By AdminFebruary 10, 2022

Insider Trading

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Dolan Saha, B.A-LL.B, KIIT LAW SCHOOL  

INTRODUCTION

  Information related to decisions of a company is very sensitive. If such information is ever leaked it negatively affects the price of securities of that company. This price sensitive information includes knowledge about confidential information regarding the Directors, declaration of dividends, and mergers and acquisitions, buy back of shares etc.
  Trading is supposed to be done abiding the regulations of fair trading, and in case of violations of such regulation it is known as unfair trading, and such violations are usually done for personal gains. When such unfair trading is done by any person who happens to be an insider of the company, that is he leaks takes advantages or leaks sensitive confidential information which he has access to. This practice leaves traders who do not have access to such information at a disadvantage.
  In India, A company is supposed to be transparent with respect to their stock trading and condemn the usage of confidential information to gain advantage, in accordance with the SEBI regulation to prevent Insider Trading and maintain Fair Market Trade.
    WHO IS AN INSIDER AND WHAT IS ‘INSIDER TRADING’ An Insider can be said to be a person who has access to the confidential and price sensitive information of a company. It maybe directors, employees or any associated companies.
‘Insider Trading’ on the other hand is when such an insider uses this unpublished confidential information available to him to manipulate profits and prices of the securities in market. Such activities are highly unethical and immoral.
  EFFECTS OF INSIDER TRADING The Malpractice of Insider Trading creates a disadvantageous position for the security holders who have no idea about the sensitive information. This creates a hostile market for the deprived person and leads to conflict of interest. This misuse of confidential information by a person is also detrimental to the interest of the company as it hurts the reputation of the company and reduces investment rate.

EVOLUTION OF INSIDER TRADING IN INDIA

The Insider Trading came to attention of the Government after the recommendations given by ‘Thomas Committee of 1948’ which re-evaluated the regulations of United States. Owing to  this, Sections 307 and 308 were introduced in the Companies Act of  1956.  These sections required certain disclosures from the ‘core Insiders’. In 1970 this ‘Insider Trading’ was categorized under ‘undesirable Practice’, but had no distinct provision to curtail this act as such.
There were recommendations from three committees :- ‘Sachar Committee 1979’, ‘Patel Committee 1986’ and ‘Abid Hussain Committee 1989’ which resulted in formation of SEBI in 1992. The Abid Hussain Committee of 1989 guided SEBI to enact regulations to curb Insider Trading i.e ‘SEBI (Insider Trading) Regulation of 1992’ and ‘SEBI (Prohibition of Fraudulent & Unfair Trade Practice relating to securities market) Regulations-1995’
 

REGULATIONS AND PROVISIONS TO CURB INSIDER TRADING

• The regulations of ‘SEBI (prohibition of Insider Trading) Regulation 2015’ prescribes the rules which penalizes and restricts the Insider Trading in India. And are mainly applicable on dealing with Listed Securities which involves “buying, selling or agreeing to buy, sell or deal in any securities by any person either as principal or agent, by insiders on the basis of any private confidential information.”
• These Regulations prohibits the “communication of any confidential information, by an insider.” Given, Communication of such information has to unauthorized.

In case of contravention of the provisions of SEBI Regulations, it will amount to an offence under the ‘SEBI Act,1992’( Section 15G) and ‘Companies Act, 2013’ (Section 458) and is punishable with imprisonment up to 10years or be fined up to 25 crores.

• SEBI has the power to investigate the cases of alleged ‘Insider Trading’.

  LEADING CASE LAWS In the case of Hindustan Lever limited (HIL) Vs SEBI[1], SEBI made an amendment to the regulations and added and defined the word ‘unpublished’. This was the origin for the definition of the term ‘Unpublished Price Sensitive Information in India’.
In the case of Rakesh Agrawal vs. SEBI[2] SEBI accused Mr. Rakesh Agarwal to be guilty of insider trading since he sold his shares of ABS Industries via his brother in law who happened to be an well connected individual on annoncement of acquisition of the commpany. SEBI directed him to deposit 34 Lakhs to pay the investors who are going  to claim later. On Appeal to the Security Appeallate Tribunal, it was found that  the accused traded the shares in best interest of the compay and not with malicious intent.  The tribunal held that: “Taking into consideration the very objective of the SEBI Regulations prohibiting the insider trading, the intention/motive of the insider has to be taken cognizance of. It is true that the regulation does not specifically bring in mens rea as an ingredient of insider trading. But that does not mean that the motive need be ignored.”
Disclosure is only permitted if it is for legitimate purposes, performance of duties or discharge of legal obligations. In Dirks v. SEC[3], a case from US, it was held that “persons like lawyers, accountants, etc. who are actually outsiders will be construed as insiders from the point at which the UPSI was shared with them under ordinary course of business.
[1]  Hindustan Lever limited (HIL) Vs SEBI, (1998) 18 SCL 311 MOF. [2] Rakesh Agrawal vs. SEBI ,2004 49 SCL 351 SAT. [3]  Dirks v. SEC ,463 U.S. 646 (1983). CONCLUSION
It is imperative to mention that the very instance of insider trading violates the fair trade policy and causes damages to the innocent investors. Law should be made more stringent to curb such white collar crimes, so as to maintain the integrity of the market.