UNIVERSITY OF PETROLEUM & ENERGY STUDIES

COLLEGE OF LEGAL STUDIES

B.B.A. LL.B (HONS.)
SEMESTER VI
ACADEMIC YEAR: 2014-2015

SESSION: JANUARY-MAY

Insider Trading; Where Should The Line Be Drawn?

FOR
Subject Name: Company Law- II
(LLBL-422)
Under the Supervision of: Prof. AjitKaushal
NAME: SHREYA SINGH
SAP ID: 500022285
ROLL NO.: R760212047

TABLE OF CONTENTS
I.

INTRODUCTION..4
1.1 Definition of Insider Trading
1.2 Efficient Capital Market Hypothesis
1.3 Concept of Insider Trading in India
1.4 Origin and Evolution of the law relating to Insider trading in India

II.

MEANS OF CONTROLLING AND LAWS FOR PREVENTION OF

INSIDER TRADING IN INDIA10
2.1.
2.2.
2.3.

Associated Penal Provisions

Civil and Administrative Penalties
Self-regulatory practices by companies and corporate governance

III.

SEBI AND INSIDER TRADING..14

3.1

SEBI Regulations on prohibition of Insider trading

IV.

THE PROSPECTS OF THE SEBI REGULATIONS AND EXISTING

LAWS19

4.1. Reason for formulation of SEBI(prohibition of Insider trading) Regulations, 2015

4.2 Analysis of Justice Sodhi Committee Report
4.3. Prospect of the new regulation and existing laws in Prevention of Insider Trading
4.4 Comparison of laws in different countries- USA & UK
4.5 The lacking provisions and suggestive additions in the legal framework

V.

RESEARCH QUESTIONS

1. If the Corporate governance laws for insider trading is self sufficient in India?
2. Where the differentiating line should be drawn between insider trading and laws
protecting whistle blowers?

VI.

CONCLUSION..29

BIBLIOGRAPHY30

PREVENTION OF INSIDER TRADING IN INDIA

Shreya Singh B.B.A. LL.B VI R760212047

Abstract

This paper is a result of class assignment given by Asst. Prof. Ajit Kaushal in Company Law, a
subject under my Integrated Law course. The project would be basically dealing with a
comparison of Indian Laws and U.S. laws pertaining to Insider Trading. Insider trading is
basically the buying or selling of the securities of a listed public company by a person who has
unpublished price sensitive information relating to that company. The project is inspired by
certain controversial cases like Hindustan Lever Limited-Brooke Bond Lipton Limited, Rakesh
Agarwal v. SEBI, the landmark case of Wall Street Journal Columnist R. Foster Winans for its
curious outcomes, etc.
An attempt has been made to analyze the Indian Insider dealing provisions as they stand. The law
in India on this subject is not well developed and both parties are expected to rely heavily on the
insider trading laws of other jurisdictions while presenting their cases. Thus, the paper includes a
comparative study between Indian and U.S. laws specifically.
The methodology used for the project will be an empirical approach studying the concept
qualitatively. The purpose is to point out the International trends and standards in connection of
this pernicious practice.
The project would also be dealing with the two broad theories in US developed by various case
laws i.e. the traditional or classical theory and the misappropriation theory. The project would
also focus and derive its comparison based on the recent HLL controversy. The project would
also throw light on the protection provided in US to the whistle blowers. The project would lastly
deal with SEBIs inabilities and suggestions regarding problems relating to insider trading in
India.
Keywords- Insider Trading- unpublished price sensitive information-Securities and Exchange
Board of India (InsiderTrading) Regulations of 1992- Securities Exchange Act of 1934- SEBIwhistle blowers-HLL controversy.

I.

INTRODUCTION
1.1. Definition of Insider Trading

As per the words in Blacks Law Dictionary Insider Trading is -The use of material non
public information in trading the shares of the company by a corporate insider or any other
person who owes a fiduciary duty to the company. Insider trading has been generally defined to
mean trading in the shares of a company for gaining or for avoiding a losses by manipulation of
prices by persons who are in the management of the company or are close to them, on the basis
of undisclosed price sensitive information regarding the working of the company which they
possess but which is not available to others.1 Most of the countries in the world with reputed
stock exchange has prohibited this practice because of its potential to demolish public confidence
in the stock exchange.2
Insider trading occurs when a corporate insider deals into information before it is disclosed to the
general public.3 It is supposed that such trading causes huge profits to the insider that comes
from the losses of the general public. 4 But because the generic investor tends to be bullish, and
the premium causes the information to come to the market sooner, some argue that nothing is
wrong with the insider receiving a premium. 5However, financial markets for the most part
depend on the investment of the general public, who expect that it will be done on a level playing
field with others in the market.6 Without this faith in the market, many investors would not
invest.7
1 Sharma, L. M., Amalgamations Mergers Takeovers Acquisitions: Principles, Practices and Regulatory
Framework (1st Edn., Company Law Journal, Taj Press, 1997) 299
2Dignam, Alan and Lowry, John, Company Law (4th Edn., Oxford University Press, 2006) 74.
3See Twentieth Century Fund, The Security Markets 14 (1935).
4Id.
5 Id.
6 Id.
7See Robert C. Rosen, The Myth of Self-Regulation or the Dangers of Securities Without Administration:
The Indian Experience, 2 J. Comp. Corp. L. & Sec. Reg. 270-71 (1979) at p.286.
4

1.2 Efficient Capital Market Hypothesis

In fact in an efficient market, even one share traded on insider trading would violate the integrity
of the markets. According to the Efficient Capital Market Hypothesis, a buyer of just one share
impacts not merely the counterparty seller, but the entire market. The buyers purchase order
drives up demand of the shares and affects all contemporaneous traders on the sell side of the
transaction. The US Supreme Court has used Eugene Famas8 theory of Efficient Capital Market
Hypothesis in Basic v. Levinson9to come to the conclusion that the requirement of reliance in a
fraud action in the securities markets is highly diluted because information is converted into
price in todays anonymous markets10. More accurately, the judgment creates a rebuttable
presumption of reliance. Thus the onus is on the defendant to show that in fact the plaintiff
thought otherwise. Thus anyone who relies on the price of a security, need not show the common
law requirement of reliance in a suit for damages based on fraud. The court said:
The modern securities markets, literally involving millions of shares changing hands daily,
differ from the face-to-face transactions contemplated by early fraud cases, and our
understanding of Rule 10b-5's reliance requirement must encompass these differences.

