘employing fictitious devices’, and market distortion. All these offences encompass insider dealing. 14 Recently, The Financial Services and Markets Act 2000 (Market Abuse) Regulations 2005 has been enacted. This implement Directive 2003/6/EC (Market Abuse Directive) of the European Parliament and

9

Shen, Han, ‘A Comparative Study of Enforcement of Insider Trading Regulation between the U.S. and China’ (February 21, 2007) 11, available at SSRN: http://ssrn.com/abstract=964548.
10

In United Kingdom Insider Trading is referred as Insider Dealing. Bourne, Nicholas, Company Law (Cavendish Publishing Ltd, Reprinted 1994) 153. Sharma, supra note 2, 306.

11

12

13

Part VIII of FSMA contains the provisions relating to market abuse and section 118 (1) defines the specific offence of market abuse.
14

Adungo, Brian Ikol, ‘The New European Union and United Kingdom Regimes for Regulation of Market Abuse’ (January 8, 2009), available at SSRN: http://ssrn.com/abstract=1324678.

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of the Council which introduces a common EC legal regime on insider dealing and market manipulation.15 2.3. India 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 US on short swing profits under Section 16 of the Securities Exchange Act, 1934. Thereafter, provisions relating to Insider Trading were incorporated in the Companies Act, 1956 under Sections 307 and 308, which required shareholding disclosures by the directors and managers of a company. 16The need for curbing insider trading was felt as early as 1978 when the Sachar Committee appointed to recommend reforms in the Companies Act.17 The final report of the committee recommended amendments to the Companies Act 1956, so as to restrict or prohibit the dealings of employees / insiders. Sachar committee report, was followed by the Patel Committee in 1986, the main recommendations of this committee was to amend the Securities Contract (Regulation) Act, 1956, so as to empower the securities exchange to curb insider trading and unfair stock deals. The final report forming the base of the Securities and Exchange Board of India (Insider Trading) Regulations 1992 was the Abid Hussain Committee report in 1989. Then the Indian regulatory authorities came with a drastically amended and renamed SEBI (Prohibition of Insider Trading) Regulations 1992 Act in 2002. A new section has been added to the SEBI (Amendment) Act in 2002, which prohibits manipulative and deceptive devices.18 Later, SEBI (Insider Trading) (Amendment) Regulations, 2002 and SEBI (Prohibition of Insider Trading) (Second Amendment) Regulations, 2002 has been enacted.

15

Financial Services and Markets Act 2000 (FSMA): Recent developments, Bulletin number 43 from HM Treasury, available at http://www.hm-treasury.gov.uk/fsma_bulletin_43.htm (accessed on 3 October, 2009).
16

Chahar, Himanshu and Sodhi, Sumeer, Insider Trading: A Critical Analysis, available http://www.legalserviceindia.com/article/l199-Insider-Trading.html (accessed on 25 September, 2009).
17

at

Sekhar, K., Guide to SEBI Capital Issues, Debentures and Listing (2nd Edn., Wadhwa and Company Law Publishers, 1996) 357.
18

Bose, Suchismita, ‘Securities Market Regulations: Lessons from US and Indian Experience’ (2005). The ICRA Bulletin, Money & Finance, Vol. 2, No. 20-21, Jan-Jun 2005. 93, available at SSRN: http://ssrn.com/abstract=1140107.

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2.4. Nepal

It was only through the Securities Act, 2007 that Insider Dealing has been defined and made an offence in Nepal. Other jurisdiction came to this problem much earlier on as mentioned above. However Section 127(h) of Company Act 1996 prescribed punishment with fine not exceeding twenty thousand rupees or with imprisonment for a term not exceeding two years or with both where any director or secretary of a company dealt the share in contrary to the said Act, making it way too vague to prohibit insider trading.

3. Definition of the term ‘Insider Trading’

3.1. USA The first country to tackle insider trading effectively was the United States.19 [T]he American legislature refuses to define insider trading. The term 'insider' is not defined by statute in the context of the U.S. prohibitions against insider trading. In fact, section 10(b) and Rule 10b-5 (or any of the federal statutes, rules, or regulations) do not define 'insider trading' or 'inside information' (or 'misappropriation,' for that matter).20 The American case law, which nonetheless is highly developed, is based on the general antifraud provisions of the Securities and Exchange Act.21 In a series of administrative decisions and injunctive proceedings, commencing in 1961, the SEC greatly broadened the applicability of Rule 10b-5 as a general prohibition against any trading on “inside information” in anonymous stock exchange transactions as well as in face-toface dealings.22Under current United States law, there are three basic theories under which

19

Davies, Paul L., Gower’s Principles of Modern Company Law (6th Edn., Sweet and Maxwell, 1997) 444. Engle, supra note 6, 27.

