INSIDER TRADING Regulations & Practices

Agenda for Presentation

Introduction History behind insider trading Regulatory Aspect of Insider Trading Cases

Introduction

Introduction
Insider trading essentially denotes dealing in a company s securities on the basis of confidential information relating to the company which is not published or not known to the public used to make profit or loss. It is fairly a breach of fiduciary duties of officers of a company or connected! persons as defined under the "#$I regulations%&''(% towards the shareholders.

Contd
Insider terms actually includes both legal and illegal conduct. The legal )ersion is when corporate insider officer% directors % and employees buy and sell stock in their own companies. when corporate insiders trade in their own securities % they must report their trades to "#$I. Illegal insider trading refers generally to buying or selling a security % in breach of fiduciary duty or other relationship of trust and confidence% while in possession of material % non public information about the security.

Who are insider traders?

Corporate officers% directors % and employees who traded the corporations securities after learning of significant % confidential corporate de)elopments. *riends % business associates% family members % and other types of such officers % directors % and employees% who traded the securities after recei)ing such information.

Contd
#mployees of law% banking % brokerage and printing firms who were gi)en such information to pro)ide ser)ices to the corporation whose securities they traded. +o)t employees who learned of such information because of their employment by the go)t . ,ther persons who misappropriated %and took ad)antage of% confidential information from their employers.

Wh for!id insider trading?

The pre)ention of insider trading is widely treated as an important function of securities regulation. In order to make sense of insider trading % we must ha)e basic understanding of markets% prices and role of markets in the economy. Insider trading appears unfair% especially to speculators outside a company who face difficult competition in the form of insider trading.

"istor !ehind Insider Trading

"istor !ehind Insider Trading Regulation in India

Insider trading in India was unhindered in its &-. year old stock market till about &'/.. In &'/' % the Sachar committee recommended amendments to the companies Act%&'01 to restrict prohibit the dealings of employees . 2enalties were also suggested to pre)ent the insider trading. In &'31 the Patel committee recommended that the securities contracts Act %&'01 may be amended to make e4change curb insider trading and unfair stock deals.

Contd
In &'3' the Abid Hussain committee recommended that the insider trading acti)ities may be penali5ed by ci)il and criminal proceedings and also suggested the "#$I formulate the regulations and go)erning codes to pre)ent unfair dealings. India through "#$I regulations &''( has prohibited this fraudulent practice . These regulations were drastically amended in (..( and renamed as "#$I regulations &''(.

In India##$
,nly &6 cases taken up by "#$I for insider trading in (..-7.6 % which went down to only / in (..67.0. In terms of cases completed% the no was only ' and 0 respecti)ely. "o does India has fewer incidence of insider trading or our systems8laws not geared enough to detect such cases9

Regulator as%ect of Insider Trading

Regulator as%ects of %rohi!ition of Insider Trading

"#$I prohibition of Insider Trading regulation &''0. "ection &&:(; # of companies act &'01 prohibits the Insider Trading <hat is Insider Trading is not defined in the companies act 7&'01

Wh there is need for the Prohi!ition of Insider Trading???

As per "#$I the 2rohibition of Insider Trading is re=uired to make "ecurities >arket? *air @ Transparent To ha)e a le)el playing field for all the participants in the market *or free flow of information @ a)oid information asymmetry

Who is Insider???
<ho is Insider is defined under the "#$I 2rohibition of Insider Trading regulation ( :e; Insider is the person who is connected with the company , who could have the Unpublished price sensitive information or receive the information from somebody in the company . *or the purpose this definition% words connected person! shall any person who is a connected person si4 months prior to an act of insider trading

Who Can !e a connected %erson???

It could be director of the company %or is deemed to be a director of the by )irtue of sub7clause:&.; of section -./ of the companies act &'01 He 8"he could be officer or professional of the company or holding a business relationship with the company. Any person ha)ing A22I from the any subsidiary or group company is also stated to be the connected person. Connected person can also be from intermediaryBs like stock e4change % >erchant $ank % Transfer agent% debenture trustee% $ankers @ relati)es of promoter or of $,C.

Relati&es are defined &er e'tensi&el in the co(%anies act )*+,

1. Father 2. Mother 3. Son 4. Sons wife 5. Daughter 6. Fathers father 7. Fathers mother 8. Mothers mother 9. Mothers father 10.Sons son 11.Sons sons wife 12.Sons aughter 11.Sons sons wife 12.Sons aughter 13.Sons aughters hus!an 14.Daughters hus!an 15.Daughters son 16.Daughters sons wife 17.Daughters aughter 18.Daughters aughters hus!an 19."rother 20."rothers wife 21.Sister 22.Sisters hus!an

But several close relatives are excluded Like all in-laws (Brother-inlaw, Father-in-law etc.)-Brothers wifes brother etc.

What is %rice sensiti&e infor(ation???

The 2rice sensiti)e information is defined in Regulation (:h;:a; of the prohibition of Insider Trading. It means any information which relates directly or indirectly with the company which if published is li!ely to materially affect the prices of the security"s of the company.

