ABSTRACT:
As the corporate world continues to expand into global markets, trading of shares, bonds, derivatives, and other instruments continues to increase. One form of trading that has received considerable interest in recent years is insider trading. Insider trading occurs when individuals with potential access to non-public information about a corporation buy or sell stock of that corporation. When the information is material and non-public, such trading is illegal. However, if the trading is done in a manner that does not take advantage of non-public information, it is often permissible. This study compares insider trading laws and penalties in countries represented by the largest securities markets throughout the world and provides data indicating that there are important differences.
Page Contents
1. Introduction
India has seen a significant number of insider trading cases, with a steady increase in their frequency. The Securities and Exchange Board of India (SEBI) has undertaken significant efforts in its mission to reduce the frequency of insider trading. However, SEBI faces specific constraints that prevent it from completely achieving its potential as a quasi-judicial overseer of the securities market.
Improved regulation is essential to safeguard the rights and interests of investors in both international and local securities markets, particularly concerning the issue of insider trading. Even with a main market regulator and the establishment of laws like the Securities and Exchange Board of India (SEBI) and the 2015 SEBI law against insider trading, there is still a lack of efficient deterrents and adequate enforcement measures to reduce the increasing cases of insider trading.[1]
The primary law regulating securities markets in India is the Securities and Exchange Board of India (SEBI) Act, 1992. The SEBI Act, 1992 was introduced to safeguard the interests of investors and to advance the growth of securities markets in India. SEBI possesses the authority to oversee and manage the operations of securities markets, which include insider trading. The SEBI Act also allows for the creation of appellate tribunals for securities to review appeals regarding SEBI’s decisions. As per the SEBI Act, an “insider” refers to an individual who has a connection to a company or is believed to have one and possesses non-public information that could impact prices. The Act prohibits insiders from divulging information or trading securities using it. SEBI possesses the power to levy penalties for violations of the SEBI Act. For SEBI to improve the legal structure for insider trading in India, the SEBI exercised this power to implement the Prohibition of Insider Trading Regulations, 2015
Stock Market trading while having access to newly disclosed, price-sensitive information is classified under the regulations as ‘insider trading’. The regulation outlined the responsibilities of insiders, which entail keeping unpublished price-sensitive information (UPSI) confidential, refraining from trading during specific times, and reporting trades to both the company and the stock exchange. This regulation also outlines penalties for breaching these rules, which may involve fines, disgorgement of profits, and in some instances, imprisonment. SEBI has employed these fines to discourage insider trading and to implement the rules more efficiently and effectively. In recent years, SEBI has adopted a more proactive stance in implementing insider trading rules. SEBI is currently leveraging technology to enhance the monitoring and identification of insider trading infractions, and has implemented initiatives to motivate whistle-blowers to report such violations. Alongside enforcing insider trading regulations, SEBI also contributes to educating and informing the public about insider trading. SEBI regularly releases circulars and guidelines to companies and market investors to improve their understanding of the regulations and ensure adherence. In summary, SEBI Act stands as a crucial law for overseeing securities markets in India, while the Prohibition of Insider Trading Regulations, 2015 constitutes a significant element of the legal structure that has reinforced the control of insider trading in the nation. Nonetheless, challenges remain in identifying and prosecuting insider trading cases, and additional efforts are required to guarantee that the regulations are properly enforced.[2]
2. A Comparative Analysis between other Jurisdictions
a. United States
The U.S. possesses a comprehensive legal and regulatory system regarding insider trading, with stringent laws and regulations upheld by the Securities and Exchange Commission (SEC). The primary legislation regulating insider trading in the US is the Securities Exchange Act of 1934, which prohibits insider trading and establishes the legal framework for enforcing restrictions on it. Besides these laws, the US also boasts a robust culture of corporate governance and ethics, as numerous companies implement rigorous codes of conduct and compliance initiatives to avert insider trading.