20 21

Parekh, Sandeep, ‘Prevention of Insider Trading and Corporate Good Governance’ (January 2003). Indian Institute of Management, Ahmedabad Working Paper No. 2003-01-03. 7, available at SSRN: http://ssrn.com/abstract=653741 or DOI: 10.2139/ssrn.653741.
22

Ratner, David L., Securities Regulation: In a Nut Shell (3rd Edn., Minn. West Publishing Co., 1988) 140.

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trading on inside information become unlawful. The disclose or abstain rule23 and the misappropriation theory24 were created by the courts under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 hereunder. Pursuant to its rule-making authority under Exchange Act Section 14(e), the Securities and Exchange Commission (SEC) adopted Rule 14e3 to proscribe insider trading involving information relating to tender offers. 25 Section 10(b) 26 of the Act provides, that it shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange (. . .) (b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, or any securities-based swap agreement (as defined in section 206B of the GrammLeach-Bliley Act), any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.

23

Disclose or abstain theory was originated in the case of Cady Roberts & Co, where rule 10b-5 was applied, which held that insiders and those who would come to be known as "temporary" or "constructive" insiders, who possess material non-public information, must disclose it before trading or abstain from trading until the information is publicly disseminated. Several year’s later in a landmark case dealing with insider trading, SEC v Texas Gulf Sulphur Co, court upheld the ruling of Cady, Roberts & co. and further built upon the, disclose or abstain rule, by including the tipper as being liable under rule 10b-5. See for detail, Sharma, supra note 7, 27-28. See also, Bainbridge, infra note 25, 2-3.
24

In the case of United States v. O'Hagan, 117 S. Ct. 2199 (1997), The Court held that ‘The "misappropriation theory" holds that a person commits fraud "in connection with" a securities transaction, and thereby violates 10(b) and Rule 10b-5, when he misappropriates confidential information for securities trading purposes, in breach of a duty owed to the source of the information. Under this theory, a fiduciary's undisclosed, self-serving use of a principal's information to purchase or sell securities, in breach of a duty of loyalty and confidentiality, defrauds the principal of the exclusive use of the information. In lieu of premising liability on a fiduciary relationship between company insider and purchaser or seller of the company's stock, the misappropriation theory premises liability on a fiduciary-turned-trader's deception of those who entrusted him with access to confidential information’. See, Insider Trading – A U.S. Perspective, available at http://www.sec.gov/news/speech/speecharchive/1998/spch221.htm (accessed on 3 October, 2009).
25

Bainbridge, Stephen M., ‘Insider Trading: An http://ssrn.com/abstract=132529 or DOI: 10.2139/ssrn.132529.
26

Overview’,

1-2,

available

at

SSRN:

Section 10(b) is codified at 15 U.S.C. § 78j (b).

7

SEC Rule 10b-527, promulgated pursuant to section 10(b) of the 1934 Act, makes unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or any facility of any national securities exchange, to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person in connection with the purchase or sale of any security.

3.2. UK

The definition of the criminal offence of insider dealing under Criminal Justice Act 1993 is very similar to the definition of the civil offence of insider dealing under FSMA 2000, although there are some subtle differences in the wording and both sets of rules must therefore be considered when analyzing if insider dealing has occurred.

3.2.1. Criminal Justice Act 1993

The offence of insider dealing is defined in the Criminal Justice Act 1993, s. 52 using a number of technical terms.28A person has information as an insider if it is and he knows that it is inside information from an inside source, if he has it through being a director, employee or shareholder of an issuer of securities or having access to the information by virtue of his employment, office or profession. 29 A person deals in securities if he acquires or disposes of the securities (whether as principal or agent).or he procures, directly or indirectly, an acquisition or disposal of the securities by any other person.30

27

SEC Rule 10b-5 is codified at 17 C.F.R . § 240.10b-5.

28

Mayson, Stephen W. et. al., Company Law (First Indian Reprint, Universal Law Publishing Co. Pvt. Ltd., 2000) 359.
29

CJA 1993, s 57 defines ‘Insiders’. Ibid, s 55(1) defines “Dealing” in securities.

