The document discusses corporate governance standards in India following the Satyam scandal. It outlines existing laws and regulations around corporate governance in India, including the Companies Act of 1956, recommendations from industry groups, and SEBI's Clause 49. However, it notes that full compliance with Clause 49 is still lacking in many companies. It argues that independent directors should be held more accountable and that the Satyam scandal highlighted weaknesses in their role and auditors' responsibilities. Tighter rules are needed to strengthen corporate governance standards and better protect shareholders and stakeholders.

1. Insider trading is the trading of a corporation's stock or other securities (e.g. bonds or stock options) by
individuals with potential access to non-public information about the company.
Such a trade is motivated by the possibility of generating extraordinary gain with the help
of nonpublic information (information not yet made public). It gives the trader an unfair
advantage over other traders in the same security.
insiders are defined as a company's officers, directors and any beneficial owners of more than ten
percent of a class of the company's equity securities
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It is important to distinguish between a STAKEHOLDER and a SHAREHOLDER. They sound the same –
but the difference is crucial!
Shareholders hold shares in the company – that is they own part of it.
Stakeholders have an interest in the company but do not own it (unless they are shareholders).
Often the aims and objectives of the stakeholders are not the same as shareholders and they come into
conflict.
The conflict often arises because while shareholders want short-term profits, the other stakeholders’
desires tend to cost money and reduce profits. The owners often have to balance their own wishes
against those of the other stakeholders or risk losing their ability to generate future profits (e.g. the
workers may go on strike or the customers refuse to buy the company’s products).
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Campaign finance refers to the fundraising and spending that political campaigns do in their election
campaigns. As campaigns have many expenditures, ranging from the cost of travel for the candidate and
others might include the purchasing of air time for TV advertisements, however in some countries, such
as Britain TV advertising is free. Candidates often devote substantial time and effort raising money to
finance campaigns.
Although the political science literature indicates that most contributors give to support candidates with
[1]
whom they are already in agreement, there is wide public perception that donors expect illegitimate
[2]
government favors in return (such as specific legislation being enacted or defeated), so some have
[citation needed]
come to equate campaign finance with political corruption and bribery . These views have led
some governments to reform fundraising sources and techniques in the hope of eliminating perceived
undue influence being given to monied interests. Another tactic is for the government, rather than private
individuals and organizations, to provide funding for campaigns.
Democratic countries have differing regulations on what types of donations to political parties and
campaigns are acceptable.
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2. Time for tighter norms to protect stakeholders’ interest
Amit Mitra
Debate over prevailing standards of corporate governance in India gained stridency in the last couple of months in
the wake of the un-spooling of the sordid Satyam fiasco.
Apart from temporarily staining the image of corporate India, Satyamgate, described as a home-grown replica of the
infamous Enron saga, did pick holes in the prevailing standards of corporate governance in India.
More importantly, it brought into sharper focus the need and scope for tightening corporate governance norms to
benefit the growing population of Indian investors in the share bazaar.
It was on the chilly evening of September 22, 2008 in London, when Satyam Computer Services was awarded the
coveted Golden Peacock Global Award for Excellence in Corporate Governance for 2008 by the World Council for
Corporate Governance, with Dr Ola Ullsten, the former Prime Minister of Sweden, serving as the lead judge.
And weeks later, the same Satyam got enmeshed in the squalid trappings of deliberate fraud, misleading of
shareholders and poor corporate governance.
Under pressure from mutual funds and minority stakeholders, Satyam did finally call off the decision to purchase 51
per cent stake in Maytas Infrastructure and 100 per cent in Maytas Properties.
But this left in its wake several issues related to corporate governance.
Firstly, the decision was not announced taking into confidence all the stakeholders of the company. That the twin
Maytas companies are run by the family members of the scam-tainted founder of Satyam, Mr Ramalinga Raju, is
clearly a case of blatant jettisoning of healthy corporate governance practices.
