Insider Trading - An Analysis in Corporate Regime

1. Introduction
Man amongst all species has proved himself to be the greediest creature since times immemorial. His greed has made him stop as low as possible in utter disregard for all principles of fair play, honesty, morality, etc. In the past and particularly in the last two decades we have witnessed many instances not only at National level but even across the globe where some genius brains have been able to use the vulnerable platform of stock market to their own advantage by enriching themselves enormously at the cost of unprecedented financial losses to thousands of others. A common tool used by these manipulative brains is what in common parlance is known as Insider trading.
 
 
With the vast developments in trade and commerce all over, every person has become very materialistic. That is the reason why people in general and particularly those in business have developed profit motives. And it is quite often that to fulfill their own monetary expectations, such people employ illegal or immoral means. One such illegal method used by some vested interests in area of corporate business is insider trading.[1]
 
Thus, when an insider of a company uses its price sensitive confidential information to buy or sell its securities thereby making a personal profit, he commits acts to the detriment of the interests of bona fide investors of the company. However, in reality, insider trading can be both legal and illegal.
 
Legal in the sense when the corporate insiders officers, directors, and employees buy and sell stock in their own companies, whereas illegal insider trading refers to buying and selling of stock by corporate insiders not within their own company. [2]
 
UK and USA had long back created separate boards for the regulations of the securities market. UK has the securities and investment Board (SIB) and USA has the Securities and Exchange Commission (SEC). And the Indian Governments intention to set up a separate board for the regulation and orderly functioning of the capital market was first declared in the Budget speech by Shri. Rajiv Gandhi, the then Prime Minister and Minister of Finance, while presenting the budget for the year 1987-88. He stated the capital markets in India have shown tremendous growth in the last few years and the approvals for capital issues have exceeded Rs 5000 crores in 1986-1987, as earlier in 1980-81 it was only Rs 500 crores. So for a healthy growth of capital markets, investors must be fully protected and trading malpractices must be prevented. Therefore, government has decided to set up a separate board for the regulation and orderly functioning of stock exchange and the securities industry. [3] Finally, a notification was issued on 12th April1988 and Securities and Exchange Board of India (SEBI) was constituted as an interim administrative body to function under the overall of the Ministry of Finance of the Central Government. [4]
 
The SEBI was given a statutory status on 30th January, 1992 by an ordinance to provide for the establishment of SEBI. A Bill to replace the Ordinance was introduced in parliament on 3rdMarch, 1992 and was passed by both houses of parliament on 1st April 1992. The Bill became an Act on 4th April 1992 the date on which it is received the Presidents assent. However, as provided for in Section 1(3), this Act is to be deemed to have come into force on 30th January, 1992, i.e. the date on which the SEBI ordinance was promulgated. [5]
 
The SEBI is the primary federal regulatory agency for the securities industry, whose responsibility is to promote full disclosure and to protect investors against fraudulent and manipulative practices in the securities markets. The SEBI is concerned primarily with promoting disclosure of important information, enforcing the securities laws, and protecting investors who interact with different organizations and individuals. Typical infractions that includes in SEBI is insider trading, accounting fraud, and providing false, and providing false or misleading information about securities and the companies which need to be protected and prevented by SEBIs rules and regulation.
 
One of the principles that is the cornerstone of the regulation of our capital markets is that insiders of public issuers and others who are in a special relationship with the issuer who have undisclosed material information about the issuer should not be permitted to
 
The accountants of a company supervising the financial operation in any company have the furthermost prospect of gaining knowledge to any kind of confidential price sensitive information.
 
Insider
An insider is understood as a person having control over the management of affairs of the corporation. Thus the directors of the company, shareholders, employees, etc would be the insiders of the company. However for the purposes of regulating insider trading, insider has been given a relatively specific definition. The SEBI (insider trading) regulations, 1992 define an insider to mean:
 
An insider, as defined by the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992 under Regulation 2(e) that:
 
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, by virtue of such connection, to unpublished price sensitive information in respect of securities of the company, or who has received or has had access to such unpublished price sensitive information. [9]
 
This definition has three important elements, which are:
 insider or who is an insider[13]
Who is a connected person[14]
What are price sensitive information[15]
 
 (i) Is a director, as defined in clause (13) of section 2 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 session 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.
 
