Manali Chotalia
Insider trading is an illegal practice done in the stock market. It means that the people having unpublished price sensitive information about a company’s commercial decisions concerning the securities and subsequently manipulate the stocks according to their requirements.
The person who involves in insider trading can easily buy or sell stocks based on inside information of the particular company and thus, making a profit while others cannot through an illegal means. The information received to do such trading is not public and the people having such inside knowledge use it to their benefit.
Usually, these information are received from the key persons of the company’s i.e. Board of Directors, Employees, persons in relationship with companies etc.
Insider trading has not been specifically defined anywhere in the Indian laws, but the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992 defines the term “insider” u/ 2 (e) – it means any person who
(i) “is or was connected with the company or is deemed to have been connected with the company and is reasonably expected to have access to unpublished price sensitive information in respect of securities of a company, or
(ii) has received or has had access to such unpublished price sensitive information.”
The term ‘connected person’ has also been described as – any person who
(i) “is a director, of a company, or is deemed to be a director of that company by virtue of sub-clause (10) of section 307 of the Act or
(ii) Occupies the position as an officer or an employee of the company or holds a position involving a professional or business relationship between himself and the company (whether temporary or permanent) and who may reasonably be expected to have an access to unpublished price sensitive information in relation to that company.”
There are two types of ‘insiders’ – ‘Primary insiders’ and ‘Secondary insiders.’
Primary insiders are those who are in direct contact with the company or are directly connected to the companies’ decisions with respect to securities.
Secondary insiders are those who have access to the unpublished information which is price sensitive and are deemed to be connected to the company. However, such persons are not caught as it cannot be ascertained how they derived the information.
Here the ‘price sensitive information’ means companies’ financial statements, their declaration of dividends and securities, future plans regarding expansion and mergers and acquisition and other such information which can lead to insider trading.
SEBI has made the practice of insider trading illegal and also has provided punishment for it. SEBI directed that the directors and the employees of the companies’ have to maintain the confidentiality of the company’s sensitive information.
If any of them discloses the price-sensitive information, then criminal charges would be applied to them and will be held liable. Such persons will not be able to participate in the future dealings of the company.
SEBI on a suo moto, on finding suspicious trading’s can get an inspection of the books of accounts of the company by appointing an officer. Criminal proceedings can also be done against that person if found in doing insider trading.
To put a check on insider trading SEBI has introduced various new rules and regulations. These rules will be applicable to both the listed and unlisted companies. ‘Informant Mechanism’ to control such unfair trading have also been introduced by it according to which a Voluntary Disclosure Form has been to submitted by the informant.
SEBI impose a hefty amount of penalty and fine in case of violation of the regulations or if the trading is going on in the contravention of the rules and regulations prescribed by the SEBI. The penalty is of the amount of ₹25 crores or three times the amount of profit made out of insider trading whichever is higher, however, it varies depending on the trading done.
Insider trading has been made illegal as it unfair for other investors and profits made through this trading can be easily identified as it leads to larger profits as compared to what the general investors make.
In the decisional practice also it has been observed that SEBI has strictly prohibited the ‘insider trading’ and debar the individuals who involved in this form future dealings in stocks and share.
Case laws
In SEBI v Sammer C. Arora, 2004, SEBI had held that the respondent is liable for insider trading and was restricted from dealing in shares and other securities for five years and was supposed to take permission from SEBI for purchasing or selling any securities in the stock market. However, this was further taken to the Securities Appellate Tribunal which overturned this restriction stating that SEBI did not have sufficient evidence for holding the respondent liable for insider trading.
In Rakesh Agrawal v Securities Exchange Board of India, 2003, in this case, a company named ABS Company Pvt. Ltd. was in dealing with another German-based company and Mr Rakesh was the Managing Director of the ABS Company Pvt. Ltd and thus had the secret information of the other company.
Mr Rakesh’s brother-in-law made an open offer to the German company of the ABS Company’s shares which resulted in gains for the ABS Company, alleged by SEBI. After the German company overtook ABS Company 51% of its shares acquired were not made public and here ABS was an insider.
Thus, Criminal proceedings were initiated u/s 24 of SEBI Act against Mr Rakesh and had to give a penalty of ₹ 34 lakhs. The Securities Appellate Tribunal further overturned the penalty paid and stating that such act was done by Mr Rakesh for securing the company’s interest.
Another recent case was where Indiabulls was involved where the company’s executive director having access to the unpublished information made profits of ₹87 lakhs. Thus, criminal action was initiated against the executive director and the sum of 87 lakhs had to be impounded.
Certain regulations have been imposed by SEBI to protect the interest of the ordinary/ general investors. The rules which have been made by SEBI relating to insider trading is deemed to be sufficient to curb this illegal practice and it is evident that the dealing in the insider trading has been reduced though not completely curbed.
If someone found in dealing with such trading then SEBI has made sure that such a person needs to provide compensation to the other investors who claim compensation for violation of their interests.
