Insider trading includes trading in a public company by someone who has confidential, price-sensitive information, and who uses and deals with such information. Insider trading can either be illegal or legal depending on the knowledge, based on which the individual is trading.
According to Section 2(h)(ha) of Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992[i] ‘price sensitive information’ means any information relating to present, future, or even past, that has the potential to affect the prices of securities and value of the company.
SEBI AND ITS FUNCTIONS
India’s Securities and Exchange Board (SEBI) is a legal regulatory agency that is responsible for overseeing the Indian financial markets. It controls the stock market by implementing certain rules and regulations and protects investor interests. The board has been formed under Section 3 of the SEBI Act, 1992. The head office of the board is situated in Mumbai. The main objective of the board is to maintain a healthy and fair environment for investors to invest in the market.
Functions of SEBI are also specified in the SEBI Act, 1992. The following are the main functions of SEBI:-
- Issue of securities– Companies’ shares and securities is listed on the exchange board. It issues IPOs (Initial Public Offering) and FPOs (Follow-up Public Offering).
- Intermediary– SEBI acts as an intermediate between the company and the investors. It’s where both parties come to do business.
- Secures investors & shareholders’ interests: It is just an idea that financial markets operate only because the traders are there. SEBI has responsibility for defending their rights and ensuring investors are not victims of stock market abuse or manipulation like insider trading, fraud, etc.
- Educate Investors and relegate brokers: SEBI educates its investors regarding how to invest in better ways and also educates them about different stock market frauds. It controls and tracks the activities of share transfer agents, stockbrokers, fund managers, trustees, and others connected to the exchange of stocks.
- Regulates Mutual funds– SEBI also regulates, registers, and controlling the operation of venture capital funds and collective investment schemes like mutual funds
WHO IS AN INSIDER?
An insider is a person who is a key employee of the company like a director or executive officer who has access to personal and sensitive information about the company which they can use for their own benefits.
According to Section 2(e) of SEBI (Prohibition of Insider Trading) Regulations, 1992[ii], “insider” means a person who-
(i) is or was connected with the company or is deemed to have been connected with the company and is reasonably expected to have access to unpublished price sensitive information in respect of securities of the company; or
(ii) has received or has had access to such unpublished price sensitive information.
Insider deals with companies’ shares with the help of sensitive information for his gain by virtue of being an employee of the company. Inside trading is an illegal practice because it’s an unfair trade practice and violates the fiduciary duty of the employee to deal fairly with the company’s shareholders.
INSIDER TRADING LAWS IN VARIOUS COUNTRIES
The United States was the first nation to deal with the issue of insider trading and it has been very effective in combating the activity. After the great depression in the US market, the Securities Act was introduced and insider trading provisions were incorporated.
On the other hand, the United Kingdom has not been very successful on the matter as most of the cases are either dismissed or the defendant is acquitted because of no rigid laws on insider trading in the country.
Germany has emphasized the voluntary moral conduct of companies and investors which is followed by not only the company but banks also and surprisingly, it has worked for them.
DEVELOPMENT OF INSIDER TRADING LAWS IN INDIA
With a fast-developing securities exchange market in the 80s and 90s, SEBI needed more extensive legislation to regulate the share market and that time SEBI introduced the Prohibition of Insider Trading Regulations in 1992 which was later amended. The Sachar Committee in 1979, the Patel Committee in 1986, and the Abid Hussain Committee in 1989 submitted recommendations for a new law prohibiting insider trading because of insufficient compliance provisions in the Companies Act, 1956.
Nevertheless, SEBI faced some challenges in upholding the law and curbing insider trading, such that Securities Appellate Tribunals (SAT) could not settle any cases due to ambiguity in the interpretation of different provisions. Yet SEBI has established laws on insider trading in India regularly and named a High-Level Committee (HLC) based on the committee’s report, SEBI released the Prohibition of Insider Trading Regulations, 2015. After 2015, SEBI has constantly amended the regulations in 2018, 2019 and most recently in July, 2020.
