SUBJECT NAME

COURSE CODE

UNIT-

ABHISHEK DWIVEDY
Assistant Professor
DME, Law School
a.dwivedy@dme.ac.in
 Programme Outcomes

Program Outcomes (POs) –

1. The programme is designed to acquaint, train and equip students with
comprehensive knowledge about the law and its relationships with human and
institutional agencies.
2. The students will be motivated to study the common principles and concepts of law
to understand its reason, significance and emergence as also the ideological
framework in the framers of the Constitution of India

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 Course Objective and Course Outcomes

Course Objectives
• The paper needs to be taught in light of the New Companies Amendment Act
2013. The Companies act 1956 has not been repealed. The New Act of 2013 is
made applicable by notifications as to particular sections by the Ministry of
Company Affairs. The notified sections which replace the provisions of
Companies Act 1956 will be highlighted.
Course Outcomes
• CO1–To develop the comprehensive knowledge of the concept of incorporation of
a company.
• CO2– To analyze the legal concept of corporate financing with respect to
classification of company’s securities.
• CO3- To illustrate the process of corporate liquidation along with mergers and
acquisitions.
• CO 4- To assess the continuous organic nature of Companies Act and the
challenges associated with the corporate sector in India.
• CO 5- To assess the continuous organic nature of Companies Act and the
challenges associated with the corporate sector in India.

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 Syllabus
• Unit I: Incorporation and Formation of Company (Lectures-12)
• a. Company and Other Forms of Business Organisations
• b. Different Kinds of Company: One Person Company, Foreign Company
• c. Process of Incorporation
• i. Nature and Content
• ii. Doctrine of Indoor Management
• iii. Doctrine of Ultra Vires
• iv. Doctrine of Constructive Notice
• d. Memorandum and Articles of Association
• Unit II: Corporate Financing (Lectures-10)
• a. Prospectus and Statement in lieu of Prospectus
• b. Shares, Share Capital and Debenture, Debenture Bond
• c. Classification of Company Securities
• d. Inter-corporate Loans
• e. Role of Court to Protect Interests of Creditors and Shareholders, Class Action Suits, Derivative Actions
• Unit III: Corporate Governance (Lectures-12)
• a. Kinds of Company Meetings and Procedure
• b. Powers, Duties and Kinds of Director: Independent Director, Women Director
• c. Different Prevention of Oppression and Mismanagement
• d. Investor Protection
• e. Insider Trading
• f. Corporate Fraud
• g. Auditing Concept
• Unit IV: Corporate Social Responsibility and Corporate Liquidation (Lectures-8)
• a. Evolution of Corporate Social Responsibility, Corporate Criminal liability, Corporate Environmental Liability
• b. Different Types of Winding up of Company
• c. Role of Courts in Winding up of Company
• d. Merger and Acquisition of Company (eg. like Arcelor Mittal and Air India Case)
• e. Cross Border Merger, Takeover Code: Role of SEBI

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 Unit III: Corporate Governance

a. Kinds of Company Meetings and Procedure

b. Powers, Duties and Kinds of Director: Independent Director,
Women Director
c. Different Prevention of Oppression and Mismanagement
d. Investor Protection
e. Insider Trading
f. Corporate Fraud
g. Auditing Concept

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3.5 (Insider Trading)

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 Suggested Readings
Text Books:
1. Author:
Book title:
Chapter Name:
2. Author:
Book title:
Chapter Name:

Reference Link:
https://blog.ipleaders.in/insider-trading-in-india-regulations-and-
controlling-authority/
https://www.youtube.com/watch?v=L6Mde-vuyzc
https://www.youtube.com/watch?v=kjBuztgXyRM
https://www.youtube.com/watch?v=w9jfS-ecu60

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 Introduction (Topic 3.5)

• Insider trading refers to the buying or selling of a security in breach of a

fiduciary duty or other relationship of trust and confidence, while in
possession of material, nonpublic information about the security.
• In simpler terms, it involves trading in a company's stocks or securities by
individuals who have access to nonpublic information about the company's
affairs.

• Insider traders use specific unpublicized information either for their own
financial benefit or for avoiding losses.
• The concept implicit in the term ‘insider trading’, includes any person having
access to unpublicized price-sensitive information about the company.

• “Insider trading is an act of buying, selling, subscribing or agreeing to subscribe

in the securities of a company, directly or indirectly, by the key management
personnel or the director of the company who is anticipated to have access to
Unpublished Price Sensitive Information with reference to securities of the
company and it is deemed to be insider trading.”
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 History
• 1940: First recommendation for Insider Trading Regulation in India.
• 1948: Thomas Committee suggests proper disclosures by directors, agents,
officers, auditors.
• 1956: Companies Act introduces provisions to prevent Insider trading.
–Sections 307 and 308 require record maintenance and disclosures by directors and
key managerial persons.
• 1979: Sachar Committee reports on Insider Trading practices, emphasizing the
need for specific provisions.
• 1986: Patel Commission calls for changes to Securities Contract Regulation. It
defines Insider Trading as trading in shares by those in company management
or close to them based on undisclosed price-sensitive information.
• 1989: Abdul Hussain Committee recommends making Insider Trading an
offense under Civil and Criminal laws, suggests SEBI formation for market
regulation.