30

8

The Criminal Justice Act 1993 creates one offence of insider dealing which may be committed in three different ways. Insider dealing will primarily be committed31 where an insider, whilst in possession of inside information, deals in securities which are price-affected in relation to that information, in circumstance where he either acquires or relies on a professional intermediary or is himself acting as a professional intermediary disposes of such securities on a regulated market.32 The offence of insider dealing will also be committed where an insider in possession of inside information encourages another person, including a company, to deal in price-affected securities, even if that other person does not know that the securities are price-affected and where an insider discloses inside information to another person, including a company, otherwise that in the proper performance of the functions of his employment, office or profession. 33

3.2.2. Financial Services and Markets Act 2000

As per Section 118(2) of FSMA, Insider dealing occurs where an insider deals, or attempts to deal, in a qualifying investment or related investment on the basis of inside information relating to the investment in question.34

Section 118B of FSMA defines Insider as ‘any person who has inside information (a) as a result of his membership of an administrative, management or supervisory body of an issuer of qualifying investments, (b) as a result of his holding in the capital of an issuer of qualifying investments, (c) as a result of having access to the information through the exercise of his employment, profession or duties, (d) as a result of his criminal activities, or (e) which he has obtained by other means and which he knows, or could reasonably be expected to know, is inside information.

31

Primary offence of Insider Dealing is defined under s 52(1) (3) of Criminal Justice Act 1993. Thorne, James, Butterworths Company Law Guide (4th Edn., Butterworths LexisNexis, 2002) 340.

32

33

Ibid, 341; CJA 1993, s 52(2)(a) restricts ‘encouraging another to deal’ and s 52(2)(b) restricts ‘disclosure of inside information’.
34

See also, Schedule 2, Regulation 5, The Financial Services and Markets Act 2000 (Market Abuse) Regulations 2005.

9

Section 118C (2) of FSMA defines Inside Information, in relation to qualifying investments, or related investments, which are not commodity derivatives, as information of a precise nature which (a) is not generally available, (b) relates, directly or indirectly, to one or more issuers of the qualifying investments or to one or more of the qualifying investments, and (c) would, if generally available, be likely to have a significant effect on the price of the qualifying investments or on the price of related investments. Section 118C (3) of FSMA defines Inside Information, in relation to qualifying investments or related investments which are commodity derivatives, as an information of a precise nature which (a) is not generally available, (b) relates, directly or indirectly, to one or more such derivatives, and (c) users of markets on which the derivatives are traded would expect to receive in accordance with any accepted market practices on those markets. Section 118C (4) of FSMA defines Inside Information, in relation to a person charged with the execution of orders concerning any qualifying investments or related investments, inside information includes information conveyed by a client and related to the client's pending orders which (a) is of a precise nature, (b) is not generally available, (c) relates, directly or indirectly, to one or more issuers of qualifying investments or to one or more qualifying investments, and (d) would, if generally available, be likely to have a significant effect on the price of those qualifying investments or the price of related investments. 3.3. India The term ‘insider trading’ has not been defined in the SEBI Act or these regulations. The definition of Insider Trading can be ascertained from a combined reading of the definition of ‘insider’ and ‘dealing in securities’, in the definition clause. 35 According to Regulation 2(d) of Securities and Exchange Board of India (‘Prohibition of’36 Insider Trading) Regulations, 1992, Dealing in securities means ‘an act of subscribing, buying, selling or agreeing to subscribe, buy, sell or deal in any securities by any person either as principal or Agent’ and according to Regulation 2(e), Insider means ‘any person who, is or was connected with the company or is
35

Sekhar, supra note 17, 359. Inserted by the SEBI (Insider Trading) (Amendment) Regulations, 2002.

36

10

deemed to have been connected with the company, and who is reasonably expected to have access to unpublished price sensitive information in respect of securities of a company, or who has received or has had access to such unpublished price sensitive information’.

Chapter 2 of the SEBI (Prohibition of Insider Trading) Regulations, 1992 deals with the prohibition of insider trading. Prohibition on insider trading had been divided into two categories:

A. dealing in securities of a company listed on any stock exchange when in possession of any unpublished price sensitive information either on his behalf or on behalf of any other person.37 B. communicating or counseling or procuring directly or indirectly any unpublished price sensitive information to any person. This will not include communication of such information as required in the ordinary course of business or profession or employment or under any law. 38

SEBI (Insider Trading) (Amendment) Regulations, 2002 added Regulation 3A that prohibits company from dealing in the securities of another company or associate of that other company while in possession of any unpublished price sensitive information but Regulation 3B 39 provides certain cases where Regulation 3A does not apply.