In up close and personal exchanges, the investigation into a financial specialist's dependence
upon data is into the subjective evaluating of that data by that speculator. With the vicinity of a
market, the business sector is intervened in the middle of dealer and purchaser and, preferably,
transmits data to the financial specialist in the prepared type of a business sector cost. Hence the
business sector is performing a generous piece of the valuation procedure performed by the
speculator in an eye to eye exchange. The business sector is going about as the unpaid specialists
of the financial specialist, advising him that given all the data accessible to it, the estimation of
8Efficient Capital Markets.Journal of Finance, 25, 383-417
9108 S.Ct. 978
10See also Use of Modern Finance Theory in Securities Fraud Cases Involving Actively Traded Securities,
38Bus.Law. 1, 4, n. 9 (1982)

the stock is justified regardless of the business value." Insider exchanging, being a types of
cheats, has likewise seen such monetary basis making advances into legitimate speculations of
harms and injunctive activity. Regardless the fact being, even one insider disregards the
respectability of the business sector and not simply the certainty of the counterparty to his
exchange.

1.3 Concept of Insider Trading in India

In India, the first legislative attempt to curb insider trading was in the shape of a disclosure
requirement regarding company directors' shareholdings11. Considerable progress has since been
made in legislation. Presently the Securities and Exchange Board of India (InsiderTrading)
Regulations of 1992 lays down the governing law for this category of offenses.
The term "insider" is defined in clause (e) of regulation 2 as: "insider means any person who, is
or was connected with the company or is deemed to havebeen connected with the company, and
who is reasonably expected to have access, by virtueof such connection, to unpublished price
sensitive information in respect of securities of thecompany, or who has received or had access
to such unpublished price sensitiveinformation."
The definition has two limbs. The two limbs form the two essential ingredients of the definition,
both of which may be split and presented as follows:
Insider means any person

price sensitive information in respect of securities of the company; or

who has received or had access to such unpublished price sensitive information.

who, is or was connected with the company; or

who is deemed to have been connected with the company; and
who is reasonably expected to have access, by virtue of such connection, to unpublished

11 Sections 307 and 308 of the Companies Act, 1956

6

In order to brand a person an insider any one of the two tests stipulated in the first limb, and one
of the three tests stipulated in the second limb, of the definition must be established.
Clause (c) of regulation 2 defines the expression "connected person" and the following persons
will be treated as connected persons:

a director or shadow director of a company,

an officer or employee of the company,
a person having professional or business relationship with a company, if he may

reasonably be expected to have access to unpublished price-sensitive information in

relation to that company.
Clause (h) of regulation (2) defines the phrase "deemed to have been connected", these secondary
insiders are connected persons, but they are not directly connected with the companies.
Regulation 2(h) identifies seven broad categories of secondary insiders within which there are a
few sub-categories. Sub-clause (I) which is relevant for the HLL transaction reads as under:
is a company under the same management or group or any subsidiary company thereof within
the meaning of section(1B) of Section 37012, or sub-section (11) of section 372, of the Companies
Act, 1956 (1 of 1956) or sub-clause (g) of section 2 of the Monopolies and Restrictive Trade
Practices Act, 1969 (54 of 1969) as the case may be."
The expression "unpublished price sensitive information" is defined in clause(k) of regulation 2.
Whether any information is price sensitive, notwithstanding that it relates to one or more of the
specified matters will always be a question of fact to be answered having regard to the facts and
circumstances in each case. Regulation 3 lays down that the offense of insider trading can be
committed in three ways :

dealing in securities the price of which will be affected by the inside information which is

in that persons possession.

by encouraging another person so to deal and

12 By virtue of the provisions of section 370 (1B) of the Companies Act, two bodies corporate shall be deemed to
be under the same management in the following circumstances: iv)if the holding within the meaning of clause(i),
clause(ii) or clause(iii)

by disclosing the inside information to another person

1.4 Origin and Evolution of the law relating to Insider trading in India
Insider trading in India was untouched in its 125 years until about 1970. It was in the 1970s that
this practice was recognized as unfair. In 1979, the Sachar Committee stated in its report that
employees of companies and directors, auditors, secretaries, etc. may have some sensitive
information that could be the used to manipulate stock prices, which can cause financial woes to
the investing public. The committee has then recommended amendments to the Companies Act
1956 to restrict or prohibit the actions of employees/insiders. Sanctions have also been proposed
to prevent insider trading.
In 1986, the Patel committee recommended that securities contracts (Regulation) Act, 1956 may
be amended to curb insider trading and unfair stock deals. It was also suggested that heavy fines
with imprisonment should be imposed including refund of the profit made or the losses averted
to the stock exchanges.13
In 1989, the Abid Hussain Committee recommended that insider trading is punishable by civil
and criminal proceedings and also suggested that SEBI to formulate regulations and codes
governing unfair dealings.
Based on above committees report, SEBI has, in exercise of the powers conferred on them by
section 30 of the Securities and Exchange Board of India Act 1992, made regulations which are
known as the Securities and Exchange Board of India (Insider Trading) Regulations 1992. This
regulation of 1992 has prohibited this fraudulent practice and a person convicted of this offence
is punishable under Section 24 and Section 15 G of the SEBI Act 1992. These regulations were
drastically amended in 2002 and renamed as SEBI (Prohibition of Insider Trading) Regulations
1992. Both the Insider Trading Regulations are basically punitive in nature in the sense that they
describe what constitutes insider trading and then seek to punish this act in various ways. More
importantly, they have to be complied with by all listed companies; all market intermediaries
such as brokers and all advisers, professional firms, merchant bankers etc.
13S.Vadielu, Insider trading in Indian stock markets, http://www.theindiastreet.com/2007/06/insidertrading-in-indian-stock-markets.html, (last visited on 21st November 2012)
8

According to speculations India amended its legislation to ensure that insider trading law to be
ten times longer than the original and insider trading has been defined more widely so that more
transactions on the stock market will be considered to make it illegal. 14SEBI as powerful as the
SEC, and is authorized to conduct an investigation on its own initiative on receipt of a complaint.
It can set up an investigative body and initiate an investigation. In addition to the commands,
which are of a general nature as constraints / restrictions / banstrade in securities in any manner,
SEBI may also declare securities transaction null and void. In addition, SEBI can also transfer
the equivalent product at cost or market price of the shares on the highest investor protection
fund of a recognized stock exchange.15

14P. Shah, A Victimless Crime?, April 18, 2002, http://economictimes.indiatimes.com/ (Last visited on
12th April,2015)

15 C. Bhui, Insider Trading In India An Overview

9

II.

