What Is Insider Trading in India - Meaning, Regulations, Examples, & Types
Insider Trading Definition
Insider Trading is the act of purchasing, selling, underwriting, or agreeing to underwrite the securities or stocks of an organization by key executives/personnel of the company who have access to UPSI - Unpublished Price Sensitive Information regarding the company.
Insider Trading Meaning
This is malpractice in which a company's unpublished sensitive information is used to trade in the company's securities. Using this information to make an improper profit or loss is called Insider Trading. The information is said to be "price sensitive" because it can affect a company's share price in the market.
Who is an Insider?
An insider is a person who is a part of the company whose shares he trades. He can be a person who owns more than 10% of the company's stock, for example, a company's directors, presidents, and senior executives. Sometimes the insider can be someone who isn't a part of the company but still has ample confidential information on stock performance from a real company executive. Some NSE Insider Trading examples are:
- Officers, directors, and employees of the company who trade in the securities of the company after becoming aware of important and confidential business developments
- Friends, peers, or relatives of such officers, directors, and employees, who exchanged securities after receiving such information
- Employees of legal, banking, and press firms who acted on information obtained about the provision of services to the company whose securities they trade
- Government employees who have exchanged confidential information learned from their office
- Political intelligence consultants who can make suggestions or act on material non-public information obtained from government employees
- Others have misused and abused confidential information from their employers, family, friends, and others.
Types of Insider Trading
This can be legal or illegal, depending on the type of material information available to the insider. If the insider has non-public information, they are prohibited by law from trading their existing stock for that company. On the other hand, if the information is already public, these people can trade safely without taking legal action against them.
What Are The Effects Of Insider Trading?
Misuse of inside information is discouraged for several reasons:
- Insiders take unfair advantage of the person whose information has been withheld
- It creates a conflict of interest because it is in the insider's interest and not in the company's best interest.
- It damages the prestige of the market and discourages investment.
Who Regulates Insider Trading in India
Several countries have objected to this practice. The USA was the first country to take action against Insider Trading. The UK, too, followed suit and imposed many restrictions on administrators to control the practice.
The Securities and Exchange Board of India SEBI, under the Companies Act and SEBI Regulations 1992, and the SEBI (Prohibition of Insider Trading) ("PIT") Regulations, 1992, strictly regulates NSE Insider Trading in India today. Any merchant or insider caught violating the various regulations imposed by the government agency can be subject to hefty fines.
The penalty under SEBI Act 1992 (Section 15G) and Companies Act 2013 (Section 195) cannot be less than INR 10 lakhs and may extend to INR 25 crores or 3 times the profit of the tort of 'insider' as the case may be.
The SEBI has drafted the SEBI Regulations 2015, which sets out the rules for the prohibition and restriction of Insider Trading in India.
The Insider Trading regulations provide that the transmission of any confidential information related to a company by an insider is prohibited unless authorized.
The information misused by the person or another person on their behalf will be considered a violation, which will be treated as a criminal offence under the law. This offence is punishable by imprisonment of up to 10 years or a fine of up to 25 crores, whichever is greater. Under the SEBI rules, the arbitrator may impose a penalty on anyone who violates the provisions of the rules other than the offence committed under section 24 of the act.
The Restrictions/Prohibitions imposed by SEBI
The Insider Trading regulations impose the following restrictions:
The Regulations restrict/prohibit Insiders from communicating, providing, or providing access to UPSI related to any publicly traded company or security to any person, including other Insiders.
These regulations restrict/prohibit a person from purchasing a UPSI from an insider related to a publicly traded company or securities to any person, including other insiders.
The Regulation restricts/prohibits an insider, when in possession of UPSI, from dealing in securities listed or proposed for listing on a recognized stock exchange.
SEBI also has the authority to investigate NSE Insider Trading and related matters. SEBI may exercise investigative powers for two main reasons:
- Investigate complaints from investors, intermediaries, or other persons regarding matters relating to allegations of this practice; and,
- Investigations based on its knowledge or information in its possession to protect the interests of securities investors against violations of these regulations.
Under the Insider Trading regulations, company founders will be held liable regardless of their shareholder status if they violate Insider Trading standards by using price-sensitive unpublished information. Of society without a legitimate purpose.
Legal Insider Trading and Exceptions to the Rule
- Disclosure is permitted for a legitimate purpose, to comply with a duty, or to comply with a legal obligation.
