Insights of Insider Trading

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  • 1. Insights of INSIDER TRADING Pavan Kumar Vijay
  • 2. What Is INSIDER TRADING?
  • 3. INSIDER TRADING It is dealing in the securities by a Insider , who has the knowledge of material “inside” information which is not known to the general public
  • 4. How BAD It Is ???
  • 5. How BAD It Is ???
    • Used to make profit at the expense of other
    • investors
    • Leads to loss of confidence of investor in stock
    • market
    • The process corrupts the ‘Level Playing Field’
    • It is easier to identify the beneficiaries of insider
    • dealing. But the extent of losses occurred is
    • impossible to calculate .
  • 6. SEBI (Insider Trading) Regulations, 1992 Governing Regulations SEBI (Insider Trading) (Amendment) Regulations, 2002 SEBI ( Prohibition of Insider Trading) (Second Amendment) Regulations, 2002 19.11.1992 20.02.2002 29 .11.2002
  • 7. Who Is INSIDER ???
  • 8. Reg 2 (e) ANY PERSON WAS IS CONNECTED WITH THE COMPANY WHO OR OR DEEMED TO HAVE BEEN CONNECTED AND WHO IS REASONABLY EXPECTED TO HAVE ACCESS HAS RECEIVED HAS HAD ACCESS OR OR TO UNPUBLISHED PRICE SENSITIVE INFORMATION INSIDER
  • 9. Connected Person?? Who Is
  • 10. Reg 2 (c) ANY PERSON Deemed to be a director U/s 307(10) of Co. Act Is a director U/s 2(13) of Co Act WHO OR OR HOLDS A POSITION INVOLVING AND WHO MAY REASONABLY EXPECTED TO HAVE ACCESS TO UPSI OR Employee Officer Business Relationship Professional Relationship OR Whether Temporary Permanent OR Connected Person
  • 11. Connected Person Explanation : WHO IS CONNECTED PERSON ANY PERSON SHALL MEAN THE WORD “CONNECTED PERSON” SIX MONTHS PRIOR TO AN ACT OF 6 6 6 6 INSIDER TRADING
  • 12. “ Person Deemed to be Connected” ? Who Is
  • 13. Company under Same Management / Group / Subsidiary Reg 2 (h) Person Deemed to be Connected All Intermediaries, Their Employees & Directors Investment / Trustee / Asset Management Company, their Employees & Directors Officials of Stock Exchange / Clearing House / Corporation Board of Trustee Members & Directors of Mutual Fund Public Financial Institution, Its Employees & Directors Relative of any of the aforementioned Persons
  • 14. Bankers of the company Reg 2 (h) Person Deemed to be Connected Contd. Relatives of the Connected Persons Any Concern / Firm / trust / HUF/ Company / AOP In which Directors or Deemed Directors / Relatives of Connected / Deemed Connected Persons or company banker Have More than 10% of the holding or Interest
  • 15. Price Sensitive Information
  • 16. Reg 2 (ha) ANY INFORMATION OR AND TO A COMPANY LIKELY TO MATERIALLY AFFECT THE PRICE OF SECURITIES OF THE COMPANY INDIRECTLY DIRECTLY Price Sensitive Information WHICH RELATES WHICH IF PUBLISHED
  • 17. Deemed Price Sensitive Information Reg 2 (ha)
    • Periodical Financial Results of the company;
    • Intended declaration of dividends;
    • Issue of securities or buy-back of securities;
    • Expansion Plans / New projects ;
    • Amalgamation, mergers or takeovers;
    • Disposal of undertaking;
    • Changes in policies of the company
  • 18. Price Sensitive Information Listing
    • Change in the general character or nature of
    • business
    • Disruption of operations due to natural calamity.
    • Commencement of Commercial Production/
    • Commercial Operations
    • Litigations/ dispute with a material Impact.
    • Revisions in Ratings
    As per Clause 36 Listing Agreement Contd.
  • 19.
    • Any other information having bearing on the operation/ performance of the Company as well as price sensitive information which includes but not restricted to;
      • Change in market lot / sub-division ;
      • Voluntary delisting by the company ;
      • Forfeiture of shares;
      • Alteration in terms of any securities ;
      • Information regarding securities issued abroad ;
      • Cancellation of dividend/ rights/ bonus etc.
    Price Sensitive Information Listing As per Clause 36 Listing Agreement Contd.