The infor(ation -hich is dee(ed to !e %rice sensiti&e are li.e###$

2eriodical financial results Intended declaration of the di)idends:both Interim @ *inal; Issue of securities or buy Dback of securities Any maEor e4pansion plans or e4ecution of new proEects. Amalgamation @ mergers or takeo)ers. Cisposal of the whole or substantial part of the undertaking Any significant changes in policies % plans or operations of the company.

Regulation / of the Prohi!ition of Insider trading

Fo Insider should deal insecurity % while in possession of A22I. He 8 "he should not communicate or procure the A22"I to others.

Regulation /012
This regulation states that there should be Chinese <all! <ith in the company @ one department should not know about what other departments are doing.

Disclosures for %rohi!ition of Insider Trading

Initial Cisclosure & Gike buying the stake greater than the 0H of the paid up capital of the company %the ac=uiring company should inform the "tock #4change with in ( days of ac=uiring the stake. ( The new director should disclose all its trade position in #=uity or deri)ati)es with in ( days of its appointment. Continuous Cisclosure & If the director changes its holding by (H . ( In)estment of Rs 0 Gacs or (0... shares or buying the &H stake of the paid up capital which e)er is the least should be disclosed. All holdings in securities of that company 6 2eriodic statements of all transactions 0 Annual statement of all holdings 1 Any other disclosure of the company to stock e4changes.

3odel Code of Conduct for Prohi!ition

A compliance officer is re=uired to be appointed by the company. There should be pre7clearance of trade by the officer of designated employees. Cesignated employees includes ?
i. #mployees from top - layers of >gmt. ii. All #mployees in finance department irrespecti)e of any designation @ grade. iii.#mployee designated by $,C from time to time to whom the trading restriction shall be a applicable.

Trading window %is closed / days prior @ (6 hours post e)ent for the connected persons! during the A22"I acti)ities like R#"AGT"%I2,%CA2#I%$AJ $ACK % etc. There are se)eral forms in accordance with disclosures @ code of conduct. InsiderLTradingLCodeLofLConduct.pdf

In&estigation of Insider Trading

Regulation 6:a; deals with the re=uest for the en=uiries. "#$I can also appoint the outsider auditor for the en=uiry @ auditor would ha)e the same power as the "#$I possess. $efore undertaking any in)estigation under regulation :0; "#$I shall gi)e a reasonable notice to insider for that purpose. <here "#$I is satisfied that in the interest of in)estors or in public interest no such notice should be gi)en% it may by an order in writing direct that the in)estigation be taken up without such notice.

SE1Is Po-er to (a.e in4uiries and ins%ection

#egu$ation 4% If the "#$I suspects that any person has )iolated any pro)ision of these regulations% it may make in=uiries with such persons. The "#$I may appoint officers to inspect the books and records of insider:s; for the purpose of inspection. The "#$I can investigate and inspect the books of account% either records and documents of an insider on prima facie. "#$I can in)estigate into the complaints recei)ed from in)estors% intermediaries or any other person on any matter ha)ing a bearing on the allegations of insider trading.

Case Studies
o HGG7$$GIG >#R+#R o RAK#"H A+AR<AG )s. "#$I o "A>IR AR,RA )s. "#$I

"556115I5 3ERGER CASE

"5571R88918ND 5IPT8N INDIA 5TD

*ocus on legal contro)ersy in)ol)ing $$GIGBs merger with HGG. "#$I% suspecting insider trading% conducted en=uiries. In August &''/% "#$I charged HGG of insider trading by using Anpublished 2rice7"ensiti)e Information.

"5571R88918ND 5IPT8N INDIA 5TD

HGG bought 3 lakh shares of $$GIG from ATI at Rs -0..-0 per share :At a premium of '.0H of the ruling market price of Rs -(.; Eust two weeks before the formal announcement knowing that the HGG and $$GIG were going to merge. "#$I held that HGG was using unpublished% price7sensiti)e information to trade% and was therefore guilty of insider trading. In >arch &''3% "#$I passes an e4ecuti)e order% which sent shock wa)es through the countryBs corporate sector. "#$I directed HGG to pay ATI Rs -.6 Crore in compensation% and also initiated criminal proceedings against the fi)e directors of HGG and $$GIG.

"5571R88918ND 5IPT8N INDIA 5TD

HGG appealed against the "#$I )erdict to the Anion >inistry of *inance. HGG contended that before the transaction% the merger was the subEect of wide speculation by the market and the media. After the formal announcement% press articles mentioned that the merger was no surprise to anyone. HGG pointed out that the share price of $$GIG mo)ed up from Rs (6( to Rs -(. between Manuary and >arch% before the transaction% indicating that the merger was generally known information!.