MEANS OF CONTROLLING AND LAWS FOR PREVENTION OF

INSIDER TRADING IN INDIA
2.1 Associated Penal Provisions

One way of dealing with insider trading is by passing regulations prohibiting such trades, making
them penal and enforcing criminal actions against violators. As any penal provision, this is
supposed to deter others from violating the regulations. However, experience has shown us that
this method provides only a small amount of relief even in more heavily regulated countries.
Thus the threat of a jail sentence for the offender under S.24 of the SEBI Act is more of a paper
tiger. Though the jail sentence may look good on the statute, history bears out the difficulty in
enforcing criminal prosecution against an economic offender. The burden of proof of proving a
criminal charge is so onerous, the requirement of intent so strict, and the courts procedures so
long and due that conviction is an exceptional exception. For instance the only case of insider
trading prosecuted by Dutch authorities in ten years failed on lack of proof. The Securities and
Exchange Commission of the United States brought 47 cases of insider trading in the year 2001 16
of which only 4 were referred to the Department of Justice for criminal action.
With a conviction rate of less than 3% in India, SEBI ought to truly focus on endeavors to
financially deaden insider traders rather than the all the more prominent and far less effective
criminal assents. The late activity against the executives of Hindustan Lever Limited is a for
example. Two years after a case in their grasp, the controller is currently getting the case to begin
criminally.17
2.2 Civil and Administrative Penalties
There is a need to add heavy civil consequences on the insider trader. According to SEBI, it does
not have the power to impose civil penalties on the violator but SEBI could seek civil powers
16SEC Annual Report, 2001
17Hindustan Lever Ltd v. SEBI (1998 SCL 311)
10

over violators with assistance from civil courts. S. 11 of the SEBI Act gives the Board broad
discretionary powers to issue appropriate remedies. To quote "Subject to the provisions of this
Act, it shall be the duty of the Board to protect the interests of investors in securities and to
promote the development of, and to regulate the securities market, by such measures as it thinks
fit". It also has the powers to issue to any person connected to the securities market such
directions "as may be appropriate in the interests of the investors in securities".
Civil monetary penalties and issue of various administrative actions like bar from the industry
without going to courts is a more effective remedy and with the enhanced powers granted to the
regulator to impose penalties of 25 crores or three times the gain made, an economic harm can
more easily be inflicted and deterrence more effectively administered. Unfortunately the
wordings of the civil monetary penalties are drafted in such a poor manner that, the penalties are
certain to be struck down (or diluted) as unconstitutional.
A recent US case is illustrative of a typical civil penalty charged by the Securities and Exchange
Commission. In SEC v. Steve Madden, the Commission filed a settled injunctive action against
shoe designer Steve Madden alleging that he engaged in insider trading. The complaint alleged
that after Madden learned from the criminal authorities that he was the target of a criminal
investigation and would be indicted or otherwise charged for securities fraud, he sold 100,000
shares of common stock in his company, Steven Madden Ltd. Madden sold this stock without
disclosing to the public the information he had learned regarding the criminal investigation. After
Madden was arrested, the companys stock price sank and Madden avoided losses of $784,000.
Madden consented to an order of permanent injunction and agreed to disgorge $784,000 of
illegally avoided losses, plus prejudgment interest, and to pay $784,000 in civil penalties.

11

Further, under the Securities and Exchange Board of India (Settlement of Administrative and
Civil Proceedings) Regulations, 201418 default of Insider Trading is inclusive as per Regulation
2(b)19 and 5(a) which explains insider trading within the scope of settlement.
2.3 Self-regulatory practices by companies and corporate governance
The third way of attacking the problem is by encouraging the companies to practice self
regulation and taking prophylactic action. This is innately associated with the field of corporate
administration. It is a methods by which the organization signs to the business sector that viable
self regulation is set up and that financial specialists are safe to put resources into their securities.
Notwithstanding disallowing wrong activities (which may not so much be precluded), self
regulation is likewise viewed as a viable method for making shareholder esteem. Organizations
can simply direct their executives/officers past what is denied by the law.
Corporate governance thus is a means of self governance by companies whereby a company
increases its firm value by higher and qualitatively superior disclosure as well as more
responsible action. It must be distinguished from regulations which are imposed by the law and
which mandate behaviour at the risk of penalty.
TheConsultative Paper on amendments to SEBI (Prohibition of Insider Trading) Regulations
1992 which have been incorporated in 2002 amendments to the Regulations and 2015 regulation
provide extensive suggestions and also extensive regulations couched in the language of
corporate good governance. Most of the good governance provisions are provided for as
mandatory provisions.
Briefly, the good governance regulations provide for:
a) Officer, director and substantial shareholder to disclose their holding on certain events or
at certain intervals.
b) Appointment of a compliance officer
18SECURITIES AND EXCHANGE BOARD OF INDIA NOTIFICATION(9th January, 2014) No. LADNRO/GN/2013-14/37/50.-In exercise of the powers conferred by section 15JB of
The Securities and Exchange Board of India Act, 1992

19 alleged default means an alleged or probable non-compliance of any provision ofthe securities laws

12

c) Setting forth policies and procedure to restrict the possibility of abuse of insider trading.
d) Monitoring and pre-clearance of trades by the designated persons.
e) Restrict trading by such insiders within a certain period of time i.e. before corporate
announcements, buybacks etc. are made.
f)

The company has to convey all the significant insider activity and corporate disclosure in
a uniform publicly accessible means to the public and to the stock exchange.

g) Chinese walls within a firm to prevent one part of the firm which deals in sensitive
information from going to other parts of the firm which have an inherent conflict of
interest with such other parts.
h) Minimum holding period of securities by insiders.
i) No selective disclosure to analysts. Wide dissemination of information.