  • 20. Un - Published
  • 21. Un - Published Reg 2 (k) Information, which is not published by the company or its agents and is not specific in nature. Explanation: Speculative reports in print or electronic media shall not be considered as published information
  • 22. Dealing in Securities
  • 23. Dealing in Securities Reg 2 (d) "Dealing in Securities" means an act of  subscribing buying, selling or agreeing subscribe to buy, sell or deal in any securities by any person either as principal or agent;
  • 24. Prohibition on Dealing, Communicating or Counseling
  • 25. Reg 3 Prohibition On Insider NO INSIDER On Other’s behalf Either on his own behalf DEAL IN SECURITIES OF THE COMPANY SHALL OR WHEN IN POSSESSION OF ANY UPSI OR COMMUNICATE / COUNSEL / PROCURE Directly Indirectly OR ANY UPSI TO ANY PERSON
  • 26. Reg 3 Exemption to Prohibition For Insider For any communication which is required in the ordinary course of business   or profession or employment or under any law.
  • 27. Reg 3A Prohibition On Company NO COMPANY Deal in Securities of SHALL WHEN IN POSSESSION OF ANY Other company Associate of that other company OR UNPUBLISHED PRICE SENSITIVE INFORMATION
  • 28. Reg 3B Exemption to Prohibition
    • The decision of transaction or agreement was not taken by officer or employee of the company who is in possession of UPSI; AND
    • Adequate Procedures in place to demarcate the persons having UPSI & persons dealing in securities; AND
    • Proper arrangement in place to block the dissemination of UPSI; AND
    • The information was not so communicated and no such advice was so given; OR .
    • The acquisition was in line with SEBI SAST Regulations
    Exemption to Prohibition For Company
  • 29. Violations of Provisions Relating to Insider Trading
  • 30. Reg 4 Violation Any insider, who deals in securities in contravention of the provisions of Regulation 3 or 3A shall be guilty of Insider trading.
  • 31. Power of SEBI To Make Inquiries & Inspections
  • 32. Reg 4A Power to make Inquiries & inspection If the Board suspects that any person has violated any provision of these regulations, it may make inquiries OR appoint persons to inspect books & records of such persons OR any Stock Exchange / Mutual Fund / Intermediaries/ Any other person as deemed fit, to form a prima facie opinion as to whether there is any violation of these regulations.
  • 33. Right of SEBI To Investigate
  • 34. Reg 5 Right to Investigate The Board may appoint investigating authority to investigate into the complaints received from investors , intermediaries or any other person on any matter having a bearing on the allegations of insider trading ; AND To investigate suo-moto upon its own knowledge or information in its possession to protect the interest of investors in securities against breach of these regulations.
  • 35. Procedure for Investigation
  • 36. On Complaints / Suo-moto On Conclusion Report to Board Board will Issue directions Investigation Started Appointment of Invtg. Auth. Notice Issued To provide all assistance Shall Reply within 21 days Findings to suspected person Procedure for Investigation Reg 6 - 9
  • 37. Directions By SEBI
  • 38. Reg 11 Directions by Board
    • INDEPENDENT
    • of right to Initiate Criminal proceedings
    • OR any action under
    • Chapter VIA of the Act (Penalties & Adjudication) ,
    • May Direct
    • Not to deal in securities
    • Prohibition on Disposal
    • Restraining to Communicate or Counsel
    • Declare transaction as null & void
    • To deliver securities back to the seller
    • Or market price equivalent be paid to the seller
    • To transfer the proceeds to the
    • Investor Protection Fund of Stock Exchange
  • 39. Disclosures To be Made
  • 40. Reg 13(1) Disclosures To be Made PARTICULARS TO BE SUBMITTED To PERIOD Initial disclosure by person who holds more than 5% shares/ voting rights in any listed company Company within 4 working days of receipt of information of allotment or the acquisition of shares/voting right To Intimate The number of shares held by such persons
  • 41. Reg 13(2) Disclosures To be Made PARTICULARS TO BE SUBMITTED To PERIOD Initial disclosure by person who is either director or officer of listed company Company within 4 working days of becoming the director or officer of company To Intimate The number of shares held by such persons
  • 42. Reg 13(3 & 5) Disclosures To be Made PARTICULARS TO BE SUBMITTED To PERIOD Continual disclosure by person who holds more than 5% shares/ voting rights in any listed company Company within 4 working days of receipt of information of allotment or the acquisition of shares/voting right To Intimate The number of shares held & any Change exceeding 2%
  • 43. Reg 13(4 & 5) Disclosures To be Made PARTICULARS TO BE SUBMITTED To PERIOD Continual disclosure by person who is either director or officer of listed company Company within 4 working days of receipt of information of allotment or the acquisition of shares/voting right To Intimate The number of shares held & any Change exceeding Rs. 5 Lakh OR 25000 Shares OR 1% whichever is Lower
  • 44. Modal Code of Conduct
  • 45. Code of Conduct To be Abide By Reg 12
    • All Listed Companies
    • Organizations Associated with Securities Markets including:
    • All intermediaries
    • AMC and trustees of mutual funds;
    • The Self Regulatory Organizations;
    • The Stock Exchanges / Clearing House / Corporations;
    • The Public Financial Institutions
    • The Professional Firms
      • Such as Auditors, Accountancy Firms, Law Firms ,
      • Analysts, Consultants, etc.,
    • Assisting or Advising Listed Companies
  • 46. Model Code of Conduct Schedules SCHEDULE I MODEL CODE OF CONDUCT FOR PREVENTION OF INSIDER TRADING PART A - FOR LISTED COMPANIES PART B – FOR OTHER ENTITIES SCHEDULE II CODE OF CORPORATE DISCLOSURE PRACTICES FOR PREVENTION OF INSIDER TRADING
  • 47. Important Terms In Code of Conduct
  • 48.
