INSIDER TRADING AND

WHISTLEBLOWER
CORPORATE LAW CIA 3
CONTENTS:
Meaning and Basic Concept of Insider Trading
Insider Trading in India
Penalties for Insider Trading
Case Study on Insider Trading
Types of Whistleblowing
Safeguards and Reach for Whistleblower
Legal Provisions
Case study on Whistleblowing
Meaning and Concept of Insider Trading
Meaning: The practice of purchasing or selling a publicly-traded
company’s securities while in possession of material information
that is not yet public information.
Material Information: Information resulting in a substantial
impact on the decision of an investor.
Non- Public Information: We mean that the information is not
legally out in the public domain.
Examples:
o CEO divulges important information about
the acquisition of his company.
o A government employee acts upon his knowledge about a
new regulation to be passed.
Insider Trading in India
It is prohibited by Regulation 3 of SEBI
Insider Trading was framed under Sec 11 of SEBI Act,
2011
Aim : To ensure that no one is gained by insider trading
Information available to all
Prohibits companies from dealing in securities if it has
unpublished information of another or associate company
Feb, 2002 –Rules tightened
a. Temporary insiders b. Relatives of connected person
SEBI and Insider Trading
Submission of Communication
Setting up enquiry
committee report to SEBI of findings to
within 1 month insiders

Appointment of Can demand for Reply by insider

investigating officers all information within 21 days

Appointment of Appeal in
auditors for Securities
•Notice to insiders
inspection of Appellate
books Tribunal
Penalties for Insider Trading
 No separate penalties have been prescribed under the Regulations
 Reference is made however to the penalty provisions under the
SEBI(Prohibition of Insider Trading) Regulation, 1992
 It states that the person found guilty would be given:

A fine of not more than 25crores or 3 times the amount of

profit made from Insider Trading

Imprisonment up to 10 years

Fine + Imprisonment

Orders to prohibit or refrain the insider from dealing in the

securities of the company
Example
Suppose a person named ‘X’ has been found guilty of Insider
Trading according to the SEBI regulations by the court of
law. He was able to get a profit of 10 Crores through his
dealings.
The court may:-
Fine him with an amount of 30 Crores.
An imprisonment of at most 10 Years.
Some amount of fine + imprisonment for some duration.
Case Study

Rajat Gupta Raj Rajratnam

 Background

• Graduate from • SriLankan-

Rajat Gupta

Raj Rajratnam
• Board member of
IIT & MBA corporations like American
Goldman Sachs,
from Harvard Procter and Gamble • The former
Business and American hedge fund
School Airlines. manager and
• Advisor to non- founder of the
profits such as the Galleon Group,
• First foreign- Bill & Melinda a New York-
born MD of Gates Foundation based hedge
McKinsey and and The Global fund
Company Fund to Fight
AIDS, management
Tuberculosis and firm.
Malaria
FACTS
 On September 23, 2008, Warren Buffet agreed to pay $5 billion for preferred
shares of Goldman Sachs.
 This information was not announced until 6 p.m., after the NYSE closed on that
day.
 Before the announcement, Raj Rajaratnam bought 175,000 shares of Goldman
Sachs.
 The next day, by which time the infusion was public knowledge, Rajaratnam sold
his shares, for a profit of $900,000.
 In the same period of time financial stocks as a whole fell.
 Again, on 23 October he called and informed that Goldman Sachs is going to
issue its reports of negative earnings
 Sold all his shares and saved 3.6 million dollars.
 In JAN 29,2009 Rajaratnam knew about the release of earnings of P&G thereby
gaining $5,70,000
How was he proven Guilty?

First, they showed that he earlier had conversations with Mr

Rajat Gupta where confidentiality had been compromised, even
if securities laws had not been violated.

Second, they showed that Mr Rajaratnam had bragged to

someone else that he had inside knowledge of the Buffett deal
from someone on the Goldman board.

Third, Mr Rajaratnam, in a conversation with Mr Gupta's

former partner at McKinsey, Anil Kumar, who pleaded guilty
to leaking confidential information to Mr Rajaratnam in
exchange for payments, speculates that Mr Gupta's motivation
was financial greed.
CONSEQUENCES
Rajaratnam was sentenced to 11 years of jail

He was proven guilty on October 16,2009

Rajat Gupta proven Guilty on 24

October,2012

Arrested for 2 years

Was on a House arrest till March,2016 in

Manhattan
TYPES OF WHISTLEBLOWING
Who is an Internal
Whistleblower?
An internal whistleblower is
someone who discovers some
type of illegal misconduct in a
workplace and decides to
communicate their discovery to a
supervisor.
Who is an External
Whistleblower?
The individual who reports the
misconduct to an outsider.
The litigation will be filed under
the False Claims Act if found
guilty
Internal Whistleblowing
It means reporting suspected
misconduct up the chain of
command at a workplace
Also known as Internal Reporting
Actions are taken within company’s
scope of operation.
External Whistleblowing
It refers to an act where an
individual who observes misconduct
by an entity or individual and
reports that misconduct to an
outsider.
Outsiders refers to government
agency or prosecutor or a public
hotline designed for reporting fraud
or abuse by private companies
Legal Provisions

The Companies

Legal Provisions
Act, 2013
Securities and
Exchange Board
Of India
Whistle blowers
Whistle blowers
Protection
Protection Act,
(Amendment)
2014
Act, 2015
The Companies Act, 2013
 According to Section 177(9), every listed company or such class or classes of
companies, as may be prescribed shall establish a Vigil Mechanism for directors
and employees to report genuine concerns in such manner as may be prescribed.

 VIGIL MECHANISM: According to Section 177(10), it is a channel or

medium which shall provide for adequate safeguards against victimization of
persons who use such mechanism and make provision for direct access to the
chairperson of the Audit Committee in appropriate or exceptional cases, provided
that the details of establishment of such mechanism shall be disclosed by the
company on its website, if any, and in the Board’s report.
 Whistle blowers
Securities and Protection
Exchange Board of (Amendment) Act,
India 2015
• Clause 49 of the Listing • Introduced in 2010 and passed
Agreement to the Indian stock by Lok Sabha in 2011
exchange mentions the • Passed by Rajya Sabha and
formulation of a Whistle-blower President in 2014
policy for companies • Amended in 2015
• It is aligned with the Companies • Special act for protection of
Act, 2013 whistle blowers
Case Study
• Adrian worked at a local site of a major waste disposal firm

• Adrian suspected that some employees of the mill were being paid to steal top grade paper,
which was then concealed amongst waste paper in skips that were collected daily by a waste
paper company.

• When the company delivered the waste to Adrian’s firm, the paper was also sold on for cash,
at a fraction of the market cost.

• He feared that if he spoke out, not only would he lose his job, but his life would be made
intolerable and that the perpetrators were influential in his firm and had good contacts with
the local police.

• Having obtained assurances on his behalf, the company’s investigators were put in touch
with Adrian. He was able to show them how the fraud had been concealed in the paperwork.

• With this information the company realised that the fraud had cost it some £3 million. The
police were called in and arrests were made.