Insider Trading is the trading of listed company’s securities by individuals with access to non-public information about the company. Insider Trading is seen as an unfair practice to other investors who do not have access to the price sensitive information as the investor with insider information could potentially make larger profits compared to that of a typical investor.
Rationale behind prohibition of insider trading
The smooth operation of the securities market and its healthy growth and development depends on a large extent on the quality and integrity of the market. Such a market can alone inspire confidence in investors. Insider trading leads investors to lose confidence in the securities market as they feel that the market is rigged and only few, who have inside information benefit and make profits from their investments. Thus, the 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. 1
Insider Trading – A menace to Corporate Governance
Corporate Governance is a term which is often associated with the aspect of ensuring transparency to stakeholders. In India most of the big companies are listed on any one of the recognized stock exchanges namely the BSE or the NSE. The actions of the companies that are listed in the stock exchanges have a bearing on their stock prices in the market when their securities are traded. In such cases care must be taken to ensure that the actions of the company are fair and not detrimental to its investors. Often there is lack of transparency between the corporate entity and shareholders. Hence its regarded as a menace to corporate governance. 2
Insider Trading Regulations,2015 -An overview
The new Insider Trading Regulation(‘Regulation’) has brought about drastic changes by amending the definitions of various concepts. The Regulation comprises of 15 Chapters, 2 Schedules and 12 Sections.
Salient features of the Regulation are as follows:
- The Regulations are effective from May 15,2015.
- The definition of an “Insider” 3 has been simplified to mean any person who is a “connected person” and those in possession of “Unpublished Price Sensitive Information” (“UPSI”).
- The scope of “Connected Person” 4 under the Regulations has been widened to include persons associated with the company in a contractual, fiduciary or employment relationship or having direct or indirect access to Unpublished Price Sensitive Information.
- “Trading” 5 under the Regulation means and includes subscribing, buying, selling, dealing or agreeing to subscribe, buy, sell or deal in any securities, and “trade” shall be construed accordingly.
- Multiple restrictions have been placed i.e. (i) prohibition on communication of unpublished price sensitive information (ii) procurement of unpublished price sensitive information and (iii) trading in securities when in possession of unpublished price sensitive information.
Restrictions on Insiders
Regulation 3(1) of SEBI (PIT) Regulations,2015 leads to statutory restriction on all insiders not to communicate, provide or allow access to any UPSI related to a company or securities listed or proposed to be listed to any person including other insiders until and unless providing such information or allowing their access is absolutely for legitimate purposes or performance of their duties and in discharge of legal obligations.
It was observed by Hon’ble SAT in the matter of Rakesh Agarwal V. SEBI that Regulation 3 must be interpreted bearing in mind the basic underlying assumption and the intent of the legislature in introducing such Regulations. The Regulation was never intended as an all-purpose ban on trading. Legitimate transactions undertake to achieve a corporate purpose or to discharge a fiduciary duty or in the interest of a body of public shareholders or stakeholders in a company or transactions in the public interest. The whole Regulation is an anti-fraud regulation.
The concept of “Trading Plan” 6 is introduced for the first time in India on an experimental basis. The fundamental principle governing the trading plan is to maintain the prohibition on trading in securities when in possession of UPSI as well as facilitate an establishment of regime in which compliance-conscious insiders are able to put in place a compliant mechanism to trade in securities where they are insiders.
The features of Trading Plans are as follows:
- Trading Plan need to be approved by compliance officer and also to be disclosed to the stock exchange before commencement of trading in accordance with such trading plan.
- Trading Plan should be for 12 months.
- Two trading plan should not overlap.
- Trading is not allowed on behalf of insider earlier than 6 months from the public disclosure.
- Trading is not allowed between 20th trading day prior to last day of any financial period and the second day after the disclosure is made to the public.
- Trading plan must mention either the total value or total number of securities, nature of trade and dates on which such trades shall be effected.
- Deviation from the trading plan is now allowed and it must be honored. Also approved trading plan cannot be revoked.
No separate penalties have been prescribed under the Regulations. Reference is made however to the penalty provisions under the SEBI Act, 1992 which shall apply. 7
Comparison Between India and US Insider Trading Laws
|1.||Governing Laws||Securities and Exchange Board of India Act, 1992||Securities Act of 1933 and Securities Exchange Act of 1934|
|2.||Nature of offence||It is only an Economic Offence and not a Criminal Offence.||It is both a Civil and a Criminal Offence|
|3.||Regulatory Authority||Securities and Exchange Board of India.||Securities Exchange Commission.|
|4.||Punishment||Fine upto 25 crores or three times the profit made out of Insider Trading.||20 Years in Prison and a fine of 5 million US Dollars.|
Insider Trading under Companies Act,2013
1. Section 195 of the Companies Act,2013(‘Section’) is a new provision and provides that no person including any director or key managerial personnel of a company shall engage in insider trading.
2. Any violation of the Section by any person shall be punishable with imprisonment for a term which may extend to 5 years or with fine which shall not be less than Rs. 5 lakhs and which shall not exceed Rs.25 crores or three times the amount of profits made out of insider trading, whichever is higher, or with both.
Insider Trading is essentially the wrong of trading in securities with the advantage of having asymmetrical access to Unpublished Price Sensitive Information which when published would impact the price of securities in the market. The Regulation being a stringent one ensures a fair level playing field in the securities market and to safeguard the interest of the investors, and this move by SEBI will facilitate further economic buoyancy in the Indian Capital Market.