This document is a research paper on insider trading prepared by CA Mayank Mittal. It defines insider trading as dealing in a company's securities using non-public, price-sensitive information for profit or loss. The paper discusses the history of regulating insider trading in India and defines who qualifies as an insider. It outlines the negative impacts of insider trading, governing regulations and penalties. The paper concludes that proper internal controls are needed to prevent insider trading and protect organizations and market integrity.
1. RESEARCH PAPER ON
INSIDER TRADING
PREPARED BY-:
CA. MAYANK MITTAL
ACA, PGDBA, CCBAF,BCOM
44TH
FAFP BATCH- GORAKHPUR
INSIDER TRADING- PREPARED BY CA. MAYANK MITTAL Page 1
2. INDEX
Key Terms
History
Negative Impact on Organistaion
Prohibition on dealing, communicating or counseling
Investigation
Procedure for Investigation
Direction by SEBI
Disclosures to be made
Action in case of Default
Model Code of Conduct
Penalty
Conclusion
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3. INTRODUCTION-
Before starting this first lets split the word Insider Trading in two 1. INSIDER and 2.
TRADING. The inherent message of the word is very clear now i.e a Person (Insider)
basically who involves in the day to day transaction (commonly an employee) or a
person who is charged with responsibility and management if WILLINGLY leaks out
some CONFIDENTIAL Information to the other for his own PERONSAL INTEREST
then that particular Phenomena is termed as INSIDER TRADING.
Insider trading essentially denotes dealing in a company ‘s securities on the basis of
confidential information relating to the company which is not published or not known to the
public used to make profit or loss. It is fairly a breach of fiduciary duties of officers of a
company or “ connected” persons as defined under the SEBI regulations,1992, towards the
shareholders.
WHO IS INSIDER???
Insider is the person who is “connected” with the company , who could have the unpublished
price sensitive information or receive the information from somebody in the company.
Insider terms actually includes both legal and illegal conduct.
The legal version is when corporate insider officer, directors , and employees buy and sell
stock in their own companies. when corporate insiders trade in their own securities , they
must report their trades to SEBI.
Illegal insider trading refers generally to buying or selling a security , in breach of fiduciary
duty or other relationship of trust and confidence, while in possession of material , non
public information about the security.
The following Person can be termed as INSIDER-
• Corporate officers, directors , and employees who traded the corporations
securities after learning of significant , confidential corporate developments.
• Friends , business associates, family members , and other types of such officers ,
directors , and employees, who traded the securities after receiving such
information.
• Employees of law, banking , brokerage and printing firms who were given such
information to provide services to the corporation whose securities they traded.
• Govt employees who learned of such information because of their employment
by the govt .
• Other persons who misappropriated ,and took advantage of, confidential
information from their employers.
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4. Any person who is or has been associated with company, in any manner, during
the six months prior to the concerned act:
An immediate relative to the connected person.
A banker of the company.
An official of stock Exchange or of clearing corporation.
• A holding/associate/subsidiary company
- * UPSI denotes Unpublished Price Sensitive Information.
UNPUBLISHED PRICE SENSETIVE INFORMATION
Any information, relating to a company or its securities, that is not generally available, and is
likely to materially affect the price of Securities is a UPSI. It Includes
Financial Results
Intended declaration of the dividends(both Interim & Final)
Change in Capital Structure
Any major expansion plans or execution of new projects
Changes in KMP
Material events in accordance with Listing Agreement
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CONNECTED PERSON
INSIDERINSIDER
PERSON IN CHARGE OF
UPSI *
5. WHAT INCLUDES TRADING ?
Trading Includes basically ONLINE TRADING of SECURITIES which can be Right
from the Subscribing of Securities to the Final sale of securities. Or it can include any
intermediary transaction or any agreement purchase or sale of securities in order to
earn PROFIT.
A Picture Depicted below will give a clear content on the TRADING.
HISTORY OF INSIDER TRADING-
Insider trading in India was unhindered in its 130 year old stock market till
about 1970.
In 1979,the Sachar Committee recommended amendments to the companies
Act,1956 to restrict prohibit the dealings of employees. Penalties were also
suggested to prevent the insider trading.