13

III.

SEBI AND INSIDER TRADING

3.1 SEBI Regulations on prohibition of Insider trading

The Securities and Exchange Board of India (SEBI) finally notified the SEBI (Prohibition of
Insider Trading Regulations) 2015 (Regulations) on January 15, 2015 replacing the two-decade
old insider trading norms in India. The Regulations are based on the recommendations made by
an 18 member committee (Committee) constituted by SEBI under the chairmanship of Justice
N.K. Sodhi, former Chief Justice of the High Courts of Kerala and Karnataka, which were
approved by the SEBI Board in its meeting held on November 19, 2014 (Board Meeting).
Please click on this link for our hotline on the Committee recommendations as well as a
comparative study of the draft Regulations vis--vis the SEBI (Prohibition of Insider Trading)
Regulations of 1992 (1992 Regulations). Our hotline on the Board Meeting is also
available here. Although the Committee recommendations have substantially been incorporated
in the Regulations, certain provisions have been left out/amended in the Regulations.
In November, 2014, Indias market capitalization crossed USD 1.6 trillion, making it worlds
ninth largest economy by market capitalization.SEBI has been constantly focussed on developing
and regulating the Indian capital market to boost the investors' confidence to maintain this
momentum. The 1992 Regulations had considerable inadequacies in terms of their drafting,
interpretation and outreach and over time, SEBI had introduced several amendments to certain
provisions of the 1992 Regulations to fill in the lacunae. However, a need was felt to
systematically review and provide a more robust and efficient mechanism in line with the global
norms and standards to curb insider trading in India. Thus, the Regulations are formulated in
14

order to put in place a framework for prohibition of insider trading in securities and to
strengthen the legal framework.
Applicability of the Regulations
The charge of insider trading has been extended to securities listed and proposed to be listed on
stock exchanges. This is an expansion from the 1992 Regulations which only applied with
respect to companies that were listed. Additionally, the Regulations also strengthen the definition
of who an insider is. The scope of connected persons 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.
Further, under the Regulations, the criteria for what constitutes unpublished price sensitive
information would be whether the information is generally available or not. The definition of
unpublished price sensitive information has been extended to both a company and securities.
Prohibition on Insider Trading
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. The1992
Regulations prohibited dealing in securities when in possession of unpublished price sensitive
information, amongst others; the expression dealing has been replaced with trading in
securities. Under the Regulations, the definition of trading has been kept wide. It must be noted
that the 1992 Regulations placed no restrictions on the procurement of unpublished price
sensitive information by other persons.
Exclusions
The Regulations provide for certain exclusions where the charge of insider trading will not get
attracted, namely:

In the conduct of due diligences: Communication and procurement of information in

connection with transactions involving PIPE, mergers and acquisitions, subject to certain
conditions;

15

For off-market transactions between promoters who are in possession of the same
information, and are making a conscious and informed decision;

In case of non-individual insiders:--

the individuals who were in possession of such unpublished price sensitive information
were different from the individuals taking trading decisions and such decision-making
individuals were not in possession of such unpublished price sensitive information when they
took the decision to trade;

when the trade was executed in the absence of any leakage of information, thereby
recognising the concept of chinese walls in large organisations;

when trades executed in pursuance of trading plans.

Rebuttable Presumption
It is clarified that the presumption against persons deemed to be connected is rebuttable under
the Regulations. This provision is akin to the presumption that exists against various persons
having a common objective or purpose of acquisition i.e. persons acting in concert under the
SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011.
Disclosure Obligations
The disclosure obligations under the Regulations have been limited to insiders and are as
follows:

Initial disclosures of trades to be made by only the promoters, key managerial personnel,
directors internally;

Continual disclosures to be made by every promoter, employee or director in case value

of trade exceed monetary threshold of ten lakh rupees over a calendar quarter; company to
accordingly notify stock exchanges within 2 trading days;

Earlier disclosure requirement for persons holding more than 5% shares or voting rights
or in case of any further change in their shareholding or voting rights has been done away with.
Trading Plans

16

Quite a novel concept to India, provisions on trading plans have been introduced whereby every
insider is entitled to execute trades in pursuance of pre-determined trading plan in accordance
with the Regulations.
Compliance Officer

Qualification criteria have been set for a compliance officer who shall report to the board
of directors of the company or the head of the organization, as the case may be.

The compliance officers role in monitoring and approving a trading plan has been made
important.

Enhanced role for the compliance officer who would need to police, monitor and regulate
trading by employees and connected persons.

Penalties
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. As per the Act, insider
trading is publishable with a penalty of INR 250,000,000 (Rupees Two Hundred Fifty Million
Only) or 3 times the profit made out of insider trading, whichever is higher. SEBI is also
empowered to prohibit an insider from investing in or dealing in securities, declare violative
transactions as void, order return of securities so purchased or sold. Any person contravening or
attempting to contravene or abetting the contravention of the Act may also be liable to
imprisonment for a term which may extend to ten years or with fine which may extend to INR
250,000,000 (Rupees Two Hundred Fifty Million Only) or with both.
The Regulations, also, prescribe certain disciplinary sanctions that may be taken by companies or
market intermediaries to require due compliance of the Regulations.
Hindustan Lever Ltd v. SEBI (1998 SCL 311) was one of the first cases where SEBI took action
on grounds of insider trading. Hindustan Lever Ltd. (HLL) and Brook Bond Lipton India Ltd.
(BBIL) controlled by Unilever, Inc. UK were both under the same management. HLL purchased
0.8 million shares of BBIL from UTI in March 1996 two weeks prior to the public announcement
of the HLL and BBIL merger. Post announcement, the price of BBILs shares shot up thereby
17