    • PSI should be disclosed only to those within the company who need the information to discharge their duty .
    • Limited access to confidential information
    • Files containing confidential information shall be kept
    • secure.
    • Computer files must have adequate security of login and pass word etc.
    Model Code of Conduct IMPORTANT TERMS NEED TO KNOW
  • 49. Model Code of Conduct
    • All D/O/E of the Co who intend to deal in the securities
    • beyond a limit should pre-clear the transactions.
    • An application to the Compliance officer indicating
    • The estimated number of securities that the D/O/E
    • intends to deal in,
    • The details as to the depository with which he has a
    • security account,
    • The details of securities in such depository mode.
    • Other details as may be required by any rule made by
    • the company in this behalf.
    IMPORTANT TERMS PRE CLEARANCE OF TRADES
  • 50.
    • Company shall specify a trading period , to be called
    • "Trading Window", for trading in the company’s securities.
    • The trading window shall be closed during the time the
    • Price Sensitive information is un-published .
    • When the trading window is closed, the D/ E /O shall not
    • trade in the company's securities in such period.
    • The trading window shall be opened 24 hours after the
    • Price Sensitive Information is made public.
    Model Code of Conduct IMPORTANT TERMS TRADING WINDOW
  • 51.
    • To restrict trading in certain securities and designate such list as restricted / grey list.
    • Client Companies for which any assignment or appraisal report or credit rating assignments are going on.
    • Any security which is purchased or sold by the organisation / firm on behalf of its clients / schemes of mutual funds, etc. shall be put on the restricted / grey list.
    • As the restricted list itself is a highly confidential information, It shall be maintained by CO.
    Model Code of Conduct IMPORTANT TERMS RESTRICTED /GREY LIST
  • 52. Model Code of Conduct
    • "Chinese Wall" policy demarcates “inside areas” from "public areas".
    • Those areas having access to confidential information , considered “inside areas” and areas which deal with sales / marketing / investment considered "public areas".
    • The employees in the inside area shall not communicate any PSI to anyone in public area.
    • In exceptional circumstances employees from the public areas may be brought "over the wall" and given confidential information on the basis of "need to know" criteria, under intimation to the CO
    IMPORTANT TERMS CHINESE WALL
  • 53.
    • Compliance Officer ‘Senior Level Employee ’ who shall report to the MD / CEO.
    • The CO shall be responsible for
    • - setting forth policies, procedures
    • - monitoring adherence to the rules for the preservation of “PSI”,
    • - pre-clearing of designated employees’ and their dependents’ trades
    • - monitoring of trades and the implementation of the code of conduct
    • under the overall supervision of the Board of the listed company.
    • The CO shall maintain a record of the designated employees and any
    • changes made in the list of designated employees.
    • To Provide clarifications regarding the SEBI (Prohibition of Insider Trading) Regulations, 1992 & the company's code of conduct to the Company’s employees. .
    Model Code of Conduct IMPORTANT TERMS COMPLIANCE OFFICER (CO)
  • 54.
    • Code provides Penalty and Appropriate action by the
    • company for violations of code.
    • Disciplinary action by the company, include wage
    • freeze , suspension, ineligible for future participation in
    • ESOP etc
    • The action by the company shall not preclude SEBI
    • from taking any action incase of violation of SEBI
    • (Prohibition of Insider Trading), Regulations, 1992.