The words connected person shall any person who is a connected person six months prior to an act of insider trading.
Deemed connected person
Regulation- 2(h) says person deemed to be connected means if such person is a company under the same management or group or any subsidiary company [16], intermediary as specified in under section 12 of Act 1992 [17], officials of stock exchange, clearing house, merchant bankers, and registrar to an issue, share transfer agent, portfolio manager or, relative of any of the above persons.
 
1.5.Price Sensitive Information, its sequence relating to insider trading
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. Reg. 2(ha) of SEBI (Insider Trading) (Amendment) Regulations, 1992, deals with 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. Examples: The following shall be deemed to be price sensitive information
- Death/ Imprisonment of promoter
- Family dispute over ownership
- Accident and loss of contracts
- Court decisions and Judgments
 
The SEBI had given a list of such price sensitive information which is to be informed to the stock exchange by the companies. [18]
 
1.6.Role of SEBI relating Insider Trading
  
To appoint a senior level employee generally the Company Secretary, 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 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.
The penalties/ punishments can be imposed in case of violation of SEBI (Prohibition of Insider Trading) Regulations, 1992.
Periodical financial result of the company.
Intended declaration of dividends.
Issue or buy- back of securities
Any major expansion plans or execution of new projects.
Amalgamation, mergers or takeovers
Disposal of the whole or substantial part of the undertaking
Any significant change in policies, plans or operation of the company
 
A mere perusal of the list gives an impression that a price sensitive information would be any information that has direct nexus with the performance of the company in percent and future time.
 
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 should be set up for faster and efficiencies disposal of cases.
 
Different countries have diverse enactments and codes of conduct to curb the ill practice of Insider Trading. While the US and the UK has comprehensive legislations and monitoring bodies in this regard, countries like Germany reply on a voluntary code of conduct.
 
In India, SEBI (Insider Trading) Regulations 1992, amended in 2002, 2003, 2007 and recently in 2008, framed under Section 11 of the SEBI Act, 1992, are intended to prevent and curb the menace of insider trading in securities.
 
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. In the UK insider trading is dealt with in Criminal Justice Act, 1993.
 
1.7.Judicial pronouncements relating to insider trading
 
The case of insider trading (HLL-BBLIL Merger). [27]
 
(a) The information of the impending deal was not supposed to emanate from L&T and in fact did not emanate from L&T. The RIL nominees on the Board of L&T were aware of the impending deal not because of their directorship but due to their position as potential sellers as Managing Directors of RIL. The Ambanis were not the directing mind and will of L&T since they were only two in number as compared to the total number of seventeen;
 
(b) For the offence of insider trading price sensitive information must come to an insider by virtue of his being an insider. L&T was not even aware of this deal and in fact was not supposed virtue of his being an insider. L&T was not even aware of this deal could not be classified to fall within the ambit of the Insider Trading Regulations
Dilip Pendse v. SEBI  [29]
This was perhaps the simplest case of insider trading which was handled by SEBI and it had no difficulties in punishing the offenders.
 
Rakesh Agrawal v. SEBI  [30]
SEBI found RK guilty of insider trading and directed his prosecution, adjudication proceedings and also directed him to deposit a sum of Rs.34 lacs with the Investor Protection Funds of NSE & BSE to compensate any investor who is aggrieved by the said act of insider trading. However SAT overruled the case.
 
India is host to one of the most stringent laws on insider trading. The insider trading regulations do not require any knowledge or intention on the part of the accused in order to sustain a conviction for insider trading. Hence, if the accused does not have the requisite knowledge that the information is either inside information or that it is from an inside source, even if he deals in securities based on that information, he will be held guilty of insider trading under Indian law. [33] Corporate governance is very vital in a profit-driven market and regulation of insider trading is essentially a part of corporate governance. Market manipulation strategies to ones own advantage are welcome provided they are not illegal. Whereas insider trading is an illegal market manipulation mechanism, as it strikes at the root of the principle of good faith in corporate dealing.
In India, the investors have been disenchanted by the regulatory mechanisms employed by SEBI in controlling insider trading.
There is a lot to be done to make the insider trading meaningful and effective. This demands concerted efforts at the hands of both
 
