Abstract
This paper will deal with the basics of Insider Trading in Indian perspective. what does it mean how it evolves over the period along with a brief history of some committees, notable cases and how it impacts the stock market of India. Furthermore, the paper emphasises on the vital role that SEBI played in prohibiting insider trading by its regulations and the focus will be on SEBI (Prohibition of Insider Trading) Regulations, 2015 which gives the idea about what is legalise and what steps or we can say remedies are listed for poor investors and penalty and punishment for the insiders .
Introduction
Insider trading means buying and selling of a company’s stock by people who have material, non-public information about the firm.Insider trading is purchasing or selling a company’s stock or other securities based on material, nonpublic information and it is a controversial issue in financial markets. While the term creates a vision of corporate insiders who are secretly gaining profit on inside information, the reality is somewhere more complex. Some insider trades are lawful as possible, but others result in severe criminal penalties. The insider trading concept relies on who qualifies as an “insider” and what is material, nonpublic information, according to Fagel it can be anybody with a fiduciary obligation to the company. Insider dealing is the buying or selling or dealing in a company’s shares by persons in possession of Unpublished Price Sensitive Information (UPSI). UPSI means any information which is not in the public domain and if disclosed to the public, it would tend to affect the share price of the company. Insider dealing or insider trading refers to the misconduct of selling or purchasing securities like bonds and equity by the insiders of a company like the directors, employees, and promoters. To avoid such transactions and to ensure fair trade in the secondary market in the interest of investors, the regulator of the stock market Sebi (the Securities and Exchange Board of India) has banned the companies from buying their own shares from the secondary market. Insider trading is most obvious malpractice that can be seen in the market.
Key Components of Insider Trading-
Insider- The SEBI has categorized an ‘insider’ as a person who have access to sensitive information about the shares or securities of a particular company. The insider can be any person who has been linked with the company in any way during the six months prior to the insider trade, could be a director, employee, relative, lawyer or banker of the company or a stock exchange official, employees of an asset management company with whom the company had business transactions. Insiders, being aware to information of the issuer of a particular security or stock that is not disclosed in public and is confidential get benefit from selling or buying concealed securities before their price movement.
UPSI- UPSI refers to a small piece of sensitive information regarding a company’s share prices, acquisition transactions, mergers or any form of sensitive activities that are not yet made public. When the insiders are granted access to the UPSI, they illegally conduct trade transactions for their own advantages.
For an example, if a director of a company tells his friend about an undisclosed transaction and the latter shares it with his colleagues who purchase shares of that company. Subsequently, the manager, his friend and his colleagues shall be booked by Sebi for violating (Prohibition of Insider Trading) Regulations.
In India, insider trading is regulated by the Sebi under the Insider Trading Regulations, 2015. The market regulator can levy fines and prohibit individuals or entities from trading in the capital market if found to be in violation of rules.
Historical Evolution
Indian Insider Trading history dates to the 1940’s via the establishment of government committees. Later, Insider Trading provisions were introduced in the Companies Act, 1956 under Sections 307 and 308, which mandated company manager and director shareholding disclosures. Owing to the poor provisions of enforcement in the companies Act, 1956, the Sachar Committee in 1979, the Patel Committee in 1986 and the Abid Hussain Committee in 1989 suggested a stand-alone law governing Insider Trading.
The Sachar Committee (1979) Official endorsement of insider dealing as an undesirable practice and then passes Sachar Committee report in 1979. This powerful Expert Committee on Companies and Monopolies and Restrictive Trade Practices Act (MRTP) made two important recommendations. First, it supported full disclosure of dealings by persons who have price-sensitive information. Second, suggested prohibition of dealing by such persons during certain time frames, except in exceptional cases. The Sachar Committee listed a set of persons who may perform insider dealing, including company directors, statutory auditors, accountants, tax and management consultants, and legal professionals. It proposed that all public companies maintain a register disclosing dealings in company shares by such persons, their spouses, and dependent children, and employees receiving over a specified level of salary. After initiatives of the Sachar Committee, the Patel Committee was formed in 1984 to examine the working of stock exchanges in general. In its final report, the committee gave serious thought to the lack of specific legislation in India to prevent abuse of insider information. It proposed severe punishment for insider dealing offenses, as it observes that this conduct was prevalent in Indian stock exchanges and was a primary cause of excessive risky activity. The Patel Committee report noted that the insider dealing, not only involving company insiders, but also involving persons working in the offices of solicitors, auditors, financial consultants, and financial institutions who had undisclosed price-sensitive information. The Abid Hussein Committee (1989) took an additional step in addressing insider trading. The committee recommended that insider trading be legally defined as a serious offense, punishable by civil penalties as well as criminal prosecution. Appreciating the complexities of insider trading and secret takeover bids, the committee recommended that such problems could be addressed to a large extent by effective regulatory measures. Significantly, the Abid Hussein Committee recommended that the newly to be formed Securities and Exchange Board of India (SEBI) be tasked with drafting the legislation necessary and be vested with the powers to enforce its provisions. This recommendation paved the way for SEBI’s key role in curbing insider trading in India.