Nasscom, the premier trade body and the voice of the Indian IT/BPO industry, quickly reacted by announcing that it
will be forming a Corporate Governance and Ethics Committee, chaired by Mr N.R. Narayana Murthy, Chief Mentor of
Infosys. Stock market regulator SEBI also announced that it would examine if there was a need to tweak existing
regulations to enhance, compliance, transparency and efficiency in the corporate system.
Improving standards
There is no gainsaying of the importance of corporate governance at a time when stock market interests have
clambered up on to a much higher perch as compared to some years ago. In fact, the turmoil in global financial
markets can be partly traced to poor corporate governance, with many reputed global financial institutions keeping
shareholders in the dark regarding their precise financial standing.
Back home, there is no denying that the Government, share market regulator, SEBI, and corporate India have been
pushing themselves hard to raise the bar for corporate governance. But the question is has corporate governance
standards have improved to the desired levels.
What is corporate governance? Broadly, it refers to the set of systems, principles and processes by which a company
is governed. It can be defined as the relationship of a company to its shareholders, going beyond just legal
compliance.
In other words, corporate governance encompasses a broad spectrum of elements, ranging from the role and powers
of the Board, legislation, Board independence, code of conduct to financial and operational reporting, audit
committees and risk management.
Comprehensive laws

3. India, indeed, has an elaborate system of laws governing corporate governance. To start with, the Companies Act,
1956 covers corporate governance widely through a string of provisions such as constitution of audit committee,
fixing of a ceiling on remuneration for directors and directors‘ responsibility statement.
It was the Confederation of Indian Industry (CII) that came out with the first comprehensive code on corporate
governance in 1998, which was followed by the recommendations of the Kumar Mangalam Birla Committee on
Corporate Governance, appointed by SEBI.
The recommendations were embedded into the Clause 49 of the Listing Agreement on Indian stock exchanges.
At that time, the issue of corporate guidelines had come into focus in the wake of huge foreign investments flowing
into the country — these investors wanted assurance that the companies they were investing in will be managed well.
And to further enhance their confidence and to safeguard retail investors, SEBI had revised Clause 49 of its ―listing
agreement‖, which stipulated that at least one-third of the directors on the boards of the companies should be
independent professionals.
These directors should in no way be connected to the interests of promoters. The revised Clause 49 was made
effective from January 1, 2006.
Major changes were also made to the definition of ‗independent directors‘, strengthening of the responsibilities of
audit committee and improving the quality of financial disclosure.
The board, as a whole, was assigned the task of adoption of a formal code of conduct for senior management and
the certification of financial statements issued by the CEO/CFO.
It is, however, no secret that many companies are yet to fully comply with the Clause 49 norms. It is thus time for
SEBI to get stricter with such companies to protect shareholders interests.
Pledging of shares
More recently, SEBI, in an attempt to further enhance transparency in corporate corridors, had made it mandatory for
promoters to announce their pledged shares for the public.
Pledging of promoters shares has been commonplace in the history of corporate India and, as it was not earlier
mandatory on them to disclose the amount of shares pledged, shareholders were left guessing.
Now that this disclosure has been made mandatory, shareholders will have a better idea of the financial stability and
ownership status of the companies they invested in.
Weak links
However, despite these measures, there still exists some weak links in the system.
For example, experts say, the Satyam episode did bring to the fore once again the role of independent directors, who
are supposed to protect shareholder interests.
―Independent directors should also be held accountable for board decisions and audit-related compliance practices,‖
said an analyst on corporate governance.
Auditors‘ role
Apart from independent directors, the role of auditors also came into focus.

4. The question that began to do the rounds in investors‘ circles in the immediate aftermath of the Satyam scandal was
whether shareholders and other stakeholders could take any action against the auditors.
Ms Namrata Mehta, Corporate Lawyer, Economic Laws Practice (ELP), a law firm that advises and litigates in areas
of Direct and Indirect Tax, says ―how an Indian Court will view the liability of the auditors of Satyam will depend upon
the extent to which the Court is convinced about a claim for negligence.‖
She further points out that regardless of the final outcome, auditors must be ―reading their professional indemnity
insurance contracts with a microscope and wishing that the Limited Liability Partnership Act was passed a few
months earlier.‖
Institutional investors
Experts feel that institutional investors can play a greater role in ensuring effective corporate governance standards,
as they have a clout to extract information and play an activist role. This was best exemplified in the Satyam scam.
