Regulatory Mechanism

-Sowmya S
-Faculty,BIMS,UOM
 The National Financial Reporting Authority

Sh Ashok Kumar Gupta

Chairperson
 Is ICAI under NFRA?

• While ICAI is a statutory body for regulating the profession

of chartered accountancy in the country and is under the
administrative control over the ministry of corporate affairs,
NFRA was set up under the Companies Act to recommend
accounting and auditing policies and standards to
government and to enforce compliance
The National Financial Reporting Authority
Insolvency and Bankruptcy Board of India
Insolvency and Bankruptcy Board of India
Insolvency and Bankruptcy Board of India
Insolvency and Bankruptcy Board of India

Ravi Mital, a 1986 batch Indian Administrative

Service (IAS) officer of Bihar cadre
Insolvency and Bankruptcy Board of India
Insolvency and Bankruptcy Board of India
 Insolvency and Bankruptcy Board of India

What is 'Information Utility'? IUs are entities that would act as data repositories of financial information which
would receive, authenticate, maintain and deliver financial information pertaining to a debtor with a view to
facilitate the insolvency resolution process in a time-bound manner.

Insolvency Professional Agencies (IPA), Insolvency Professionals (IP) and Information

Utilities (IU) in India
Insolvency and Bankruptcy Board of India
Insolvency and Bankruptcy Board of India
Insolvency and Bankruptcy Board of India

Insolvency Professional are enrolled with an Insolvency Agency and they are
involved in the dissolution process of an insolvent individual, companies, LLPs or
partnerships. These professionals are authorized to act on behalf of such insolvent
individual, companies etc.
Insolvency and Bankruptcy Board of India
Insolvency and Bankruptcy Board of India
Insolvency and Bankruptcy Board of India
Insolvency and Bankruptcy Board of India
Insolvency and Bankruptcy Board of India
 Insider Trading

• Insider Trading can mean that a person buys or sells stock

based on information that is not available to the public. The
person may be a corporate officer, director employee or
someone who has received the non-public information.
• Insider trading is a white collar crime and a person who has
been found guilty of insider trading can be sent to prison.
Insider Trading also can be legal If:
• A CEO of a corporation buys 1,000 shares of stock
in the corporation. The trade is reported to the
Securities and Exchange Commission.
• An employee of a corporation exercises his stock
options and buys 500 shares of stock in the
company that he works for.
• A board member of a corporation buys 5,000
shares of stock in the corporation. The trade is
reported to the Securities and Exchange
Commission.
 Insider Trading also can be Illegal If:
• Illegal insider trading is very different than
legal insider trading.
• A person who engages in illegal insider trading
may work for the company that he buys the
stock for, but does not necessarily have to.
The key is that the person who buys or sells
the stock acts on insider information (not
public information) in violation of the law.
 Examples of Illegal Insider
Trading

• A lawyer representing the CEO of a company learns in a confidential

meeting that the CEO is going to be indicted for accounting fraud the next
day. The lawyer shorts 1,000 shares of the company because he knows
that the stock price is going to go way down on news of the indictment.
• A board member of a company knows that a merger is going to be
announced within the next day or so and that the company stock is likely
to go way up. He buys 1,000 shares of the company stock in his mother's
name so he can make a profit using his insider knowledge without
reporting the trade to the Securities and Exchange Commission and
without news of the purchase going public.
• A high-level employee of a company overhears a meeting where the CFO
is talking about how the company is going to be driven into bankruptcy as
a result of severe financial problems. The employee knows that his friend
owns shares of the company. The employee warns his friend that he needs
to sell his shares right away.
 Examples of Illegal Insider Trading

• A government employee is aware that a new regulation is going to be

passed that will significantly benefit an electricity company. The
government employee secretly buys shares of the electricity company and
then pushes for the regulation to go through as quickly as possible.
• A corporate officer learns of a confidential merger between his company
and another lucrative business. Knowing that the merger will require the
purchase of shares at a high price, the corporate officer buys the stock the
day before the merger is going to go through.
 Famous Illegal Insider Trading Case
The Raj rajanathanam Insider trading case