In 1989 the Abid Hussain Committee recommended that the insider trading
activities may be penalized by civil and criminal proceedings and also suggested
the SEBI formulate the regulations and governing codes to prevent unfair
dealings.
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6. In 1989 the Abid Hussain committee recommended that the insider trading
activities may be penalized by civil and criminal proceedings and also suggested
the SEBI formulate the regulations and governing codes to prevent unfair
dealings.
India through SEBI regulations 1992 has prohibited this fraudulent practice .
These regulations were drastically amended in 2002 and renamed as SEBI
regulations 1992.
WHY INSIDER TRADING IS HARMFUL-
It is Harmful as 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.
WHY THERE IS NEED FOR PROHIBITION OF INSIDER TRADING???
As per SEBI the Prohibition of Insider Trading is required to make securities market:
Fair and Transparent.
To have a Level Playing Field for all the participants in the market.
For free flow of information and avoid information asymmetry.
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7. GOVERNING REGULATIONS-
Severity of the Insider Trading can be guessed from the above Therefore it need to be
checked at various fronts .Thus Act and Law need to be more Stringent and updated from
time to time which is demonstrated below-
WHO WILL MONITOR THE INSIDER TRADING IN A ORGANISATION-
There are many governing laws which will protect us from Insider Trading but First we
need to ensure that we have Good Internal Controls so that any Adverse situations can
be Averted. For this we need to fix the Authority and Responsibility of Officer
The Regulations have casted major responsibility for monitoring &
implementing the codes specified in these Regulations upon the Compliance
Officer
Compliance Officer means any senior officer, designated so and reporting to
the BOD, who is financially Literate and well versed with legal and Regulatory
Compliances
He shall be responsible for compliance of policies, procedures, maintenance of
records, monitoring adherence to the rules for the preservation of unpublished price
sensitive information, monitoring of trades and the implementation of the codes
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8. specified in these regulations under the overall supervision of the board of
directors of the listed company
WHETHER INSIDER TRADING IS BENEFECIAL
No insider shall communicate provide or allow access to any UPSI, to any person
including other insiders however there are certain exceptions to this-
Except for performance of duties, for legitimate business purposes and on a
need to know basis
UPSI may be communicated in connection with an open offer under the
takeover regulations, where the BOD is of the view that the proposed transaction
is in the best interest of the company;
If the proposed transaction does not entail an open offer, then the BODs
shall disseminate the UPSI at least 2 trading days prior to the proposed
transaction;
Defences available to an Insider
THE ONUS OF PROVING THE INNOCENCE LIES ON THE “INSIDER”
Contract confidentiality & Non-disclosure agreements has been executed
The transaction is an off-market inter-se transfer between promoters
Individuals who were in possession of such UPSI were different from the
individuals taking decisions
Appropriate & adequate arrangements were in place to ensure that Regulations
are not violated
Trades were pursuant to a trading plan
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9. DISCLOSURE REQUIREMNET-
Initial Disclosure
Like buying the stake greater than the 5% of the paid up capital of the
company ,the acquiring company should inform the Stock Exchange with in 2
days of acquiring the stake.
The new director should disclose all its trade position in Equity or derivatives
with in 2 days of its appointment.
Continuous Disclosure
If the director changes its holding by 2% .
Investment of Rs 5 Lacs or 25000 shares or buying the 1% stake of the paid up
capital which ever is the least should be disclosed.
All holdings in securities of that company
Periodic statements of all transactions
Annual statement of all holdings
Any other disclosure of the company to stock exchanges.
Investigation of Insider Trading
Regulation 4(a) deals with the request for the enquiries.
SEBI can also appoint the outsider auditor for the enquiry & auditor would have
the same power as the SEBI possess.
Before undertaking any investigation under regulation (5) SEBI shall give a
reasonable notice to insider for that purpose.
Where SEBI is satisfied that in the interest of investors or in public interest no
such notice should be given, it may by an order in writing direct that the
investigation be taken up without such notice.
SEBI’s Power to make inquiries and inspection
Regulation 4A
If the SEBI suspects that any person has violated any provision of these
regulations, it may make inquiries with such persons.
The SEBI may appoint officers to inspect the books and records of insider(s) for
the purpose of inspection.