As for retail investors, it is important that they take all possible precautions before making investments.
Whatever may be the denouement of the Satyam fiasco, it is pertinent that corporate houses take this black chapter
of India‘s corporate history as a lesson in poor corporate governance practices and collectively map out a stricter
structure that will protect the interests of all stakeholders.
nsider trading is a term subject to many definitions and connotations and it encompasses both legal and
prohibited activity. Insider trading takes place legally every day, when corporate insiders – officers, directors
or employees – buy or sell stock in their own companies within the confines of company policy and the
regulations governing this trading. In simple terms ‗insider trading‘ buying or selling a security, in breach of a
fiduciary duty or other relationship of trust , and confidence , while in possession of material , nonpublic
information about the security
Thus , in nutshell , insider trading is the buying , selling or dealing in securities of a listed company by a
director , member of management , employee of the company , or by any other person such as internal
auditor , advisor , consultant , analyst etc, who has knowledge of material inside information which is not

5. available to general public
Examples of Insider Trading-
Corporate officers -, directors and employees who , traded the company‘s securities after learning of
significant, confidentiality corporate developments;
Employees of law, banking , brokerage and printing firms- who were given such information to provide
services to corporation whose securities they traded;
Government employees – who learned of such information because of their employment by the government;
Therefore, preventing such transactions is an important obligation for any capital market regulatory
system,because insider trading undermines investor confidence in the fairness and integrity of the securities
markets.
For instance, prior knowledge of a bonus issue would result in the insider acquiring a significant exposure in
particular scrip, knowing that his holding would increase significantly after the bonus is announced.
The first country to tackle insider trading effectively however was the United States[1].In the USA, the
Securities and Exchange Commission is empowered under the Insider Trading Sanctions Act, 1984 to
impose civil penalties in addition to criminal proceedings. Most countries have in place suitable legislation to
curb the menace of insider trading.
In India, SEBI (Insider Trading) Regulations 1992, framed under Section 11 of the SEBI Act, 1992, are
intended to prevent and curb the menace of insider trading in Securities. Now SEBI has with effect from 20th
February 2002 amended these Regulations and rechristened them as SEBI 9 Prohibition of Insider Trading
Regulation , 1992 . These Regulation have been further amended in November 2002
Rational Behind Prohibition of Insider Trading
The smooth operation of the securities market and its healthy growth and development depends on a large
extend on the quality and integrity of the market .Such a market can alone inspire confidence in investors
Insider trading leads to loose of confidence of investors in securities market as they feel that market is rigged
and only the few, who have inside information get benefit and make profits from their investments . Thus,
process of insider trading corrupts the ‗level playing field‘
Hence the practice of insider trading is intended to be prohibited in order to sustain the investor‘s confidence
in the integrity of the security market.
In Samir C Arora Vs SEBI [2]
It was observed that activities like insider trading fraudulent trade practices and professional misconduct are
absolutely detrimental to the interests of ordinary investors and are strongly deprecated under the SEBI
Act,1992 and the Regulations made there under. No punishment is too severe for those indulging such
activities.
MEANING OF Insider & Insider Trading Defined
Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992, does not directly
define the term "insider trading".
But it defines the terms-
. insider" or who is an "insider;[3]
. who is a "connected person[4]
. What are "price sensitive information".[5]
Insider
According to the Regulations "insider" means any person who, is or was connected with the company or is
deemed to have been connected with the company, and who is reasonably expected to have access,
connection, to unpublished price sensitive information in respect of securities of a company, or who has

6. received or has had access to such unpublished price sensitive information;
The above definition in turn introduces a new term "connected person".
