Insider Trading

By: Prof. K.S. Murthy

Insider Trading
SEBI (Insider Trading) Regulations 1992,
[Regulation 2(c)] Insider is:
Natural person or Legal Person
Connected or deemed to have been connected
with the company, and
Access to unpublished Price Sensitive
information
Has received or has had access
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Tests to Confirm Insider
Test of Connection:
Connected person (Direct Insider)
Director, Deemed Director, Officer or an Employee
permanent/ part time/ contract basis
Person having professional or business relationship
Deem to be connected (an indirect insider)
Organization remotely connected, Directors, Officers &
Relatives
Period of connection (either present or past in time dimension)
Test of Access
Actual or presumed access
Reasonable presumption is enough

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Price Sensitive Information
Specific Matters:
Financial results, Intended declaration of
dividends, issue of shares
Major Expansion plan, Amalgamation, Merger or
Takeover, Disposal
Information affecting the earning, Change in
policies, Operations


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cont Price Sensitive Information
Unspecified Matters:
Selective leaks to the press
Published by the company as the matters
generally known
Not generally known and likely to affect the price
of the securities
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What Comprises Insider Trading
Dealing in securities
Beneficiary self or third party
Communicating information
Sender of information
Counseling others for trading
Communicates and positively induces
The crux is leakage and abuse of price
sensitive information
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ILL effects of insider trading
Inequitable market practice
Information asymmetry gives unfair advantage
Breach of fiduciary responsibility
Seeks to enrich self at the cost of shareholders
Conflict of interest
Company lose in terms of the appreciation of its market
value
Excessive speculation
Result in sharp volatility
Market in disrepute
Impairs the investor confidence
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Information Asymmetry
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Supplier
Director
Officer
Access to
Information
Access to
Information
Insider
Gainer
Public
Loser
Public
Auditor
Relative
Information
Asymmetry
Direct:
Indirect:
Banks, FIs
Code of Internal procedures and
conduct
Frame a code of internal procedures and
conduct
Initial disclosure of interest and shareholding
in a listed company
Continuous disclosure change in
shareholding and voting rights
Disclosure by company to stock exchange
Violation liable for action under Sec 11 or
11b and/or Sec 24 of SEBI Act
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Model code of conduct for listed
companies
Appointment of compliance officer
Preservation of Price Sensitive Information
To be handled on a Need to know Basis
Limited access to confidential information
Prevention of misuse of price sensitive
information, trading window, pre clearance of
trades
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Cont Model code of conduct for
listed companies
Fresh Pre-Clearance and minimum holding
period
Initial, Periodic and annual reporting
Violation attract disciplinary action by
company
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Corporate Disclosure policy
Prompt disclosure of price sensitive information
Overseeing Coordinating Disclosure
Responding Market Rumors
Timely reporting of shareholding /ownership
Disclosure/ Dissemination of PSI with special
reference to analysts, institutional investor
Medium of disclosure/ dissemination
Dissemination by stock exchanges
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Model code of conduct for the entities
Chinese wall policy to separate Insider
Area and Public Area
Restricted/ Grey list
Listed intermediaries to comply both
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