Securities Exchange Act of 1934
The Securities Exchange Act of 1934 is an essential law regulating securities markets in the United States of America. Securities Exchange Act was established in reaction to the 1929 stock market crash and the ensuing Great Depression, aiming to create a regulatory structure for securities markets while fostering transparency and fairness within the market. The Securities Exchange Act prohibits insider trading, and companies are required to quickly and correctly reveal significant information to the public. The Act established the Securities and Exchange Commission (SEC) as the main regulatory body for US securities markets, giving it the power to enforce securities rules and regulations. Insider trading in the United States is regulated by the SEC through the powers conferred upon it by the Securities Exchange Act. Fraud connected to the buying or selling of securities is forbidden by Rule 10b-5, a regulation established under the Act. The SEC has implemented steps to strengthen oversight of insider trading, mandating companies to maintain and enforce conduct codes to prevent insider trading. Sanctions for insider trading breaches under the Securities Exchange Act can be harsh, comprising fines, profit disgorgement, and potential incarceration. The Act additionally allows for injunctive relief and civil lawsuits to obtain damages for those impacted. In summary, the Securities Exchange Act of 1934 is a crucial law regulating securities markets in the US and has significantly contributed to enhancing transparency and fairness in the market, particularly concerning insider trading.[3]
Role of the Securities and Exchange Commission (SEC):
The Securities and Exchange Commission (SEC) serves as the main regulatory authority for securities markets in the United States. The SEC possesses extensive authority to oversee and implement securities laws and regulations concerning insider trading, which encompasses the following:
Enforcement: The SEC possesses the authority to examine and act against insider trading offenses. SEC has the controlling authority over people to impose certain penalties, recover profits, and mandate imprisonment, along with seeking injunctive relief and pursuing civil cases to obtain damages for those impacted.
Rulemaking: Securities & Exchange Commission is authorized to establish rules and regulations in relation to insider trading with reference to Securities Exchange Act, 1934 and various securities laws and regulation.
Education and outreach: SEC is also involved in education and dissemination of information to the public regarding insider trading and various other securities laws and regulations. SEC frequently provides guidance and resource material to assist companies and market investors in understanding their responsibilities and to encourage compliance. In summary, SEC is vital for overseeing insider trading in the US and fostering transparency and equity in the securities market. SEC’s actions with reference to enforcement, regulation, and educational outreach are focused on maintaining a market that is fair, transparent, and reliable.
b. European Union
The European Union (EU) has implemented a legal and regulatory structure for insider trading aimed at promoting fairness and transparency within the securities markets of all its member countries. The Market Abuse Regulation (MAR) serves as the primary legislation governing insider trading in the EU, setting forth rules and processes to prohibit insider trading and ensure the disclosure of inside information. All financial instruments traded on EU-regulated exchanges, including stocks, bonds, and derivatives, are governed by the MAR. The MAR prohibits insider trading and requires companies to quickly and accurately share insider information with the public. Companies are required to establish and uphold effective internal policies to prevent insider trading in compliance with the MAR. The European Securities and Markets Authority (ESMA) is the primary regulatory authority tasked with supervising and implementing the MAR throughout the EU member nations. The ESMA is tasked with creating technical standards and guidelines for implementing the MAR, and for overseeing the supervision of securities markets throughout the EU. Sanctions for breaches of insider trading regulations under the MAR can be harsh, encompassing fines, profit forfeiture, and imprisonment. The MAR additionally includes provisions for administrative penalties, including the suspension or revocation of authorizations or licenses.[4]
Market Abuse Regulation (MAR)
Market Abuse Regulation (MAR) is an essential law regulating securities markets within the European Union (EU). MAR was implemented in 2016, succeeding the earlier Market Abuse Directive, to enhance transparency and fairness in the EU securities markets. The prevention of insider trading and the leaking of confidential information is necessary by all means; hence, MAR establishes rules and regulations and responsibilities for everyone that is involved in the securities market directly and indirectly. All financial instruments exchanged on markets is regulated by the EU, including stocks, bonds, and derivatives, which are governed by the law set up by ESMA (European Securities and Markets Authority). MAR prohibits insider trading and requires companies to swiftly disclose information to the public with accurate structuring. Business firms shall establish and uphold effective duty-bound internal regulations/ policies to prevent insider trading as a component of compliance.