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• Formation of SEBI: Based on committee reports, SEBI is established to
regulate market transactions.
• 1992 TISCO Case: Sharp fall in company profits; sale of shares before half-
yearly results. Lack of regulations leads to the formation of SEBI (Insider
Trading) Regulations, 1992.
• 2015: SEBI (Prohibition of Insider Trading) Regulation, 2015 enacted to
address flaws in earlier regulations, covering unlawful transactions.
• 2019: Significant amendment to cover direct and indirect transactions.
• Companies Act 2013: Initially had Section 195 restricting Insider Trading.
Omitted in 2017, as SEBI gains power to conduct trials against accused
persons.
• Current Regulations: SEBI (Prohibition of Insider Trading) Regulations,
2015, effective from May 15, 2015, replacing the 1992 Regulations.
• 2015 Regulation: Initially announced as SEBI (Insider Trading) Regulations,
1992, changed to SEBI (Prohibition of Insider Trading) Regulations, 1992, in
2002.
• The 2015 regulation retains the same name as the 1992 regulation it replaced.
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 Who is Insider?
• An "insider" typically refers to individuals who have access to non-public
information about a company and can use that information for trading
securities. Insiders are usually individuals associated with the company.
–Officers and Directors
–Employees
–Major Shareholders
–Connected Persons
–Professional Advisors
• As per Regulation 2(1)(g) of SEBI (Prohibition of Insider Trading) Regulations,
2015 “insider” means any person who is:
• i) a connected person; or
• ii) in possession of or having access to unpublished price sensitive information;

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• The term connected person is defined in regulation 2(1)(d) of the SEBI
(Prohibition of Insider Trading) Regulations, 2015, which includes the following
person:
– Any person associated with the company during the six months prior to the concerned act
– An immediate relative
– Holding/associate/subsidiary company
– An official of stock exchange or clearing corporation
– A Banker of the company
– A concern, firm, trust, HUF, company or AOP wherein above person having interest or
holding more that 10%
– Legal consultant and auditors and other person having direct or indirect interest with the
company

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• Unpublished Price Sensitive Information: As per Regulation 2(1) (n) of the SEBI
(Prohibition of Insider Trading) Regulations, 2015-
• means any information, relating to a company or its securities, directly or
indirectly, that is not generally available which upon becoming generally
available, is likely to materially affect the price of the securities and shall,
ordinarily including but not restricted to, information relating to the following:
– financial results
– dividends
– change in capital structure
– Capital Restructuring
– changes in key managerial personnel.

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• Types of Insider Trading
• This can be legal or illegal, depending on the type of material information
available to the insider.
–If the insider has non-public information, they are prohibited by law from
trading their existing stock for that company.
–On the other hand, if the information is already public, these people can trade
safely without taking legal action against them.

• What Are The Effects Of Insider Trading?

• Insiders take unfair advantage of the person whose information has been withheld
• It creates a conflict of interest because it is in the insider's interest and not in the
company's best interest.
• It damages the prestige of the market and discourages investment.

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 Insider Trading Examples

• Reliance Petroleum Case (2007): In this case, Reliance Industries was accused of
insider trading in the shares of its subsidiary, Reliance Petroleum. The Securities
and Exchange Board of India (SEBI) alleged that Reliance Industries had made
unlawful gains through insider trading just before a merger announcement. The
case resulted in penalties imposed by SEBI.
• Rajat Gupta and Raj Rajaratnam Case (2011): Although this case involved
individuals connected to India and the U.S., it gained international attention. Rajat
Gupta, a former board member of Goldman Sachs and Procter & Gamble,
was found guilty of passing confidential information about these companies to
hedge fund manager Raj Rajaratnam, leading to illegal trades.
• Larsen & Toubro (L&T) Finance Case (2012): SEBI charged L&T Finance and
its top officials with insider trading. The case involved alleged violations related to
the issuance of securities. SEBI imposed fines and penalties on the company and
individuals.
• Hindustan Lever Limited (HLL) Case (2000): HLL, now known as Hindustan
Unilever Limited, faced accusations of insider trading. The company was alleged
to have bought shares of Brooke Bond Lipton India Limited based on inside
information before a merger announcement. SEBI imposed penalties on HLL. 15
 Penalty
• In India, the Securities and Exchange Board of India (SEBI) is the regulatory
authority responsible for overseeing securities markets, and it has established
regulations regarding insider trading.
• Monetary Penalties: SEBI has the authority to impose monetary penalties on
individuals or entities found guilty of insider trading. The fines can be substantial
and are designed to act as a deterrent.
• Restitution: In addition to monetary penalties, SEBI may order the disgorgement
of unlawful gains made through insider trading. This involves the repayment of
profits obtained through the illegal activity.
• Market Ban: Individuals found guilty of insider trading may face restrictions or
bans from participating in the securities markets for a specified period. This can
include a prohibition on trading in securities or holding certain positions.
• Criminal Prosecution: In cases of serious violations, SEBI may refer the matter
to law enforcement agencies for criminal prosecution. Criminal penalties, if
convicted, can include imprisonment.
• Disclosure Requirements: SEBI may also impose additional disclosure
requirements on entities and individuals involved in insider trading. This could
include mandated disclosures of their trading activities and other relevant 16