SEBI, with the latest 2020 amendment, has intended to modernize rules and regulations by mandating structured digital databases to be maintained about sensitive personal information by the company. First high profile insider trading case was in Hindustan Lever Ltd v SEBI[iii] . Hindustan Lever and a couple of its chief employees were prosecuted for insider trading associated with the merger of Brooke Bond. SEBI’s case was that Hindustan Lever had procured portions of Brooke Bond before the declaration of the merger, a demonstration that added up to insider trading. Be that as it may, the investigative authority didn’t maintain the charges, remembering for the ground that data in regards to the conceivable merger was in the open space at that point.
PENALTIES AND PUNISHMENT FOR INSIDER TRADING
According to the SEBI Act, 1992, SEBI has been given the power to regulate and prohibit insider trading.[iv] Securities Exchange Board may take steps to investigate any listed public company’s book of accounts, registration, or other records if the board believes the public company is indulging in insider trading and unfair practices.
Under Section 15G of SEBI Act[v], if an insider who,
(I) either on his behalf or behalf of any other person, deals in securities of a body corporate listed on any stock exchange based on any unpublished price-sensitive information; or
(ii) communicates any unpublished price-sensitive information to any person, with or without his request for such information except as required in the ordinary course of business or under any law; or
(iii) counsels, or procures for any other person to deal in any securities of anybody corporate based on unpublished price-sensitive information,
shall be liable for fines as high as Rs 25 lakhs, or three times the sum of insider trading income, whichever is greater. The Act further prescribes that insider dealing is punishable by up to 10 years in jail. In SEBI v DSQ Biotech Ltd, the court held the Mr DSQ liable under Section 11 of SEBI Act and debarred the company from dealing in the securities market for 5 years.[vi] But generally, it is seen that most of the matters of insider trading are settled with the consent of SEBI. Defaulters just pay the penalty and are free to go but the profit defaulters make is much higher than the penalties they pay. In the case of TATA Finance Ltd. (TFL), a subsidiary of TATA, Nishkalpa made a loss of seventy-nine crore rupees but this information was to be made public next month and Dilip Pendse, MD of Nishkalpa, leaked this information to his wife and they drew their shares from the company. Mr. Pendse was found guilty of insider trading and was fined with Rs 5,00,000 but no legal action was taken against him.[vii]
A study of the major cases on the topic shows a rather negative picture, including both views of SEBI’s ability to prosecute defaulters and launch criminal proceedings towards them. Part of this is inevitable because instances of insider trading are hard to verify. Yet even if the investigation is launched, the matter is usually resolved by orders of agreement or on the payment of meagre sanctions.
SEBI has time and again amended anti-insider trading laws. It has to strengthen ways to regulate the mechanism and has also improved the surveillance method. With the amendment in the definition of ‘Insider’ in 2002, SEBI now can include different types of cases under insider trading.
Notwithstanding all these steps and reforms, SEBI was unable to implement and use these laws to curb the cases most of the time, disputes are resolved or dismissed due to lack of evidence. SEBI should not promote any insider trading information and should announce incentives for the same. SEBI should also learn from its US counterpart, who has been very successful in combating insider trading cases.
Furthermore, SEBI should be given assistance from the central agencies like the Central Economic Bureau of Investigation (CEBI) to investigate and solve cases of insider trading in a better way and quickly. Also, the biggest issue is faced by investors in the cases of insider trading as they put both their money and trust in the companies. SEBI should provide for better mechanisms to deal with investors if they are victims of insider trading. It should make a list of investors who have been affected by the false trading and should calculate their collective losses then notice should be issued so that investors can individually collect compensations for their losses from the money recovered by the way of penalties. This is an important step to maintain the trust of investors in the stock market.
Insider trading is a very old phenomenon and it is a very deeply ingrained stock market issue that will possibly never be done, but SEBI should take strict action against people if they are indulging in insider trading so that others are prevented from doing the same and should also raise awareness about insider trading and why it is wrong.
[i] Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992, s.2(h)(ha).
[ii] Securities and Exchange Board of India (Prohibition of Insider Trading) (Amendment) Regulations, 2008.
[iii]  SCL 311.
[iv] Securities and Exchange Board of India Act, 1992, s.11(2g).
[v] Securities and Exchange Board of India Act ,1992, s.15G.
[vi]  MANU SB 0033.
[vii] https://tradebrains.in/ (Last visited September 20, 2020).
BY- Prakhya Shah | United World School of Law, Karnavati University, Gandhinagar