MAR contains regulations regarding market manipulation, including the manipulation of benchmark prices, and sets out rules for market soundings and the sharing of inside information by individuals in managerial roles. The European Securities and Markets Authority (ESMA) is the primary regulatory agency tasked with monitoring and enforcing the MAR throughout the EU member nations. In summary, the MAR is a vital regulatory framework for securities markets within the EU and has significantly contributed to enhancing transparency and equity in the capital market, especially concerning insider trading.[5]
Role of the European Securities and Markets Authority (ESMA)
The European Securities and Markets Authority (ESMA) is the primary regulatory agency tasked with monitoring and enforcing securities regulations throughout the European Union (EU). The responsibilities of ESMA regarding insider trading consist of:
Regulation: The ESMA is tasked with creating technical standards and guidelines for implementing the Market Abuse Regulation (MAR) and various other securities regulations within the EU. The ESMA oversees the application of the MAR by EU member countries and can intervene if needed.
Oversight: The ESMA manages the oversight of securities markets throughout the EU, encompassing the monitoring of insider trading. ESMA collaborates with the national competent authorities (NCAs) in every EU member state to guarantee that they are properly enforcing the MAR and additional securities regulations.
Enforcement: The ESMA has the authority to initiate enforcement measures against individuals who violate EU securities regulations, including those pertaining to insider trading. The ESMA is authorized to levy fines, sanctions, and other penalties on offenders and can collaborate with NCAs to synchronize cross-border enforcement initiatives.
In summary, the ESMA is essential in overseeing insider trading within the EU and in enhancing transparency and equity in the securities market. The regulation, supervision, and enforcement actions of ESMA are focused on making sure that the market stays fair, transparent, and reliable throughout all EU member states.
c. United Kingdom
The Financial Conduct Authority (FCA) enforces stringent laws and regulations pertaining to insider trading in the United Kingdom (UK), which has a well-developed legal and regulatory framework. The Criminal Justice Act 1993, which makes it illegal to deal in securities while in knowledge of inside information, is the primary component of law governing insider trading in the United Kingdom. The Market Abuse Regulation (MAR), which is applicable to UK-regulated markets, is one of the rules and regulations that the FCA has released to support the Criminal Justice Act. The UK has a strong corporate governance and ethical culture in addition to these rules and regulations, and many businesses have implemented strict compliance procedures and codes of conduct to stop insider trading. In the UK, there are harsh penalties for insider trading infractions, such as fines, disgorgement of earnings, and imprisonment.
Financial Services and Markets Act, 2000 (FSMA)
One important piece of law controlling the securities markets in the United Kingdom (UK) is the Financial Services and Markets Act 2000 (FSMA). The UK’s financial services regulations were reformed and consolidated by the FSMA, which also made the Financial Services Authority (FSA) a key regulator for the country’s securities markets.
Insider dealing is forbidden by the FSMA, and businesses must promptly and accurately disclose inside information to the public. As an addition to the Criminal Justice Act of 1993, the Act also created the Market Abuse Regulation (MAR), which criminalizes dealing in securities while in possession of inside knowledge. The primary regulatory agency in charge of monitoring and implementing securities laws in the United Kingdom is the Financial Conduct Authority (FCA). The FCA is in charge of organizing the oversight of securities markets throughout the United Kingdom and creating technical standards and guidelines for the implementation of the MAR and other securities regulations. Violations of the FSMA can result in harsh penalties, such as fines, disgorgement of profits, and imprisonment. Additionally, the FSMA allows for civil litigation to seek damages for impacted parties as well as injunctive relief. All things considered, the FSMA is a crucial piece of legislation that oversees the UK’s securities markets and has been instrumental in advancing market fairness and transparency, particularly with regard to insider trading.[6]
Role of the Financial Conduct Authority (FCA)
The Financial Conduct Authority (FCA) is the main regulatory body responsible for overseeing and enforcing securities regulations across the United Kingdom (UK). The FCA’s role in relation to insider trading includes:
Regulation: The Market Abuse Regulation (MAR) and other securities laws in the UK must be applied according to technical standards and recommendations that are developed by the FCA. Additionally, the FCA keeps an eye on how market participants are implementing the MAR and has the authority to act if needed.