causing losses to UTI. HLL was held liable by SEBI for insider trading. According to SEBI, HLL
had full knowledge of the impending merger and misused the unpublished price sensitive
information to its advantage. However, the Securities Appellate Tribunal reversed the order on
the ground that the information was not price-sensitive as it was reported in the media and,
therefore, was public knowledge. As a result of this case, SEBI amended the Regulations to
specifically provide that speculative reports in the media (print or electronic) would not be
treated as publication of price sensitive information.
There is relatively limited Indian case law on insider trading and relatively fewer convictions as
compared to the US. Section 15G and Section 24 of the SEBI Act, 1992, provide for civil
remedies (a fine which is the greater of Rs 25 crore or three times the amount of profits made out
of such unlawful trade) and criminal remedies (imprisonment for a term which may extend to ten
years or fine or both) for violation of the insider trading regulations. However, unlike the US,
there is no provision allowing private citizens to claim damages.
An interesting question is whether SEBI will follow the US lead on trapping insider trading cases
using the method of wiretapping. Wiretapping is regulated under Section 5(2) of the Indian
Telegraph Act, 1885 which allows the central and state government or any officer authorised by
such governments to direct any message relating to any subject to be detained or intercepted or
stopped from transmission if it is satisfied that it is necessary for preventing an incitement to the
commission of an offence.
Additionally, the Supreme Court, in PUCL v. The Union of India20held that telephone tapping is a
serious invasion of an individual's privacy and that an order for a tap can be issued only by
extremely senior government personnel such as the Union Home Secretary or his counterparts in
the states.
Another permissible method of tracking insider trading cases is by accessing the
data/information of any suspect in such insider trading cases. Section 69 of the IT Amendment
Act, 2008 allows the Central or State Government to intercept, monitor or decrypt any
20(1997) 1 SCC 301
18

information generated, received, transmitted or stored in any computer resource if it is satisfied

that it is expedient to do so for investigation of any offence.

IV.

THE PROSPECTS OF THE SEBI REGULATIONS AND EXISTING

LAWS

4.1 Reason for formulation of SEBI(prohibition of Insider trading) Regulations, 2015

Given the current investment sentiment and the dire need to reboot the Indian economy, SEBI
has made several efforts to review and amend a variety of its laws. Especially, with a view to
ensure a level-playing field in the securities market and to safeguard the interest of small
investors, SEBI has identified greater oversight mechanism on insider trading and a stronger risk
management framework as among key focus areas for the coming year.
The wrong of insider trading has attracted sufficient regulatory attention from jurisdictions
across the world, especially in light of several recent high-profile cases such as the Rajat Gupta
case21 or the SAC Capital Advisors case. In India, the two decade old insider trading norms have
time and again proven to be inadequate in deterring insider trading. Even more so, as in India,
insider trading is not only a civil wrong but also a criminal offence, there was a pressing need to
provide clear and comprehensive regulatory policy on this subject and to balance the needs of the
Indian market and investors in India with international standards and best practices.

4.3 Analysis of Justice Sodhi Committee Report

21United States of America v Rajat Gupta, Docket No. 12-4448 available at

http://www.ca2.uscourts.gov/decisions
19

The High Level Committee to Review the SEBI (Prohibition of Insider Trading) Regulations,
1992 constituted under the Chairmanship of Justice (Shri.) N.K. Sodhi, former chief justice of
Karnataka and Kerala High Courts and former presiding officer of the Securities Appellate
Tribunal, submitted its report to SEBI Chairman, Shri U.K. Sinha, on December 7, 2013 at
Chandigarh.The Committee has made a range of recommendations to the legal framework for
prohibition of insider trading in India and has focused on making this area of regulation more
predictable, precise and clear by suggesting a combination of principles-based regulations and
rules that are backed by principles. The Committee has also suggested that each regulatory
provision may be backed by a note on legislative intent.
Some of the salient features of the proposed regulations are set out below22:While enlarging the definition of "insider", the term connected person has been defined more
clearly and immediate relatives are presumed to be connected persons, with a right to rebut the
presumption. The term immediate relative would cover close relatives who are either
financially dependent or consult an insider in connection with trading in securities.
Insiders would be prohibited from communicating, providing or allowing access to UPSI unless
required for discharge of duties or for compliance with law.
The regulations would bring greater clarity on what constitutes unpublished price sensitive
information (UPSI) by defining what constitutes generally available information
(essentially, information to which non-discriminatory public access would be available). A list of
types of information that may ordinarily be regarded as price sensitive information has also been
provided.
Trading in listed securities when in possession of UPSI would be prohibited except in certain
situations provided in the regulations.

22 Justice Sodhi Committee on Insider Trading Regulations submits report to SEBI available at
http://www.sebi.gov.in/sebiweb/home/detail/26940/yes/PR-Justice-Sodhi-Committee-on-Insider-TradingRegulations-submits-report-to-SEBI (last accessed on 12th April, 2015)

20

Insiders who are liable to possess UPSI all round the year would have the option to formulate
pre-scheduled trading plans. In such cases, the new UPSI that may come into their possession
without having been with them when formulating the plan would not impede their ability to
trade. Trading plans would, however, be required to be disclosed to the stock exchanges and have
to be strictly adhered to.
Conducting due diligence on listed companies would be permissible for purposes of transactions
entailing an obligation to make an open offer under the Takeover Regulations. In all other cases,
due diligence would be permissible subject to making the diligence findings that constitute UPSI
generally available prior to the proposed trading. In all cases, the board of directors would need
to opine that permitting the conduct of due diligence is in the best interests of the company, and
would also have to ensure execution of non-disclosure and non-dealing agreements.
Trades by promoters, employees, directors and their immediate relatives would need to be
disclosed internally to the company. Trades within a calendar quarter of a value beyond Rs. 10
lakhs or such other amount as SEBI may specify, would be required to be disclosed to the stock
exchanges.
Every entity that has issued securities which are listed on a stock exchange or which are intended
to be so listed would be required to formulate and publish a Code of Fair Disclosure governing
disclosure of events and circumstances that would impact price discovery of its securities.
Every listed company and market intermediary is required to formulate a Code of Conduct to
regulate, monitor and report trading in securities by its employees and other connected persons.
All other persons such as auditors, law firms, accountancy firms, analysts, consultants etc. who
handle UPSI in the course of business operations may formulate a code of conduct and the
existence of such a code would evidence the seriousness with which the organization treats
compliance requirements.
Companies would be entitled to require third-party connected persons who are not employees to
disclose their trading and holdings in securities of the company.
4.4 Prospect of the new regulation and existing laws in Prevention of Insider Trading
21