• Raj Rajaratnam is a Sri Lankan-born American citizen of Tamil descent who

founded the Galleon Group, a New York-based hedge fund management firm.
• On October 16, 2009, he was arrested by the FBI on allegations of insider trading,
which also caused the Galleon Group to close.
• His attorney indicated that Rajaratnam would plead not guilty and fight the
charges of insider trading in court.
• On October 13, 2011, Rajaratnam was sentenced to 11 years in prison.
• He was the 236th richest American in 2009, with an estimated net worth of $1.8
billion.
• Rajaratnam started his career as a lending officer at the Chase Manhattan Bank
where he made loans to high-tech companies.
• He joined the investment banking boutique Needham and Co as an analyst in
1985, where his focus was on the electronics industry.
• He became the head of research in 1987 and the president in 1991, at the age of
34.
• At the company's behest, he started a hedge fund - the Needham Emerging
Growth Partnership - in March 1992, which he later bought and renamed 'Galleon'.
 Players Involved in the case
• Raj Rajaratnam was the Sri-Lankan manager of the hedge fund Galleon
Group, which managed $6.5 billion at its height.
• Rajat Gupta is a former director at Goldman Sachs and head of McKinsey
consulting. He also served on the board of Procter & Gamble.
• Warren Buffet is the CEO of Berkshire Hathaway, an investment company.
• Preet Bharara is the United States Attorney for the Southern District of
New York.

Preetinder Singh Bharara

Warren Edward Buffett is an
Rajat Kumar Gupta is is an Indian-born Raj Rajaratnam
American business magnate,
an Indian-American American lawyer Hedge fund
investor, and philanthropist. He is
businessman Manager, Galleon
currently the chairman and CEO
Group
of Berkshire Hathaway.
 Summary of the Illegal Insider Trading Case-
Rajaratnam

• 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.
 Summary of the Illegal Insider Trading Case-
Rajaratnam

• In October 2009, the Justice Department charged Raj Rajaratnam, a New York hedge fund
manager, with fourteen counts of securities fraud and conspiracy. Rajaratnam, who was
found guilty on all fourteen counts on May 11, 2011, had allegedly cultivated a network of
executives at, among others, Intel, McKinsey, IBM, and Goldman Sachs. These insiders
provided him with material nonpublic information.
• Preet Bharara, the government’s attorney, argued in the case that Raj Rajaratnam had made
approximately $60 million in illicit profits from inside information.
• Rajaratnam’s conviction in fact falls into a larger post-recession crackdown on insider
trading undertaken by the SEC(Security and exchange commission) and the US Justice
Department, led by Preet Bharara.
• Raj Rajaratnam was the 35th person to be convicted of insider trading of 47 people charged
since 2010.This effort to prosecute insider trading has been marked by more aggressive
tactics such as wiretapping to prosecute insider-trading cases, which might otherwise be
difficult to prove.
• This case study will use a specific instance of insider trading from the Rajaratnam trial to
examine more general claims that insider trading ought to be legal. It will focus on
Rajaratnam’s trading immediately before and after Warren Buffet’s infusion of $5 billion into
Goldman Sachs on September 23, 2008.
 Rakesh Agrawal vs. SEBI

• n 1996, Rakesh Agrawal, managing director of ABS Industries

Ltd., signed a deal with Bayer AG, a German business, which
agreed to purchase 51% of ABS Industries Ltd.’s shares.
• Following UPSI’s announcement of the acquisition, the
accused sold a significant portion of his ABS Industries
ownership, which he owned through his brother-in-law, Mr. I.
P. Kedia. Considering Mr. Kedia to be a well-connected
individual, SEBI held that Mr. Rakesh Agrawal was guilty of
insider trading and directed him to deposit Rs. 34 lakhs with
Investor Protection Funds of Stock Exchange, Mumbai and
NSE (in equal proportion i.e. Rs.17 lakhs in each exchange) to
pay any investor who may make a claim afterwards.
 Rakesh Agrawal vs. SEBI
• On appeal to the Securities Appellate Tribunal (SAT), it was concluded that
even if Mr. Agrawal had traded securities while in possession of UPSI, he
was not guilty of insider trading because his actions were in the best
interests of the company (as Bayer AG was not willing to acquire the
company unless it could obtain a minimum of 51% of the shares) and there
was no intention to make a profit.
• Further, SAT decided that in order to penalize an insider for violating the
Regulations, it must be proven that the insider benefited unfairly from the
trade. The tribunal also rejected SEBI’s argument that insider trading
jurisprudence is founded on the concept of ‘disclose or abstain’, and that
an insider in possession of UPSI cannot trade in a company’s stocks until
he reveals the UPSI.
 Rakesh Agrawal vs. SEBI

• After revisiting the entire jurisprudence of insider trading on

requirement of Mens Rea under Indian legal system, the
tribunal held that:
• “Taking into consideration the very objective of the SEBI
Regulations prohibiting the insider trading, the
intention/motive of the insider has to be taken cognizance
of. It is true that the regulation does not specifically bring in
mens rea as an ingredient of insider trading. But that does
not mean that the motive need be ignored.”

Mens rea : Criminal intent or evil mind