Connected person
The Regulation defines that a "connected person" means any person who-
(i) is a director, as defined in clause (13) of section 2 of the Companies Act, 1956 (1 of 1956) of a company,
or is deemed to be a director of that company by virtue of sub-clause (10) of section 307 of that Act or
(ii) occupies the position as an officer or an employee of the company or holds a position involving a
professional or business relationship between himself and the company whether temporary or permanent
and who may reasonably be expected to have an access to unpublished price sensitive information in
relation to that company;
Price Sensitive Information means any information, which relates directly or indirectly to a company and
which if published, is likely to materially affect the price of securities of company.
American insider trading law
The United States has been the leading country in prohibiting insider trading and the first country to tackle
insider trading effectively.
Thus it is important to discuss insider trading in American perspective. While Congress gave us the mandate
to protect investors and keep our markets free from fraud, it has been our jurists, albeit at the urging of the
Commission and the United States Department of Justice, who have played the largest role in defining the
law of insider trading.
The market crash in 1929 due to prolonged lack of investors confidence in the securities market followed by
Great Depression of US Economy , led to the enactment of Securities Act of 1933 in which Section 17 of the
contained prohibitions of fraud in the sale of securities which were greatly strengthened by the Securities
Exchange Act of 1934The 1934 Act addressed insider trading directly through Section 16(b) and indirectly
through Section 10(b).Section 16(b) of the Securities Exchange Act of 1934 prohibits short-swing profits
(from any purchases and sales within any six month period) made by corporate directors, officers, or
stockholders owning more than 10% of a firm‘s shares. Under Section 10(b) of the 1934 Act, SEC Rule 10b-
5, prohibits fraud related to securities trading. Further the Insider Trading Sanctions Act of 1984 and the
Insider Trading and Securities Fraud Enforcement Act of 1988 provide for penalties for illegal insider trading
to be as high as three times the profit gained or the loss avoided from the illegal trading..[ Much of the
development of insider trading law has resulted from court decisions. In SEC v. Texas Gulf Sulphur Co.[6], a
federal circuit court stated that anyone in possession of inside information must either disclose the
information or refrain from trading. (1966)
In 1984, the Supreme Court of the United States ruled in the case of Dirks v. SEC that tippees (receivers of
second-hand information) are liable if they had reason to believe that the tipper had breached a fiduciary
duty in disclosing confidential information and the tipper received any personal benefit from the disclosure.
(Since Dirks disclosed the information in order to expose a fraud, rather than for personal gain, nobody was
liable for insider trading violations in his case.)
The Dirks case also defined the concept of "constructive insiders," who are lawyers, investment bankers and
others who receive confidential information from a corporation while providing services to the corporation.
Constructive insiders are also liable for insider trading violations if the corporation expects the information to
remain confidential, since they acquire the fiduciary duties of the true insider.
In United States v. Carpenter (1986) the U.S. Supreme Court cited an earlier ruling while unanimously
upholding mail and wire fraud convictions for a defendant who received his information from a journalist
rather than from the company itself. The journalist R. Foster Winans was also convicted. [7]
"It is well established, as a general proposition, that a person who acquires special knowledge or information
by virtue of a confidential or fiduciary relationship with another is not free to exploit that knowledge or
information for his own personal benefit but must account to his principle for any profits derived therefrom."
However, in upholding the securities fraud (insider trading) convictions, the justices were evenly split.
In 1997 the U.S. Supreme Court adopted the misappropriation theory of insider trading in United States v.

7. O'Hagan, 521 U.S. 642, 655 (1997),. O'Hagan was a partner in a law firm representing Grand Met, while it
was considering a tender offer for Pillsbury Co. O'Hagan used this inside information by buying call options
on Pillsbury stock, resulting in profits of over $4 million. O'Hagan claimed that neither he nor his firm owed a
fiduciary duty to Pillsbury, so that he did not commit fraud by purchasing Pillsbury options.
The Court rejected O'Hagan's arguments and upheld his conviction.
The "misappropriation theory" holds that a person commits fraud "in connection with" a securities transaction,
and thereby violates 10(b) and Rule 10b-5, when he misappropriates confidential information for securities
trading purposes, in breach of a duty owed to the source of the information. Under this theory, a fiduciary's
undisclosed, self-serving use of a principal's information to purchase or sell securities, in breach of a duty of
loyalty and confidentiality, defrauds the principal of the exclusive use of the information. In lieu of premising
liability on a fiduciary relationship between company insider and purchaser or seller of the company's stock,
the misappropriation theory premises liability on a fiduciary-turned-trader's deception of those who entrusted
him with access to confidential information.