The regulation is preventive in nature:The SEBI Act (Insider Trading) Regulations prohibits
"insiders" from dealing in exchange-listed securities on his or another's behalf based on
unpublished price sensitive information, communication of such information unless in the
ordinary course of business, or counseling others based on that information.23 "Dealing in
securities" means trading or agreeing to trade either as a principal or agent.24
In the new regulation, the definition of `Insider` has been widened to include person connected
on the basis of being in any a) contractual; b) fiduciary or c) employment relationship that allows
such a person to access unpublished price sensitive information (UPSI). Further, Insider will also
include a person who is in possession or has access to UPSI.25
Immediate Relatives: Immediate relatives will be presumed to be connected persons, with a
provision of right to challenge this presumption26. SEBI in past has faced several difficulties in
showing evidence for passing of UPSI to an immediate relative. With this proposed amendment,
the burden of proof will now shift on the immediate relative to prove that he or she did not hold
UPSI before trading the securities.
UPSI Strengthened: UPSI under the old regulations was been defined as information not
generally available and which may impact the price. The New Regulations strengthens the
definition of UPSI by providing a test to identify price sensitive information, aligning it with
listing agreement and providing platform of disclosure 27. Earlier, the definition of price sensitive
information had reference to company only; now it has reference to both a company and
23See.The Gazette of India Part III (2015) Securities and Exchange Board of India (Insider Trading) Regulations,
2015, under 30 read with clause (g) of sub-section (2) of section 11 and clause (d) and clause (e) of section 12A of
the Securities and Exchange Board of India Act, 1992 (15 of 1992), Securities and Exchange Board of India,
Bombay, 15th Jan 2015

24Id.
25Id. 2(g)
26Id. 2(d)
27Id. 2(n)
22

securities. Further, generally available information means information that is accessible to the
public on a nondiscriminatory platform which would ordinarily be stock exchange platform.28
Legitimate Business Transaction:Aligning insider trading norms with international practices
and facilitate legitimate business transaction, SEBI now intends to permit access of UPSI though
duediligence with appropriate safe guards. This provision will make it easier for private equity
and strategic investors for accessing UPSI during their due diligence. However to maintain the
information cemetery, UPSI must be disclosed at least 2 days before the trading.29
Management holding UPSI: Insiders who are liable to possess UPSI all round the year i.e. CEO,
CFO and senior management of the company, would now have the option to formulate pre
scheduled trading plans. Trading plans would, however, will be required to be disclosed on the
stock exchanges and have to be strictly adhered to.An insider shall be entitled to formulate a
trading plan and present it to the compliance officer for approval and public disclosure pursuant
to which trades may be carried out on his behalf in accordance with such plan.30
Ease of Compliance Burden: Repeated disclosures have been removed so as to ease compliance
burden and to align with the SEBI (Substantial Acquisition of Shares and Takeovers)
Regulations, 2011 (``Takeover Code``). Disclosure of any change of 2% for persons holding
more than 5% shares or voting rights has been removed as they are prescribed under Takeover
Code.

4.5

Comparison of laws in different countries- USA & UK

United States wasthe first province toadopt regulationson insider trading andtoday it continues
tolead the world intheregulation and enforcement, the United Kingdomconsiders theDirectiveof
the European ParliamentalsorepresentsEClegal regime in insider trading deals, on the another

28Id. 2(e)
29Id. 3(3)(ii)
30 Id. 5(1)
23

hand India is thecountry whose law regardinginsider tradingdoes not have along history,
however, changes are madeto make offensemore punitiveand preventive.
4.5.1 USA
Before the adoption of the Securities Exchange Act of 1934, there were no rules codified in the
United States that regulated insider trading. Section 17 of the Securities Act of 1933 consisted
prohibitions of fraud in the sale of securities which have been greatly enhanced by the Securities
Exchange Act of 1934.31The Securities and Exchange Act, 1934 sets out provisions to protect the
interests of investors against insider trading. The 1934 Act addressed insider trading directly by
Article 16 (b) and indirectly by Article 10 (b). 32 Section 16 in practice is rarely invoked.
However, the actual role of Article 16 is to tell as in what types of people may be covered in
inside trading when referred to Article 10b. 33With the mark in early 1980s and in the middle of
few interesting cases of insider trading, Congress to curb the practice of insider trading
introduced Insider Trading Sanction Act enacted in 1984. The modification that this act
comprised allowed the SEC to bring a civil action directly rather than first having the
Department of Justice to prosecute criminal and civil proceedings. Subsequently in 1988
Congress enacted legislation against insider trading, with much deterrent effect, which was
known as insider trader and Securities Fraud Act 1988.34
In this Act, "Congress enacted section 20A Exchange Act to provide expressly the right to act on
behalf of "traders" who were contemporaneously trading in the same class of securities on the
31See, American Insider Trading Law, available at http://www.stocks.gl/American-insider-tradinglaw2.html
32See, Insider Trading A U.S. Perspective, available
athttp://www.sec.gov/news/speech/speecharchive/1998/spch221.htm (accessed on 15th April 2015 ).