 
Ipsita Das
NALSAR University of Law
ipsitadas50@gmail.com
 
[1] G.Gehani,FCS, Vice President and Company Secretary, PSL Holdings Ltd., New Delhi, article on Role Of SEBI in regulating the insider trading.
[2] Divya Bhardwaj, Regulation of insider trading in India, Nalsar Journal, p.107.
[3] www.econlib.org/library/Enc/InsiderTrading.html accessed on 11.5.2010 at 3:09pm.
[4] ibid
[5] Investment Laws Contract Programme Programme- Class I Securities Market in India, by Prof.S.Krishnaswamy www.nls.ac.in/.../MBLII/Securities%20Market%20India.pdf accessed on 13.5.2010 at 1:45 am.
[6] Pdfdatabase.com//06-cp-8-insider trading-policy-final-2-spanish-pdf-3213310.html. accessed on 12.5.2010 at 11:34 pm.
[7] Supra note 29, p.9.
[8] Ibid.
[9] Reg. 2(e) of SEBI (Prohibition of Insider Trading) Regulations, 1992.
[10] Reg. 2(c) of SEBI (Prohibition of Insider Trading) Regulations, 1992.
[11] Reg. 2(h) of SEBI(Prohibition of Insider Trading) Regulations, 1992.
[12] An unpublished price sensitive information means information relating to the present or probable future state of the company, that can potentially affect the value of the securities of the company in the market, that has not been available to the public
[13] SEBI (Insider Trading) Regulations 1992[Reg.2(e)]
[14] Reg.2(c) of SEBI(Prohibition of Insider Trading) Regulations, 1992.
[15] Reg.2(ha) of SEBI (Prohibition of Insider Trading) Regulations, 1992.
[17] Section 12 deals with Code of internal procedures and conduct for listed companies and other entities as seen in securities and exchange board of India ([PROHIBITION OF] INSIDER TRADING) Regulations, 1992, Inserted by the SEBI (Insider Trading) (Amendment) Regulations, 2002, w.e.f. 20-02-2002.
[18] PR Ramaanathan, Insider Trading Regulation An appraisal, SEBI and Corporate Laws, Vol.85, 2008, p.63-68.
[19] American Depository Receipt
[20] Global Depository Receipt
[21] Supra note 29, p.9
[22] SEBI on Insider Trading, www.legalservice.com/.../1268-on-Insider-Trading.html. accessed on 20.5.2010 at 3:04 pm.
[23] As a person connected or deemed to be connected and who is reasonably expected to have access to any unpublished price sensitive information in respect of securities [i.e. shares, debentures etc.] of a company, or who has received or has access to such unpublished information. The directors, officers, employers of the company, & persons involving a professional or business relationship [like CAs lawyers etc.] are onnected person as per regulations 2(c).
[24] 2(h) securities and exchange board of India ([Prohibition of] insider trading) Regulation , 1992
[25] Ibid.
[26] Hindustan Lever Ltd. (HLL) v. SEBI, as referred from http://consumer.indlaw.com/search/articles/?80e7e35d-8e56-499b-b27f-5606d1d799de, as visited on August 30,2009
[27] http://www.icmrindia.org/casestudies/Finance/Case%20of%20insider%20trading%20%20HLL%20-%20BBLIL%20Merger.htm accessed on 7.5.2010 at 3:58 pm.
[28] Ibid
[29] ibid
[30] Rakesh Agrawal v. SEBI, cited from SEBI Annual Report, 2003-04, Part IV, p.116
[31] AIR 1964 SC 1140
[32] Anant Kaushik and Anand Shankar Jha, Proving insider trading has become a herculean task analysis, Vol. 75, 2007, p. 159-164.
[33] Varsha Sharma and Anshul Bansal, Insider trading in India a case study of Tata Finance Ltd.,SEBI and Corporate Laws, Vol.87, 2008.
[34] Himanshu Chahar & Sumeer Sodhi, Insider Trading: A critical Analysis,www.legalserviceindia.com/article/1199-Insider-Trading.htm. 
[35] Sudershani Ray & Kartik Dawar, Insider Trading its legal mechanism, www.legalservice.com/.../1147-Insider-Trading-And-its-Legal-Mechanism.html.