Challenges faced by SEBI
Hard to Spot: Usually conducted secretly, insider trading is difficult to find. Those engaged employ clever strategies including trading via others or making use of accounts abroad.
Proof of someone using private company data is something SEBI needs. Finding evidence is difficult, particularly in cases when individuals cover their tracks.
Legal cases require a long time to resolve. This makes it more difficult for SEBI to punish offenders and stop them.
Technology Problems: To catch violations, SEBI must keep up with fresh technologies.
Cross-border issues: Insider trading sometimes involves accounts or individuals outside of India.
Role of SEBI
In India, insider trading is regulated primarily by the Securities and Exchange Board of India (SEBI). SEBI is the regulator of the securities market, which ensures that the market is transparent, fair, and safeguarding investors. Regulatory and Development functions are very inter-related having almost similar objectives. Quick and healthy progress in most of the cases are outcomes of well-regulated structures. SEBI is a statutory body, which functions under the legal structure of Securities and Exchange Board of India Act 1992. SEBI powers and functions are mentioned under the said act.
It is the SEBI’s responsibility to protect the interest of the investors and monitor the securities market. Insider trading prohibition is among the most significant steps of SEBI’s securities market. SEBI can investigate into the complaints received from investors, intermediaries or any other person on any matter of related to the allegations of insider trading. In this regard, SEBI may authorize one or more officers to visit the books and records of insiders or any other person for investigation purposes. Before investigating, the Board shall give a reasonable notice to insider for those purposes. The governing body may inspect any books, records, papers and computer information or other proper statements of any member, director, partner, owner or employee of the insider or other persons.
Realizing the growing complexities of insider trading, SEBI introduced the Prohibition of Insider Trading Regulations, 2015, which are broader in nature.
SEBI Regulations Prohibiting Insider Trading, 2015
These rules seek to prohibit and penalize insider dealing by defining who the insiders, UPSI, and the responsibilities of individuals and entities.
Key provisions include-
Restrictions on Trading Window: Companies need to decide on specific time frames where trading is restricted for insiders to prevent the abuse of UPSI.
Disclosure Requirements: Insiders must disclose their trades and holdings periodically to ensure transparency.
Penalties and Enforcement: SEBI may investigate charges of insider trading and impose severe penalties on the culprits. If every insider who; either alone or on behalf of any other person, deals in a company whose securities are listed on the stock exchange on the basis of any unpublished price-sensitive information; or discloses any unpublished information to any person, with or without his consent for such particular facts save to the extent necessary in the normal course of business or as provided by statute; will be penalized with a fine by the Sebi. The penalty for insider trading is imprisonment, which may extend to five years, and a minimum of five lakh rupees (five hundred thousand) to twenty five crore rupees (two hundred and fifty million) or three times the profit made, whichever is higher.
Steps taken by SEBI
To find possible instances of insider trading, SEBI uses a diverse approach. Several crucial steps are involved in this process:
Finding Insiders: The first step for SEBI is to determine who is considered an insider. Key executives, board members, auditors, and others who deal with sensitive financial data are usually included in this. The regulator also closely examines promoters, their associates, and their close family members.
Defining Unpublished Price Sensitive Information: SEBI gives careful view to the definition of unpublished price sensitive information. This can include anything from significant financial developments to large contracts of acquisitions.
Analysing Trading Patterns: To find out questionable activity that might point to insider trading, the regulator looks at trading patterns. This involves examining how trade timing relates to important business announcements or events.
Examining Relationships: SEBI checks if people who traded in the stock market had any links with those having secret, important information. They look at things like family, work, or social connections to spot any suspicious activity.
Case of Insider Trading
In Indian securities law, the Rakesh Agarwal v. SEBI case – Allegations of insider trading on Rakesh Agarwal, ABS Industries Ltd.’s Managing Director, trading shares based on unpublished price-sensitive information (UPSI) linked to a deal with Bayer AG, a German company acquiring a majority ownership in ABS Industries.
First finding him guilty, SEBI fined him. Later, the Securities Appellate Tribunal (SAT) decided that his activities were in the company’s best interest rather than intended for personal profit, which sparked a major discussion on the meaning of insider trading rules.
Remedy for Investors
To find out how many investors lost money due to insider trading.
Calculate losses: Find out the amount each investor lost compared to what they would have made in a fair trade.
Public notice: Once someone is guilty of insider trading, put out a notice asking affected investors to seek pay within a set time.
Conclusion
To conclude that SEBI’s rules on trading mean to keep the stock market fair by watching and punishing bad acts. Cases such as Rakesh Agarwal v. SEBI show the problems in reading trading laws. Though fines are given, aggrieved investors often get no help. A way out is to pay hurt investors by finding losses, sending out notices, and using fines to help them. This builds trust and fairness in the market. In this way both justice for investors and punishment for wrongdoers are highlighted.
Author Bio