33Engle, Eric Allen, Insider Trading in U.S. and E.U. Law: A Comparison (September 22, 2008) 15, available
atSSRN: http://ssrn.com/abstract=1271868

34Sharma, Vaibhav, Prohibition on Insider Trading: A Toothless Law (May 7, 2009). Law School Research
PaperNo. 996. 27, available at SSRN: http://ssrn.com/abstract=1400824

24

other side of the transaction during the time the alleged illegal inside trade occurred. 35Lately,
United States has developed a number of supplementary statutory rules, such as The Securities
Enforcement Remedies and Penny Stock Reform Act of 1990; Rule 14e-3 Tender Offer Rule,
Regulation FD, as well as the Sarbanes-Oxley Act of 2002.36
4.5.2. UK
It was only with the Companies Act 1980 that there was the first legislative intervention in the
United Kingdom to combat insider trading.37 The relevant UK legislation was contained in the
Companies Securities (Insider Dealing) Act 1985 and the Financial Services Act 1986. A New
Legislation has altered the law on insider dealing to take into account the EC Directive on Insider
Dealing (89/592).38 A number of useful and introductory changes to the law on insider dealing in
the United Kingdom have been affected by the Criminal Justice Act, 1993. The earlier law,
namely, the Company Securities (Insider Dealing) Act, 1985, has been wholly superseded, in
relation to offences allegedly committed on or after 1 March, 1994, by Part V of the Criminal
Justice Act, 1993.39 The law against insider trading has been strengthened further by Financial
Services and Markets Act 2000 (FSMA), which introduces a new offence of market abuse. 4021
The FSMA introduced the wider offence of market abuse; this covers insider dealing,
disclosing inside information, dissemination of false and misleading information,

35Steinberg, Mark I., Understanding Securities Law (Matthew Bender and Company Incorporated, 1989)
177.
36 Shen, Han, A Comparative Study of Enforcement of Insider Trading Regulation between the U.S.
and China(February 21, 2007) 11, available at SSRN: http://ssrn.com/abstract=964548.
37 In United Kingdom Insider Trading is referred as Insider Dealing.
38Bourne, Nicholas, Company Law (Cavendish Publishing Ltd, Reprinted 1994) 153
39 Sharma, supra note 2, 306
40 Part VIII of FSMA contains the provisions relating to market abuse and section 118 (1) defines the
specificoffence of market abuse.
25

employing fictitious devices, and market distortion. All these offences encompass insider
dealing.4142
Recently, The Financial Services and Markets Act 2000 (Market Abuse) Regulations 2005 has
been enacted. This implements Directive 2003/6/EC (Market Abuse Directive) of the European
Parliament and of the Council which introduces a common EC legal regime on insider dealing
and market manipulation.23
4.6The lacking provisions and suggestive additions in the legal framework.

Insider tradingand the laws that seek to contain itis always an intriguing subject, all the
more relevant now because the capital market regulator is introducing new rules governing it
that come into effect on 15 May.
Norms governing insider trading prohibit anyone who has access to inside information in a

company from dealing in that firms publicly traded shares. If found guilty of insider trading,
a person could be sent to prison for up to 10 years or be required to pay a fine of up to Rs.25
crore or thrice the amount of profits made.
To be sure, proving guilt in insider trading cases is not an easy matter and leads to many

possible complications. These come about in no small part because unscrupulous traders will
always have incentive to find new loopholes in insider trading laws or ways for them to

continue making money in new and secretive ways that will avoid prosecution.
Despite that, its important to curb insider trading since it ruins the efficient functioning of

stock markets and can lead to honest investors losing millions.

To tighten gaps in existing norms, the Securities and Exchange Board of India (SEBI) will,
on 15 May, introduce the SEBI (Prohibition of Insider Trading) Regulations, 2015, that will
replace the existing SEBI (Prohibition of Insider Trading) Regulations, 1992.
The new regulations appear to be promising, more practical, and largely in line with the

global approach to insider trading. They also seem to be equipped to ensure better
compliance and enforcement. It is, therefore, only natural for everyone to be talking about
the new norms.
41Adungo, Brian Ikol, The New European Union and United Kingdom Regimes for Regulation of Market
Abuse(January 8, 2009), available at SSRN: http://ssrn.com/abstract=1324678.

42

26

Most financial regulations require constant modifications to keep pace with the ever evolving
market dynamics. Insider trading is no different. The existing regulations were notified in
1992. In the past two decades, the laws and understanding of insider trading (both globally

and in India) have evolved significantly.

Despite several amendments, certain provisions of the existing regulations were proving to

be impediments in smooth transactions of listed securities.

For example, the existing regulations do not explain properly how to regulate due diligence.
This becomes an issue because financial investors, such as private equity funds, usually
invest only after conducting a thorough legal and financial investigation of the target

company.
More often than not, this results in such investors getting access to insider information about
the target company prior to buying the shares, which in turn can result in the offence of

insider trading.
Similarly, in the absence of a specific definition, nobody clearly understood what is meant by

trading.
SEBI, therefore, constituted a committee under the chairmanship of Justice Sodhito
undertake a comprehensive review of the existing regulations, as a result of which the new

regulations came into being.

Some housecleaning was indeed much in order and the new regulations are definitely a big

step forward.
For example, among other things, the new rules specifically define trading, prescribe a more
structured disclosure regime, and permit due diligence exercises when someone wants to buy
a listed company, subject to appropriate disclosures and compliance.
Apart from the housecleaning and simple fixes, the new regulations also bring about some

significant changes which will have practical effects that are perhaps not very well
understood yet, as is to be expected in an area this complex. For instance, in addition to listed

companies, the new regulations apply to companies that are proposed to be listed.
It is unclear what proposed to be listed means. Does it mean that if I get some insider

information about a company which intends to go for an initial public offering in a couple of
years, I wouldnt be able to trade in the securities of such company?
Unfortunately, its really unclear as to what is meant by the phrase. It may be intended to
cover companies that have filed a draft red herring prospectus with SEBI. This could create
some problems.

27

The definition of connected persons now covers anyone who has a connection with a

company that is expected to put the person in possession of insider information.

The existing regulations covered a specific set of people under the definition of connected
person. However, the new regulations cover even public servants such as judges and
bureaucrats, who may not have any professional relationship with the company, but who may
be aware of a judgment or policy which, when made public, may impact the price of shares
of the company.
Also, the new regulations require the compliance officer of the company to monitor trading

by employees and connected persons. Given the wide ambit of the definition of a connected

person, it may be an uphill task for the compliance officer to do so.

Trading is not allowed by an individual while in possession of insider information. There
could be confusion about whether a person who is a director of a company, for example, and
will likely always be in possession of some insider information, will be allowed to trade at all

in that entity.
The new regulations allow for the formulation of trading plans. Under this, a person can
formulate a trading plan, get it approved by the compliance officer and trade in accordance
with it. However, such trading needs to comply with certain specific conditions to ensure any
insider information in not misused.
For instance, the trading plan would be disclosed to the public and a person cannot trade

within six months of such public disclosure. Further, once approved, the person cannot back

out or deviate from the plan.

