Insider Trading

Insider trading occurs when personnel with non-public, material information about a public corporation trade in its stock or other securities.

An insider is a person who is a part of the company whose stocks they are trading. They may or may not possess confidential non-public knowledge regarding the firm.

What is Insider Trading?

Insider trading can be either unlawful or legal, depending on when the trade is made and the laws of the country in which the trader is located.

Read more to know about Insider Trading in the Indian market and some histories associated with it in the country.

How Does SEBI Regulate Insider Trading?

SEBI perceives trading by the following groups or individuals as a form of insider trading.

Therefore, any person coming under one of these categories should avoid trading equities for the firm for which they are classified as an insider.

  1. Immediate relatives of connected individuals or insiders
  2. An associated company or holding firm directly linked with the other corporation
  3. A high-level executive belonging to such a holding firm of the parent company
  4. An official working at a clearing house or stock exchange
  5. Asset management company board members or a trustee in mutual fund management companies 
  6. A Board member or chairman of a public financial organisation

SEBI also restricts the procurement of Unpublished Price Sensitive Information or UPSI, unless required by law or legal proceeding. 

Past Instances of Insider Trading in India

Even after several insider trading regulations by SEBI, convictions have been few and far between.

For instance, the regulatory body investigated as many as 70 instances of alleged insider trading but completed only 19 probes. Between FY15 and FY19, SEBI took up more than 140 of such cases.

Following are some recent instances of charges brought against companies by the SEBI.

  • General Insurance Company 

In October 2019, SEBI sent a notice to General Insurance Company or GIC informing the firm regarding impending insider trading investigations.

In the notice, SEBI also provided a settlement offer to the insurance provider. In December the same year, GIC settled the charges by paying a penalty of around Rs. 1.23 Crore.

  • Infosys

The IT company was found in violation of SEBI insider trading regulations when it failed to make public an allegation of a company insider regarding illegal trading.

While the original complaint was filed on September 20, 2019, the matter came to light when the whistleblower mailed a copy of the same to the media a month later, in October. 

In November, the lead independent director of Infosys, Kiran Mazumdar Shaw, settled the charges by paying a fine of Rs. 3 Lakh to SEBI.

  • Rakesh Jhunjhunwala

Independent investor and billionaire Rakesh Jhunjhunwala was summoned by SEBI for alleged insider trading at Aptech Limited.

As per reports, the regulatory body is investigating the period between February and September 2016. Apart from Jhunjhunwala, SEBI also looked into his family member’s role in the matter.

  • Balram Garg

Another high profile case of alleged insider trading came to light in December 2019, when SEBI sent a notice to PC Jeweller Managing Director, Balram Garg.

At the same time, the government body ordered the impounding of around Rs. 8 Crore that two promoters and associated entities earned from suspected illegal trading.

  • Reliance Industries

RIL was barred from the derivatives business for a year and fined by the Securities and Exchange Board of India.

The exchange regulator charged the corporation with attempting to profit by circumventing limitations on its legally authorised trading limits and decreasing the cash market price of its stock.

There are countless more cases that are either pending or already complete that allege Indian insider trading. However, the conviction rate and the penalty that SEBI levies is generally quite limited. The government body has also come under severe criticism for improper enforcement of insider trading regulations. 

The above-mentioned insider trading examples can give you an idea regarding a lack of conviction.

Many blame SEBI’s lax attitude toward the offence as the primary reason for growing cases of illegal trading of this sort. Still, as a responsible trader, you must understand the exact regulations that the authoritative body has laid down to reduce such instances of NSE insider trading.

SEBI Regulations Against Insider Trading

Section 11(2) E of Companies Act, 1956 mainly prohibits insider trading for the following reasons -

  • To provide equal opportunities to every participant in the market
  • Ensure fairness and transparency in all transactions
  • Offer free flow of information and prevent information symmetry

The following information is deemed sensitive. Possession of such information by a trader may expose him/her to insider trading litigations-

  • Intended dividend declaration
  • Periodic financial reports
  • Buy-back or issuance of securities
  • Major changes in policies or operative plans for the company
  • Any upcoming takeovers and/or mergers

When is Insider Trading Legal?

In some cases, insider trading is legal. Such a trade is common since many employees of these public-traded firms also own stocks belonging to the company.

Example

Suppose there is an insider who plans to sell stocks of the company after their retirement for a specific period to earn returns. However, at a later date, he/she comes to possess UPSI.

In this case, the trader may not be indulging in illegal insider trading, as they did not decide on selling their owned stocks based on the non-public information.

PIT Regulation, 1992

According to the original legislation, companies needed to establish countermeasures to prevent the leakage of sensitive information. However, as per a 2019 update to the regulation, public firms need to have a plan in place to deal with such security lapses and information leakages.

With such stringent regulations against insider trading, attracting fines and/or imprisonment, investors need to ensure they do not partake in any such illicit activities by knowing about the rules and regulations of the same. 

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