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Introduction
Introduction
Insider trading essentially denotes dealing in a company s securities on the basis of confidential information relating to the company which is not published or not known to the public used to make profit or loss. It is fairly a breach of fiduciary duties of officers of a company or connected persons as defined under the SEBI regulations,1992, towards the shareholders.
Contd
Insider terms actually includes both legal and illegal conduct. The legal version is when corporate insider officer, directors , and employees buy and sell stock in their own companies. when corporate insiders trade in their own securities , they must report their trades to SEBI. Illegal insider trading refers generally to buying or selling a security , in breach of fiduciary duty or other relationship of trust and confidence, while in possession of material , non public information about the security.
Friends , business associates, family members , and other types of such officers , directors , and employees, who traded the securities after receiving such information.
Contd
Employees of law, banking , brokerage and printing firms who were given such information to provide services to the corporation whose securities they traded. Govt employees who learned of such information because of their employment by the govt . Other persons who misappropriated ,and took advantage of, confidential information from their employers.
Contd
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.
India through SEBI regulations 1992 has prohibited this fraudulent practice .
These regulations were drastically amended in 2002 and renamed as SEBI regulations 1992.
In India.
Only 14 cases taken up by SEBI for insider trading in 2003-04 , which went down to only 7 in 2004-05. In terms of cases completed, the no was only 9 and 5 respectively. So does India has fewer incidence of insider trading or our systems/laws not geared enough to detect such cases?
Who is Insider???
Who is Insider is defined under the SEBI Prohibition of Insider Trading regulation 2 (e) Insider is the person who is connected with the company , who could have the Unpublished price sensitive information or receive the information from somebody in the company . For the purpose this definition, words connected person shall any person who is a connected person six months prior to an act of insider trading
But several close relatives are excluded Like all in-laws (Brother-inlaw, Father-in-law etc.)-Brothers wifes brother etc.
It means any information which relates directly or indirectly with the company & which if published is likely to materially affect the prices of the securitys of the company.
Regulation 3(B)
This regulation states that there should be Chinese Wall With in the company & one department should not know about what other departments are doing.
Continuous Disclosure 1 2 3 4 5 6 If the director changes its holding by 2% . Investment of Rs 5 Lacs or 25000 shares or buying the 1% stake of the paid up capital which ever is the least should be disclosed. All holdings in securities of that company Periodic statements of all transactions Annual statement of all holdings Any other disclosure of the company to stock exchanges.
Trading window ,is closed 7 days prior & 24 hours post event for the connected persons during the UPPSI activities like RESULTS,IPO,CAPEX,BUY BACK , etc. There are several forms in accordance with disclosures & code of conduct. Insider_Trading_Code_of_Conduct.pdf
Case Studies
o HLL-BBLIL MERGER
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 that the share price of BBLIL moved up from Rs 242 to Rs 320 between January and March, before the transaction, indicating that the merger was generally known information.
HLL argued that only the information about the swap ratio could be deemed to be price-sensitive and that this ratio was not known to HLL or its directors before the purchase of shares from UTI.
HLL also argued that the news of merger was not price sensitive as it had already been announced by the media before the official announcement.
Rakesh Agarwal, MD of ABS Industries Ltd was involed in negotiations with Bayer A.G, regarding their intention to takeover ABS.
As per SEBI, Rakesh Agarwal had access to the Unpublished price-sensitive information. SEBI alleged that prior to the announcement of acquisition, Rakesh Agarwal, through his brother-in-law, had purchased shares of ABS and tendered the said shares in the open offer made by Bayer.
Pursuant to Bayers condition to acquire at least 51% shares of ABS, he, through his brother-in law bought the shares and later sold them to Bayer.
The SEBI directed Rakesh agarwal to deposit Rs 34,00,000 with Investor Education & Protection Funds of Stock Exchange, Mumbai and NSE. SAT held that the SEBI order directing Agarwal to pay Rs 34 lakh couldnt be sustained, on the grounds that Rakesh Agarwal did that in the interests of the company.
OBSERVATION
Inability of SEBI in proving its cases. Wide definition of Insider Trader as defined in the 1992 Act. Proving Insider Trading a bizarrely difficult task.
Lack of assistance from Central Economic Intelligence Bureau (CEIB) to investigate the cases.
Absence of an adequate remedy available to the investors at large.
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