The new regulations prohibit not only dealing in securities when in possession of insider
information, but also communicating or procuring of insider information, except where this is

in furtherance of, among other things, legitimate purposes.

The phrase legitimate purposes, too, has not be defined. Accordingly, it is unclear what

purposes are legitimate enough to allow insider information to be communicated or procured.

The new regulations also require companies to come up with codes for regulating,
monitoring and reporting trading by employees or connected persons, and fair disclosure of

material information, such as financial information, key business decisions, etc., by the
company.
Compliance with these codes appears to be cumbersome, particularly for companies with
large shareholder and employee bases. For instance, in a company with 10,000 staff, it would
require dedicated resources just to monitor trading activities of the employees.
28

SEBI might need to clarify some of these issues before the rules kick in, although that looks

unlikely.
However, theres hope that the regulations are interpreted by courts and authorities in a
progressive manner and timely clarifications are issued by the capital market regulator.

V.

RESEARCH QUESTIONS

1. If the Corporate governance laws for insider trading is self sufficient in India?
Answering the questions as it was raised which was the purpose for conducting this
research, it is found that regulations regarding Insider trading thus falls flat and there
are certain loopholes. The comparison done above with US and UK laws give us ample
grounds to take up and implement.
2. Where the differentiating line should be drawn between insider trading and laws
protecting whistle blowers?
Coming to the second research question, it is overwhelming to know that presently there
are no laws protecting whistle blowers in India. Several incidents have been that seek
urgent demand for protection of whistle blowers not only in corporate environment but
other fields too. The provision regarding direct complaint to the president in case of any
default, breach, mis-happening without revealing the name fell flat on the very next day
with the death of one of the whistle blowers. Thus, before laying down a differentiating
line, we first need to implement laws regarding it.

3. CONCLUSION
The smooth operation of the securities market, its healthy growth and development dependsto a
large extent on the quality and integrity of the market. Such a market can alone inspire the
confidence of investors. Factors on which this confidence depends include, among others, the
assurance the market can afford investors, that they are placed on an equal footing and will be
protected against improper use of inside information. Inequitable and unfair practices such as
insider trading, market manipulation, price rigging and other security frauds affect the integrity,
fairness and efficiency of the securities market and impairs the confidence of the investors.
Irrespective of the outcome of the HLL case it would be more equitable to require SEBI to prima
facie establish that insider trading has indeed occurred and then shift the onus of proof on to the
defendant to establish his bonafides. Such an approach has the following advantages:
29

it would reduce the cost of enforcement

it would lead to more effective enforcement where offenders will not go scot free because

of insufficient evidence. At the same time it would enable innocent parties to prove their

credentials.
it would act as a deterrent as companies would be doubly careful to ensure that they not
only refrain from insider dealing but would also take care to prevent practices which
appear to be insider deals even though they actually are not.

Further, the new regulation has many provisions for prevention of insider trading and has high
prospects of success to curb insider trading in India.

BIBLIOGRAPHY
Books/Journals/Articles
1. Insider Trading in Supervised Industries, David M. Reeb, Yuzhao Zhang, Wanli Zhao,
Journal of Law and Economics, Vol. 57, No. 3 (August 2014), pp. 529-559
2. Insider Trading in a Rational Expectations Economy, Lawrence M. Ausubel, The
American Economic Review, Vol. 80, No. 5 (Dec., 1990), pp. 1022-1041
3. Insider Trading in Junk Bonds, Harvard Law Review, Vol. 105, No. 7 (May, 1992), pp.
1720-1740
4. The Global Crackdown on Insider Trading: A Silver Lining to the Great Recession,
Christopher P. Montagano, Indiana Journal of Global Legal Studies, Vol. 19, No. 2
(Summer 2012), pp. 575-598
5. An Empirical Analysis of Illegal Insider Trading, Lisa K. Meulbroek, The Journal of
Finance, Vol. 47, No. 5 (Dec., 1992), pp. 1661-1699

30

6. The Ethics of Insider Trading Revisited, Peter-Jan Engelen, Luc Van Liedekerke, Journal
of Business Ethics, Vol. 74, No. 4, Ethics in and of Global Organizations: The EBEN
19th Annual Conference in Vienna (Sep., 2007), pp. 497-507
7. Insider Trading: How Well Do You Understand the Current Status of the Law?, Gary L.
Tidwell, Abdul Aziz, California Management Review, Vol. 30, No. 4 (Summer 1988), pp.
115-123
8. The Ethics of Insider Trading, Patricia H. Werhane, Journal of Business Ethics, Vol. 8,
No. 11 (Nov., 1989), pp. 841-845
9. Insider Trading in Continuous Time, Kerry Back, The Review of Financial Studies, Vol.
5, No. 3 (1992), pp. 387-409
10. Insider trading and Corporate Governance, Pragyaan, Issue 2 Vol. 1.

References:

Prof. Sandeep Parekh, Prevention Of Insider Trading available at

http://www.manupatrafast.com/articles/PopOpenArticle.aspx?ID=318de23c-f3ed44a9-8346-159f9af8544d&txtsearch=Subject:%20Finance/Banking

Himank Sharma, SEBI approves new insider trading rules available at

http://in.reuters.com/article/2014/11/19/india-sebi-insidertradingidINKCN0J31BF20141119

Subhash Chandra Das, Corporate Governance (New Delhi Prentice Hall of India, 5th
ed., 2012)

Sanjay K Agarwal, Corporate Social Responsibility in India (2nd ed.,2008)

Nishith M. Desai & Krishna A. Allavaru, Insider Trading: A Comparative Study

available
athttp://www.nishithdesai.com/fileadmin/user_upload/pdfs/associates_insider_trading
_-_a_comparative_study.pdf

Stephen M. Bainbridge ,An Overview of Insider Trading Law and Policy: An

Introduction to the Insider Trading Research Handbook(2012) available at
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2141457

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