    Model Code of Conduct IMPORTANT TERMS PENALTY FOR CONTRAVENTION OF CODE OF CONDUCT
  • 55. Action By SEBI Against Violations
  • 56.
    • Take actions to Prohibit Insider Trading – U/s 11.
    • Issue directions in Interest of Investors & Securities Market – U/s 11B
    • Impose Penalty ( 25 Crore) / Imprisonment (10 Years) U/s - 24
    Reg 14 GENERAL ACTION AGAINST VIOLATIONS
  • 57. Sec 15 G of SEBI SPECIFIC ACTION AGAINST VIOLATIONS
    • APPLICABILITY :
    • Any Insider Who
      • Deals in Securities based on any UPSI.
      • Communicates any UPSI to any person, with or without his request
      • Counsels / procures to deal in Securities Based on UPSI.
    • PENALTY :
        • Rs. 25 Crore OR
        • 3 times the amount of profit made
        • Whichever is HIGHER
  • 58. Interesting Judgements on Insider Trading
  • 59. MATTER OF DEBATE WHETHER AN ACTION UPON ANY PRICE SENSITIVE INFORMATION WHICH TURN OUT TO BE INCORRECT FALLS UNDER INSIDER TRADING SAMEER ARORA VS. SEBI HELD INFORMATION WHICH FINALLY TURNS OUT TO BE FALSE OR AT LEAST UNCERTAIN CANNOT EVEN BE LABELED AS INFORMATION.
  • 60. MATTER OF DEBATE WHEN AN PRICE SENSITIVE INFORMATION WILL BE TREATED AS MADE PUBLIC DSQ HOLDINGS VS. SEBI HELD THE DAY ON WHICH THE INFORMATION IS SENT TO THE STOCK EXCHANGE AS PER THE LISTING AGREEMENT.
  • 61. 2. DSQ HOLDINGS VS SECURITIES & EXCHANGE BOARD OF INDIA. BRIEF ISSUES & DECISION The appellant was charged for indulging in the insider trading in the shares of the Company via DSQ Biotech Ltd.(DSQB). The Transaction Relates to the period from 1/08/1994 to 30/09/1994. The respondent has held that appellant is an insider and it had purchased shares on the basis Of UPPSI relating to RIGHT ISSUE. The appellant is found guilty of violating regulation 3(I) of the Insider Regulations. The impugned order states that the information on the right issue Becomes public only on 309/94 when the AGM was held. The notice of AGM was dispatched to the shareholding on 25/08/94. The Appellant states that the right issue was first discussed in the Board Meeting of the Co. held on 30/7/94. The Company send the Information to the Stock exchange as per the Listing Agreement on the Very same day. The concerned public was aware of the company’s Proposal the very same day Thus the ingredients of insider trading not found in the case and hence The appeal was dismissed. Disclosure of confidential information by son to his father concerning adverse Corporate developments at the Company because of the a new drug jointly being developed by the company along with Other Company. Father used the information and purchased the Co’s “PUT” Options. Father sold the put options on Co’s JV termination generating an overnight profit of more than $ 55,000. S E C VS TIMOTHY J.POTTER & GEORGE R.POTTER INTERNATIONAL JUDGEMENT FACTS HELD Both Father & Son was charged of the GUILTY OF INSIDER TRADING
  • 62. Alfred Teo a major shareholder of a company learned about the tender Offer for the company and then purchased the stock on the basis of this Information prior to the Company’s Public announcement of the Acquisition. Teo also tipped eight other defendants. Thereupon made illicit profits of approximately $22 Million. It was proved that the defendants use the inside information and also Give tips to others and earned illicit profits. S E C VS ALFRED S.TEO, SR, ET AL INTERNATIONAL JUDGEMENT FACTS HELD The exchange ordered for disgorgement of all illicit profits, Civil penalties, permanent injunctions also.
  • 63. Arjun Sekhri, a former investment banking associate having An inside confidential information about the Company tipped Various other persons in advance of six major corporate Announcements S E C VS ARUM SEKHRI, AMLOLAK SEHGAL, & PRATIMA RAJAN INTERNATIONAL JUDGEMENT FACTS HELD The offence of insider trading was proved against the defendants and they were sentenced for Imprisonment and were asked for disgorgement of the Trading profits .
  • 64. It is easier to identify the beneficiaries of insider dealing. But the extent of losses occurred to the general investor is impossible to calculate . Lastly…
  • 65. Let’s we knowingly not involved in this practice and put in place proper measures so would not get involved in Insider Trading. Thus… Thanks…