3.4. Nepal

Section 91(1) of Securities Act, 2007 provides that ‘if any person deals in securities or causes any other person to deal in securities on the basis of any insider information or notice that are unpublished or communicates any information or notice known to such a person in the course of the discharge of his or her duties in manner likely to affect the price of securities such a person shall be deemed to have been committed an insider trading in securities’ thereby prohibiting dealing in securities, causing any other person to deal in securities and communicating any
37

SEBI (Prohibition of Insider Trading) Regulations, 1992, Regulation 3(i). Ibid, Regulation 3(ii).

38

39

Regulation 3B has been inserted by SEBI (Prohibition of Insider Trading) (Second Amendment) Regulations, 2002.

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information or notice in a manner likely to affect the price of securities. In an explanation to this section, "insider information or notice" had been defined as ‘any such specific kind of information or notice not published by a body corporate issuing any securities as may be capable of affecting the price of such securities if such information or notice is disclosed.’

Section 91(2) of Securities Act 2007 provides that ‘notwithstanding anything contained in subsection (1), any transactions already carried on shall not be deemed to be affected at all merely by the reason that an insider trading has been committed’ thus making the transaction out of the purview of the Acts on the ground of retrospective effect.

Securities Act 2007 under section 92 provides persons likely to be involved in insider trading are (a) a director, employee or a person, who can obtain any information or a notice in the capacity of a shareholder of that body corporate, (b) a person who can obtain any information or a notice in the capacity of a professional service provider to that body corporate, (c) a person who can obtain any information or a notice having a direct or indirect contact with the person or source as specified in clauses (a) and (b).

4. Penalty

4.1. USA Section 21(A) 40 of the Securities Exchange Act 1934 provides the civil penalty for insider trading, which states in the pertinent part: The amount of the penalty which may be imposed on the person who committed such violation shall be determined by the court in light of the facts and circumstances, but shall not exceed three times the profit gained or loss avoided as a result of such unlawful purchase, sale, or communication.

40

Section 21(A) is codified at 15 U.S.C. § 78u-1.

12

Section 3241 of the Securities Exchange Act 1934 provides that any person who willfully violates any provision of this chapter (other than section 78dd-1 of this title), or any rule or regulation hereunder the violation of which is made unlawful or the observance of which is required under the terms of this chapter (…), shall upon conviction be fined not more than $5,000,000, or imprisoned not more than 20 years, or both, except that when such person is a person other than a natural person, a fine not exceeding $25,000,000 may be imposed; but no person shall be subject to imprisonment under this section for the violation of any rule or regulation if he proves that he had no knowledge of such rule or regulation.

4.2. UK The UK was the first European country to make insider dealing a criminal offence. 42 The contract is unaffected as in Percival v Wright43. The sanctions are criminal, the maximum sentence being seven years’ imprisonment and/or a fine of unlimited amount.44 Section 52(1) of the 1993 Act defines the central offence which it creates in the following terms: “An individual who has information as an insider is guilty of insider dealing if, in the circumstances mentioned in subsection (3), he deals in securities that are price-affected securities in relation to the information.”45 If a defendant is convicted of insider dealing then, if it is a summary conviction, he/she is liable to maximum fine of £5,000 or imprisonment for no more than 6 months or both.46 For conviction on indictment the punishment is an unlimited fine or imprisonment for a maximum of seven years, or both.47
41

Section 32 is codified at 15 U.S.C. § 78ff. Mayson, supra note 28, 359.

42 43

[1902] 2 Ch 421where the court held that ‘the directors of the company are not trustees for individual shareholders, and may purchase their shares without disclosing pending negotiations for the sale of the company’s undertaking’.
44

Keenan, Denis, Smith and Keenan’s Company Law (12th Edn., Pearson Education Ltd, 2002) 242. Davies, supra note 19, 455. Thorne, supra note 32, 351; CJA 1993, s 61(1)(a). Ibid; CJA 1993, s 61(1)(b).

45

46

47

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The Criminal Justice Act 1993 imposes criminal liability for insider dealing, but did not provide a civil remedy for the company or unsuspecting outsider. Part VIII of the FSMA was enacted to complement the criminal offence of insider dealing provided by Part V of the 1993 Act.48 The Financial Services and Markets Act 2000 provide a significantly broad regulatory regime for financial services in the UK. The Act introduced civil/administrative sanctions to complement the criminal sanctions contained in Part V of the Criminal Justice Act, 1993.49 As a result of the difficulty in prosecuting individuals under the criminal regime the government introduced a civil offence of ‘market abuse’ contained in s118 of the FSMA. 50 If the FSA51 is satisfied that a person is engaging in, or has engaged in market abuse, or has required or encouraged another person to do, it may impose an unlimited civil fine; make a public statement that the person has engaged in market abuse; apply to the Court for an injunction to restrain threatened or continued market abuse; require a person to disgorge profits made or losses avoided as a result of market abuse; require the payment of compensation to victims. 52