The Court specifically recognized that a corporation‘s information is its property: "A company's confidential
information...qualifies as property to which the company has a right of exclusive use. The undisclosed
misappropriation of such information in violation of a fiduciary duty...constitutes fraud akin to embezzlement –
the fraudulent appropriation to one's own use of the money or goods entrusted to one's care by another."
In 2000, the SEC enacted Rule 10b5-1, which defined trading "on the basis of" inside information as any time
a person trades while aware of material nonpublic information — so that it is no defense for one to say that
she would have made the trade anyway. This rule also created an affirmative defense for pre-planned trades.
In May of 2007, representatives Brian Baird and Louise Slaughter introduced a bill entitled the "Stop Trading
on Congressional Knowledge Act, or STOCK Act." that would hold congressional and federal employees
liable for stock trades they made using information they gained through their jobs. The bill would also seek to
regulate so called "Political Intelligence" firms that research government activities and sell the information to
financial managers.
Insider trading in India
In India Regulation 3 of the SEBI Regulations seeks to prohibit dealing, communication and counseling on
matters relating to, insider trading. Regulation 3 provides that no insider shall either on his own behalf of any
other person deal in securities of a company when in possession of any unpublished price sensitive
information on communicate, counsel or procure , directly or indirectly any unpublished price sensitive
information to any person , who while in possession of such unpublished price sensitive information shall not
deal in securities. However, these restrictions are not applicable to any communication required ordinary,
course of business or profession or employment or any law.
Further 3 A prohibits any company from dealing in the securities of another company or associate of that
other company while in possession of any unpublished price sensitive information.
Insider Trading Regulations have been tightened by SEBI during February 2002. New rules cover 'temporary
insiders' like lawyers, accountants, investment bankers etc.[8]
Directors and substantial shareholders have to disclose their holding to the company periodically. The New
Regulations have added relatives of connected persons, as well as, the companies, firms, trust, etc.in which
relatives of connected persons, bankers of the company and of persons deemed to be connected persons
hold more than 10% .The definition of relative[9]under the New regulations is in line with that of the
Companies Act, 1956, which ranges from parents and siblings to spouses of siblings and grandchildren. The
term ―connected person‖ is defined to mean either i) a director or deemed to be a director, ii) occupies the
position as an officer or an employee or having professional or business relationship whether temporary or
permanent, with the company. Thus, there are two categories of insiders:
Primary insiders, who are directly connected with the company and secondary insiders who are deemed to
be connected with the company since they are expected to have access to unpublished price sensitive
information.[10] The jurisprudential basis for the 'person-connected' approach seems to be founded in the

8. equitable notions of fiduciary duty.
The secondary insider, who would have traded with an unfair informational advantage, may escape from
being caught simply because there can be no trace of how he derived this information in the first place.
insider by reason of his connection with the company. In reality, much of the flow of the price-sensitive
information often does not operate by way of such established networks of relational links between
individuals. Very often, such price-sensitive information is communicated and spread out through very
loosely connected and informal networks of brokers, clients and even between friends and through electronic
networks etc. or an elaborate nexus of company official, brokers, traders. These individuals are very often
privy to strategic policy decisions or developments that may influence the valuation of a company‘s scrip on
the bourses.