Supervision: The FCA oversees organizing the supervision of the UK’s securities markets, which includes the oversight of insider trading. To make sure that market participants are properly adhering to securities laws, the FCA collaborates with other authorities, including the Bank of England and the Prudential Regulation Authority.
Enforcement: Violators of the securities regulations in the UK, especially those pertaining to insider trading, may face enforcement action by the FCA. The FCA has the authority to coordinate cross-border enforcement efforts with other regulators and to impose fines, sanctions, and other penalties on violators.
With all factors considered, the FCA is essential to controlling insider trading in the UK and advancing equity and openness in the securities industry. The goal of the FCA’s supervision, enforcement, and regulating activities is to guarantee that the market participants abide by securities laws and that the market continues to be fair, transparent, and reliable.[7]
3. Recommendations for Improving Insider Trading Regulations in India
Insider trading continues to be a significant issue in India, and there are several important areas where legal framework can be strengthened and enforcement could be enhanced. The following are some of the primary challenges and suggestions for enhancing India’s insider trading laws:
- Criminal sanctions: In India, insider trading is currently only penalized by civil penalties. To further discourage insider trading, regulators could consider making insider trading offenses punishable by law.
- Enhancing cooperation between regulators: Since insider trading could be a cross-border activity, it is critical that authorities work together to efficiently identify and investigate violations. Indian authorities could think about enhancing their cooperation with regulators in other countries.
- Organizing training sessions: To give market participants, such as, brokers, traders, and analysts, a more thorough understanding of insider trading laws and compliance guidelines, regulators could organize training sessions.
- Developing online resources: To help market players communicate and work together, regulators should provide online resources, including websites or forums, that offer information and guidelines on insider trading regulations.
- Adopting international standards: To make sure that its regulatory framework is in line with international best practices, India may want to adopt international standards and best practices for insider trading regulation, such as those established by IOSCO. These procedures have the potential to increase investor confidence in India’s securities markets, decrease insider trading opportunities, and encourage improved regulatory compliance.
4. Conclusion
Insider trading is a complex and dynamic topic that calls for constant investigation and discussion between academics, market players, and authorities. Insider trading is likely to continue to be a problem that needs constant attention and innovation as the securities markets and new technology develop. To find new trends and patterns in insider trading, assess the efficacy of regulatory measures, and pinpoint the best techniques for detection and prevention, more study is required. Furthermore, constant communication between those involved can aid in fostering a better comprehension of the potential and difficulties associated with combating insider trading as well as in identifying areas that require cooperation and development. Stakeholders can cooperate to advance greater equity and transparency in securities markets, boost investor confidence, and advance economic growth and development by carrying on with research and discussion.
References:
[1] Armaan Patkar, INSIDER TRADING: LAW & PRACTICE, 1st Edn., 2019
[2] Saurabh Chakraborty, INSIDER TRADING IN INDIA, 5 Issue 3 Int’l J.L. Mgmt. & Human. 1573 (2022)
[3] Roberta S. Karmel, The Future of the Securities and Exchange Commission as a Market Regulator, 78 U. Cin. L. Rev. 501 (2009-2010)
[4] NIAMH MOLONEY, THE AGE OF ESMA: GOVERNING EU FINANCIAL MARKETS (2018)
[5] What is the Market Abuse Regulation?, LSEG POST TRADE, https://www.lseg.com/en/post-trade/regulatory-reporting/regulation/market-abuse
[6] Dr. Adrian Yeo, Greg McEneny, Jessica Coke, Overview of the Financial Services and Markets Act, DENTONS (Jul. 3, 2023), https://www.dentons.com/en/insights/newsletters/2023/july/3/the-financial-services-and-markets-act-2023/overview-of-the-financial-services-and-markets-act
[7] The Financial Conduct Authority: How It Functions And How Best To Respond To It, RAHMAN RAVELLI, https://www.rahmanravelli.co.uk/expertise/financial-conduct-authority-fca-investigations/the-financial-conduct-authority-how-it-functions-and-how-best-to-respond-to-it/
Author Bio