- Disclosure is permitted where it is in the best interest of the company.
Insider Trading Examples - Cases Of Insider Trading In India
- On May 21, SEBI fined Indiabulls Venture, former non-executive director Pia Johnson, and her husband Mehul Johnson for violating PIT regulations by exchanging the company's scrip using USPI.
- The incidence of this practice seems to be increasing as many large companies, such as SpiceJet, Sun Pharma, Future Group, etc., appear to violate laws.
- Rakesh Jhunjhunwala Case - Independent investor and billionaire Rakesh Jhunjhunwala has been summoned by SEBI for alleged NSE Insider Trading at Aptech Limited. According to reports, the regulator investigates the period between February and September 2016. Apart from Jhunjhunwala, SEBI is also looking into the role of a member of his family in the matter.
- Balram Garg Case - Another high-profile case of alleged Insider Trading came to light in December 2019, when SEBI issued a notice to PC Jeweler's Managing Director, Balram Garg. At the same time, the government agency ordered the confiscation of approximately INR 8 Crore, which deserves two promoters and associated units of alleged illegal trade.
Countless other cases are pending. However, the rate of conviction and the sentence according to the results of SEBI are generally very limited. The government authority has also received violent criticisms due to the poor application of commercial regulations. However, as a responsible trader, you should understand the rules established by the authoritative body to reduce such instances of NSE Insider Trading.
SEBI has a long way to go to strengthen the governance of the NSE Insider Trading laws as it lags in many ways, such as the lack of technical experience, making it very difficult for SEBI to catch the culprit.
Even if SEBI can identify the culprit, initiating Insider Trading cases is difficult because these allegations are usually based on circumstantial evidence, which makes them difficult to prove. SEBI does not have the authority or power to wiretap phones.
With such strict rules against Insider Trading, obtaining fines, and imprisonment, investors should ensure that they do not engage in such illegal activities by being aware of its rules and regulations.
Frequently Asked Questions
Are there any prohibitions/restrictions imposed on designated persons regarding trading in company securities?
Designated Individuals and they are next of kin are prohibited at all times from communicating directly or indirectly with any person, or providing any access, except for the pursuit of 'legitimate purposes, the performance of obligations, or compliance with legal obligations. Insider trading is prohibited at any time by a designated person or their close associates. By the policies of SEBI, a Designated Person who buys or sells any number of securities of the company may not enter into a contrary transaction within 6 months of the date.
What is meant by "trading window"? What is the close of the trading window?
The Compliance Officer will specify a trading period, referred to as the "Trading Window", which allows trading in the company's securities. Typically, the company announces a specific period during which trading in the company's securities is limited, and this is referred to as the "closing of the trading window". Designated Persons and their immediate family members are not permitted to trade in the company's securities during this period. When the trading window is not closed, it will be considered OPEN for trading, subject to compliance with the Code and the quantity/value limit of the shares indicated in the Code.
What is "initial disclosure"? When should it be given?
Disclosure of the equity investments of the company:
- The first time after the entry into force of the Code
- It will be the first disclosure at the time of employment with the company.
What are the impacts/results of insider/agent and company non-compliance with the Code?
Any employee/director/designated officer who trades in securities or provides information for trading in securities in violation of the provisions of the Code may be disciplined, and the company may take appropriate action. In the event of a violation of the provisions of the Code, the following actions may be taken against Insiders/Designated Persons:
- Warning that the consequence of the violation/non-compliance will be dismissal from service.
- Blocking of future company benefits, increases/promotions
- Suspension of the service
SEBI may also take similar punitive measures prescribed in the SEBI Act, 1992, including:
- a) a maximum penalty of Rs. 25 crores or three times the amount of profit obtained from such insider trading, whichever is higher. b) Imprisonment of up to ten years or with a fine of up to Rs. 25 crores, or both.
- c) under Regulation 11 SEBI may also transmit appropriate orders to Insiders who carry out insider trading activities.
What measures should be taken to prevent insider trading?
Insiders must take the following steps to prevent insider trading:
- Comply with the Code for the Prevention of Insider Trading. Restricted access to confidential information.
- Introduction of implementation systems for login and password.
- Provision of information on a need-to-know basis.
- Prevention of misuse of "price sensitive information"