Duties/ Obligations Of the company
Every listed company has the following obligations under the SEBI(Prohibition of Insider Trading)Regulations
, 1992
To appoint a senior level employee generally the Company Scecretary , as the Compliance Officers;
To set up an appropriate mechanism and to frame and enforce a code of conduct for internal procedures,
To abide by the Code of Corporate Disclosure practices as specified in Schedule ii to the SEBI (Prohibition of
Insider Trading)Regulations , 1992
To initiate the information received under the initial and continual disclosures to the Stock Exchange within 5
days of their receipts;
To specify the close period;
To identify the Price Sensitive Information
To ensure adequate data security of confidential information stored on the computer;
To prescribe the procedure for the pre- clearance of trade and entrusted the Compliance Officers with the
responsibility of strict adherence of the same
Penalties
Following penalties /punishments can be imposed in case of violation of SEBI (Prohibition of Insider
Trading)Regulations , 1992
SEBI may impose a penalty of not Rs 25 Crores or three times the amount of profit made out of insider
trading; whichever is higher
SEBI may initiate criminal prosecution
SEBI may issue orders declaring transactions in securities based on unpublished price sensitive information
SEBI may issue orders prohibiting an insider or refraining an insider from dealing in the securities of the
company
Conclusion
The new 2002 regulations in India have further fortified the 1992 regulations and have increased the list of
persons that are deemed to be connected to Insiders. Listed companies and other entities are now required
to frame internal policies and guidelines to preclude insider trading by directors, employees, partners, etc. In
the past, it has been observed that insider trading legislation is ineffective and difficult to enforce and has
little impact on securities markets. Low enforcement rates and few convictions against insiders have been
cited as evidence of this ineffectiveness. Irrespective of whether or not the SEBI was bestowed with wide
ranging powers, it has been a clear failure when it came to the task of administering the law.
The importance of policing insider trading has also assumed international significance as overseas regulators
attempt to boost the confidence of domestic investors and attract the international investment community.
So, SEBI now should take the role of a regulator only. Special Courts could be set up for faster and
efficacious disposal of cases.
References
1. Where an insider discloses the inside information to another person, otherwise than in the proper
performance of the functions of his employment, office or profession. (Section 52(2) (b)).
2. 83 /2004
3. SEBI (Insider Trading) Regulations 1992[Reg2(e)]
4. [Reg 2(c)]
5. Reg 2(ha)]
6. (1966)

9. 7. Christopher Cox, U.S. Securities and Exchange Commission Speech by SEC Chairman:Remarks at the
Annual Meeting of the Society of American Business Editors and Writers
8. www.academyofcg.org/marchissue.htm
9. On September 15, 2002 the SEBI Board decided to relax the meaning of the term `relative' in the Insider
Trading Regulations. Only direct relatives of those who are deemed to have price-sensitive insider
information on securities will now come under the ambit of the Securities and Exchange Board of India
(Insider Trading) Regulations. SEBI officials pointed out that the decision to exclude the third category of
relatives from the ambit of the insider trading regulations comes in the wake of a host of representations
saying that the existing definition of the term relative was too restrictive
10. Regulation 2(h) identifies seven broad categories of secondary insiders within which these are a few sub-
categories, such as (a) Companies under the same management;(b) Members and employees of Stock
exchanges;(c) Market Intermediaries, Mutual Funds etc.;(d) Directors and employees of financial
institutions;(e) Officers and employees of self-regulatory bodies;(f) Relatives;(g) Bankers
--------------------------------------------------------------------------------
[1]Where an insider discloses the inside information to another person, otherwise than in the proper
performance of the functions of his employment, office or profession. (Section 52(2) (b)).
[2] 83 /2004
[3]SEBI (Insider Trading) Regulations 1992[Reg2(e)]
[4] [Reg 2(c)]
[5] Reg 2(ha)]
[6](1966),
[7]Christopher Cox, U.S. Securities and Exchange Commission Speech by SEC Chairman:Remarks at the
Annual Meeting of the Society of American Business Editors and Writers
[8]www.academyofcg.org/marchissue.htm
[9]On September 15, 2002 the SEBI Board decided to relax the meaning of the term `relative' in the Insider
Trading Regulations. Only direct relatives of those who are deemed to have price-sensitive insider
information on securities will now come under the ambit of the Securities and Exchange Board of India
(Insider Trading) Regulations. SEBI officials pointed out that the decision to exclude the third category of
relatives from the ambit of the insider trading regulations comes in the wake of a host of representations
saying that the existing definition of the term relative was too restrictive
Added Date: 15 Jan
2008
Lenght: 3022
words
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