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10. The SEBI can investigate and inspect the books of account, either records and
documents of an insider on prima facie.
SEBI can investigate into the complaints received from investors, intermediaries
or any other person on any matter having a bearing on the allegations of insider
trading.
Model Code of Conduct for Prohibition
A compliance officer is required to be appointed by the company.
There should be pre-clearance of trade by the officer of designated employees.
Designated employees includes :
a. Employees from top 3 layers of Mgmt.
b. All Employees in finance department irrespective of any designation &
grade.
c. Employee designated by BOD from time to time to whom the trading
restriction shall be a applicable.
Trading window ,is closed 7 days prior & 24 hours post event for the “connected
persons” during the UPPSI activities like RESULTS,IPO,CAPEX,BUY BACK ,
etc.
There are several forms in accordance with disclosures & code of conduct.
PENALTIES-
Monetary Penalty: Section 15G of the act imposes penalty of at least
Rs.10lacs,which may extend to Rs.25 Crore or three times of profits made out of
insider trading whichever is higher.
Imprisonment: Section 24 of SEBI Act even goes to the extent of imprisonment
upto 10 years or fine upto 25 Crore, or both, for any offences pertaining to
contravention of the provisions of the Act.
Lets have a Flavour of Insider Trading with the Help of a Case study-
HINDUSTAN LIVER LIMITED – BROOKBOND LIPTON INDIA LTD
• Focus on legal controversy involving BBLIL’s merger with HLL.
• SEBI, suspecting insider trading, conducted enquiries.
• In August 1997, SEBI charged HLL of insider trading by using Unpublished
Price-Sensitive Information.
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11. • HLL bought 8 lakh shares of BBLIL from UTI at Rs 350.35 per share (At a
premium of 9.5% of the ruling market price of Rs 320) just two weeks before the
formal announcement knowing that the HLL and BBLIL were going to merge.
• SEBI held that HLL was using unpublished, price-sensitive information to trade,
and was therefore guilty of insider trading.
• In March 1998, SEBI passes an executive order, which sent shock waves through
the country’s corporate sector.
• SEBI directed HLL to pay UTI Rs 3.4 Crore in compensation, and also initiated
criminal proceedings against the five directors of HLL and BBLIL.
• HLL appealed against the SEBI verdict to the Union Ministry of Finance.
• HLL contended that before the transaction, the merger was the subject of wide
speculation by the market and the media.
• After the formal announcement, press articles mentioned that the merger was no
surprise to anyone.
• HLL pointed out that the share price of BBLIL moved up from Rs 242 to Rs 320
between January and March, before the transaction, indicating that the merger
was “generally known information”.
• HLL contended that to be considered as an insider, it should have received
information “by virtue of such connection” to the other company.
• According to HLL, it was an initiator and the transferee, and it was the
“primary party” to the merger and no primary party to the merger can be
considered an insider from the point of view of insider-trading.
• HLL argued that only the information about the swap ratio could be deemed to
be price-sensitive and that this ratio was not known to HLL or its directors
before the purchase of shares from UTI.
• HLL also argued that the news of merger was not price sensitive as it had
already been announced by the media before the official announcement.
• HLL claimed that the purpose of the purchase of shares was to enable Uniliver
to acquire 51% shares of BBLIL.
• In July 1998, the Appellate Authority of the Finance Ministry dismissed the
SEBI order.
• However, SEBI was correctly order was correctly based on a simple proposition
of law : what can not be done directly can not be done indirectly.
CONCLUSION-
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12. After a Long discussion over Insider Trading it can be concluded that Insider trading is
harmful for the Growth of overall organisation. Proper Internal control should be
developed and deployed in order to avert the situations.
Various regulations and amendments have been made in act in order to minimize the
possibility for Insider Trading.
In the era of Digitization the chances of Fraud are ever growing and the
Behaviour/Intention of a person towards a Organisation is Unpredictable. Due to
numerous reasons Personal Goals are prevailing over and above ORGANSIATION
GOAL.
Framework need to defined by the Organisation which should raise Red Flags wherever
required. INSIDER TRADING is the misuse of privileged position and breach of trust
and hence can disturb whole structure of Securities Market
References-
1- www.slideshare.net
2- www.wikipidea.com
3- www.google.com
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