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Insider trading

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WHAT IS INSIDER TRADING???



Insider trading is dealing in securities of a listed company by any person who has knowledge of material “inside” information which is not known to the general public.


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Insider is the person who is “connected” with the company , who could have the unpublished price sensitive information or receive the information from somebody in the company.


CONNECTED PERSON WITH DETAILED CLARIFICATION
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.
WHAT INCLUDES TRADING ?
WHO ARE INSIDER TRADERS?
Corporate officers, directors ,and employees who traded the corporations securities after learning of significant, confidential corporate developments.
Friends, business associates, family members and employees of law, banking and brokerage firms who were given such information to provide services to the corporation whose securities they traded.
GOVERNING REGULATIONS
Securities & Exchange Board Of India Act,1992

SEBI (Insider Trading) Regulations,1992

SEBI (PIT) (Amendment) Regulations,2002

SEBI (PIT) (Amendment) Regulations,2003

SEBI (PIT) (Amendment) Regulations,2008

SEBI (PIT) (Amendment) Regulations,2011



HISTORY BEHIND INSIDER TRADING IN INDIA
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.


UNPUBLISHED PRICE SENSITIVE INFORMATION
REGULATORY ASPECTS OF PROHIBITION OF INSIDER TRADING

SEBI prohibition of Insider Trading regulation 1995.

Section 11(2) E of companies act 1956 prohibits the insider trading.

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.

CASE STUDY


HLL – BBLIL MERGER CASE
HLL-BROOKBOND LIPTON INDIA LTD

The case primarily involves 4 pa

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Insider trading

  1. 1. WHAT IS INSIDER TRADING??? Insider trading is dealing in securities of a listed company by any person who has knowledge of material “inside” information which is not known to the general public.
  2. 2. 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.
  3. 3. CONNECTED PERSON WITH DETAILED CLARIFICATION  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.
  4. 4. WHAT INCLUDES TRADING ?
  5. 5. WHO ARE INSIDER TRADERS?  Corporate officers, directors ,and employees who traded the corporations securities after learning of significant, confidential corporate developments.  Friends, business associates, family members and employees of law, banking and brokerage firms who were given such information to provide services to the corporation whose securities they traded.
  6. 6. GOVERNING REGULATIONS  Securities & Exchange Board Of India Act,1992  SEBI (Insider Trading) Regulations,1992  SEBI (PIT) (Amendment) Regulations,2002  SEBI (PIT) (Amendment) Regulations,2003  SEBI (PIT) (Amendment) Regulations,2008  SEBI (PIT) (Amendment) Regulations,2011
  7. 7. HISTORY BEHIND INSIDER TRADING IN INDIA  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.
  8. 8. UNPUBLISHED PRICE SENSITIVE INFORMATION
  9. 9. REGULATORY ASPECTS OF PROHIBITION OF INSIDER TRADING SEBI prohibition of Insider Trading regulation 1995. Section 11(2) E of companies act 1956 prohibits the insider trading.
  10. 10. 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.
  11. 11. CASE STUDY HLL – BBLIL MERGER CASE
  12. 12. HLL-BROOKBOND LIPTON INDIA LTD  The case primarily involves 4 parties namely Unit Trust of India(UTI),Hindustan Lever Limited(HLL),Brooke Bond Lipton India Limited (BBLIL)and Securities &Exchange Board of India (SEBI).  SEBI , suspecting insider trading, conducted enquiries.  In August 1997 , SEBI charged HLL of insider trading by using Unpublished Price-Sensitive Information.
  13. 13.  HLL bought 8 lakh shares of BBLIL from UTI at Rs.350.35 per share (At a premium of 9.5% of 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 order.  SEBI penalized HLL with Rs. 34 million in compensation, and also initiated criminal proceedings against the five directors of HLL and BBLIL.
  14. 14.  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 the shares of BBLIL moved up from Rs.242 to 320 between January and March, before the transaction, indicating that the merger was “generally known information”.
  15. 15.  HLL claimed that the purpose of the purchase of shares was to enable Unilever to acquire 51% shares of BBLIL.  In July 1998, the Appellate Authority of the Finance Ministry dismissed the SEBI order.  However, SEBI order was correctly based on a simple proposition of Law : what can not be done “directly” can not be done “indirectly”.
  16. 16. INSIDER TRADING THROUGH AN VISUAL EXAMPLE
  17. 17. MEET KIM & SAM
  18. 18. KIM’s GOT MAIL
  19. 19. KIM’s GOT MAIL
  20. 20. AT THE PUB
  21. 21. THINK ABOUT IT
  22. 22. THINK ABOUT IT
  23. 23. THINK ABOUT IT
  24. 24. RESULT
  25. 25. 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.
  26. 26. CONCLUSION INSIDER TRADING is the misuse of privileged position and breach of trust and hence can disturb whole structure of Securities Market.

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