"5571R88918ND 5IPT8N INDIA 5TD

HGG contended that to be considered as an insider% it should ha)e recei)ed information by )irtue of such connection! to the other company. According to HGG% it was an initiator and the transferee% and it was the primary party! to the merger and no primary party to the merger can be considered an insider from the point of )iew of insider7trading. HGG argued that only the information about the swap ratio could be deemed to be price7sensiti)e and that this ratio was not known to HGG or its directors before the purchase of shares from ATI. HGG also argued that the news of merger was not price sensiti)e as it had already been announced by the media before the official announcement.

"5571R88918ND 5IPT8N INDIA 5TD

HGG claimed that the purpose of the purchase of shares was to enable Anili)er to ac=uire 0&H shares of $$GIG. In Muly &''3% the Appellate Authority of the *inance >inistry dismissed the "#$I order. Howe)er% "#$I was correctly order was correctly based on a simple proposition of law ? what can not be done directly can not be done indirectly.

RA9ES" AGARWA5 &s$ SE1I

RA9ES" AGARWA5 &s$ SE1I

,ne of the most famous case highlighting the )ulnerability of the "#$IBs &''( regulations. Rakesh Agarwal% >C of A$" Industries Gtd was in)oled in negotiations with $ayer A.+% regarding their intention to takeo)er A$". As per "#$I% Rakesh Agarwal had access to the Anpublished price7sensiti)e information. "#$I alleged that prior to the announcement of ac=uisition% Rakesh Agarwal% through his brother7in7law% had purchased shares of A$" and tendered the said shares in the open offer made by $ayer.

RA9ES" AGARWA5 &s$ SE1I

Rakesh Agarwal contended that he did this in the interests of the company. 2ursuant to $ayerBs condition to ac=uire at least 0&H shares of A$"% he% through his brother7in law bought the shares and later sold them to $ayer. The "#$I directed Rakesh agarwal to deposit Rs -6%..%... with In)estor #ducation @ 2rotection *unds of "tock #4change% >umbai and F"#. "AT held that the "#$I order directing Agarwal to pay Rs -6 lakh couldnBt be sustained% on the grounds that Rakesh Agarwal did that in the interests of the company.

SA3IR AR8RA &s$ SE1I

SA3IR AR8RA &s$ SE1I

"ameer Arora was star fund manager of Alliance Capital >utual *und :AC>; and the poster boy of the Indian >utual *und Industry. He was managing Rs ((16 crores with ACA> in)ested in Indian e=uity and fi4ed income markets as of -&st August (..-. <ithin a few years of its launch% AC>* became a darling among the in)estors. The fund which was launched in &''0% had been generating a return of (.61- H since inception under the growth option. The CI,% Asian operations% "amir Arora was applauded by e)eryone for a good show.

SA3IR AR8RA &s$ SE1I

In April (..-% there were talks about the consolidation of Cigital +lobal "oft GTC:C+G; with the Hewlett 2ackard Indian "oftware ,perations:H2I",;% a &..H subsidiary of H2. ,n >ay 0% (..- Arora% in an inter)iew with Business Standard% proposed that merger was going to immensely help C+G due to the additional proEects it is going to get from H2. ,n >ay 3% (..- an internal analyst of Alliance recommended reducing position in the stock. AC>* sold &.&' lakh shares and AC> sold (.&3 lakh shares. ,n >ay &(% (..- AC>* sold -.-0 lakh shares while AC> sold (.0 lakh shares.

SA3IR AR8RA &s$ SE1I

Arora said% #)en risk from tomorrowBs results is too high. $ipolar situation% but we do not like to take such risks post7)ery )olatility in technology stocks around results8corporate issues.! >ay &-% (..- C+G announced N6 results in line with the e4pectations of the market. AC> sold (.&& lakh shares. Mune /% (..- C+G announced demerger ratio which was percei)ed as unfa)orable by the market. "tock fell (1H.

SA3IR AR8RA &s$ SE1I

In August (..-% "#$I charged "amir Arora of insider trading under "ection &&$ and &&:6;:$; of the "#$I Act. "#$I indicted Arora on many serious charges i.e 7 A. Trading C+G shares on the basis of Anpublished price sensiti)e information. $. Fon7disclosure after crossing 0H limit in se)eral companies C. Causing panic in the market by making public his decision to =uit Alliance Capital% leading to the redemption of Rs &-.. Crore.

SA3IR AR8RA &s$ SE1I

In April (..6% "#$I debarred Arora from dealing in securities directly or indirectly for fi)e years. "#$I charged the penalty of Rs &0 Crore on AC> and two associated Alliance entities. ,ctober (..6% the "ecurities Appellate Tribunal set aside the order of "#$I on grounds of insufficient e)idence to pro)e the charges of insider trading and professional misconduct against >r. Arora.

81SER:ATI8N
Inability of "#$I in pro)ing its cases. <ide definition of Insider Trader as defined in the &''( Act. 2ro)ing Insider Trading D a bi5arrely difficult task. Gack of assistance from Central #conomic Intelligence $ureau :C#I$; to in)estigate the cases. Absence of an ade=uate remedy a)ailable to the in)estors at large.

Than. ou