4.3. India

India through Securities and Exchange Board of India (Insider Trading) Regulations 1992, prohibited this fraudulent practice and a person convicted of this offence is punishable under Section 24 and Section 15G of the SEBI Act 1992.53 The Act now permits SEBI to
48

Alexander, Kern. ‘Insider Dealing and Market Abuse: The Financial Services and Markets Act 2000’ (December 2001). ESRC Centre for Business Research, University of Cambridge, Working Paper No. 222, available at http://ideas.repec.org/p/cbr/cbrwps/wp222.html (accessed on 12 October, 2009).
49
50

Adungo, supra note 14. Dignam and Lowry, supra note 3, 75.

51

The Financial Service Authority (FSA) is the UK’s single financial services regulator, established by the FSMA. The FSA has powers to prosecute the offence of insider dealing and to impose ‘civil’ penalties for market abuse.
52

Lewis, Morgan, A Summary of the Financial Services Authority’s Market Abuse Regime in the United Kingdom, available at http://www.morganlewis.com/pubs/FSA-Market%20Abuse.pdf (accessed on 5 October, 2009).
53

See, Sharma, supra note 7, 36.

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simultaneously initiate criminal prosecution.54 The regulation does not contain any provision prescribing penalty for insider trading. Generally the penalty provision as contained in section 24 of the SEBI Act provides that 55 without prejudice to any award of penalty by the Adjudicating Officer under this Act, if any person contravenes or attempts to contravene or abets the contravention of the provisions of this Act or of any rules or regulations made hereunder, he shall be punishable with imprisonment for a term which may extend to ‘ten years, or with fine, which may extend to twenty-five crore rupees or with both’56. Section 15G provides for insider trading penalty of ‘twenty-five crore rupees or three times the amount of profits made out of insider trading, whichever is higher’57.

4.4. Nepal

A person who commits an insider trading a referred to in Section 91 shall, upon being convicted of the offense of insider trading, be liable to the punishment with a fine equal to the amount in controversy or with imprisonment for a term not exceeding one year or with both punishments. 58

5. Conclusion

In as early as 1934, US legislation by making the use or employ of manipulative and deceptive device unlawful for the protection of investors initiated to combat insider trading. After half a century, Insider Trading Sanction Act 1984 and Insider Trader and Securities Fraud Enforcement Act 1988 were aptly promulgated to curb insider trading. It is apparent that enactments of UK legislation on insider trading have been made to take account of the EC Directive. The law on Insider Trading of India evolved as a summation of the recommendations made by several committees that culminated as SEBI (Insider Trading) Regulations 1992. Regular amendments of
54
55

Bose, supra note 18, 97. Sekhar, supra note 17, 364. SEBI (Amendment) Act, 2002 substituted it for ‘one year, or with fine, or with both’. SEBI (Amendment) Act, 2002 substituted it for ‘not exceeding five lakh rupees’. Securities Act 2007, s 101.

56 57
58

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legislation in these countries are further bringing obnoxious practices with in the purview of law. The law on insider trading in Nepal is in nascent state compared to these countries.

There is no statutory definition of insider trading in USA, unlike UK and India where the conjunctive reading of ‘insider’ and ‘dealing in securities’ connotes insider trading, thus judiciary has played important role in forming large part of law. In UK according to CJA 1993 dealing or encouraging to deal in price affected securities or disclosing of the inside information amounts insider dealing and according to FSMA 2000 dealing or attempting to deal in a qualifying investment or related investment amounts to insider dealing. In India, dealing in securities when in possession of any unpublished price sensitive information or communicating, or counseling or procuring unpublished price sensitive information amounts insider trading. In Nepal, dealing or causing any other person to deal in securities on the basis of any insider information or communicating any information in a manner likely to affect the price of securities amounts insider trading.

In these countries both the civil and criminal penalty is provided to deter the menace of insider dealing. Both in USA and India, only civil penalty is provided for insider trading and together the criminal penalty is imposed on the violation of any provisions of Securities Exchange Act 1934 and SEBI Act 1992 or any rules or regulations made hereunder in case of USA and India respectively. In UK, CJA 1993 provided only criminal penalty for insider dealing but later FSMA 2000 introduced civil/administrative sanction for market abuse under which insider trading is included as one of the offence. Like in UK, criminal penalty is provided by Securities Act 2007 for insider trading in Nepal but there is no civil penalty regime.

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