Introduction
Insider trading is a financial malpractice which occurs when company insiders, such as directors, officers, or employees, utilize confidential information to gain an unfair advantage over other market participants. This confidential information may include upcoming financial results, mergers and acquisitions, regulatory decisions, or any other material information that could significantly impact the stock price. Armed with this non-public information, insiders can make substantial profits by trading stocks before the information becomes public knowledge, leaving ordinary investors at a disadvantage. India, being one of the largest emerging economies in the world, is not immune to this unethical practice. Insider trading involves the illegal buying or selling of stocks based on non-public, material information by individuals with privileged access. In recent years, the Indian government and regulatory bodies have stepped up their efforts to combat this menace and ensure a fair and transparent market for all participants.
Current framework regulating insider trading in India
The Securities and Exchange Board of India (SEBI), the regulatory body overseeing the Indian securities market, introduced the SEBI (Prohibition of Insider Trading) Regulations in 2015. This landmark legislation aimed to establish a robust framework for combating insider trading and promoting a level playing field for all market participants. Following are the key highlights of the regulation
•Clearing ambiguity: The regulation clearly defines key terms such as “insider,” “price-sensitive information,” “trading,” and “unpublished information” are clearly defined, leaving no room for ambiguity.
•Prohibition of Insider Trading : it establishes the overarching prohibition of insider trading. It explicitly states that no insider shall trade in securities while in possession of unpublished price-sensitive information. The section also emphasizes the importance of maintaining confidentiality and prohibits the communication of such information, except for legitimate purposes.
•Trading Plans: It introduces the concept of trading plans, which allows insiders to trade in securities in a pre-determined and automated manner. The regulations lay down specific conditions and procedures that insiders must adhere to when formulating and executing trading plans. Trading plans offer transparency and can help prevent allegations of trading based on insider information.
•Designated Persons and Compliance Officer: it focuses on the identification of designated persons within a company and the appointment of a compliance officer responsible for overseeing compliance with the regulations. The compliance officer acts as a crucial link between the company and SEBI, ensuring adherence to the regulatory framework.
•Disclosure of Trading by Designated Persons: it mandates the disclosure of trading activities by designated persons to the company and the stock exchanges within specified timeframes. Designated persons are required to submit details of their trades, including the nature of securities, quantity, price, and the dates of the transactions. Such disclosures enhance transparency and enable effective monitoring by regulatory authorities.
•Trading Window :The concept of a trading window is introduced in this regulation. Insiders are permitted to trade in securities during the trading window, which remains closed during specified periods such as the announcement of financial results or material events. The regulations ensure that insiders do not take advantage of unpublished price-sensitive information during restricted periods.
•Disclosures by Company: It outlines the obligations of companies to disclose UPSI to the stock exchanges as soon as possible. Companies must promptly disseminate material information that could impact the stock prices to ensure fair and equal access to information for all market participants.
•Code of Conduct :The regulations require companies to establish and implement a code of conduct to prevent insider trading. The code lays down guidelines and best practices, outlining the responsibilities, obligations, and consequences of non-compliance for insiders and other employees. Codes of conduct foster a culture of compliance and ethics within organisations.
•Maintenance of Digital Database: it emphasizes the importance of maintaining a digital database of all individuals who have access to unpublished price-sensitive information. The database serves as a comprehensive record, facilitating effective monitoring, and enabling regulatory authorities to investigate any potential breaches.
•Obligations of Intermediaries: Intermediaries such as stock exchanges and depositories have specific obligations outlined in this regulation. They are responsible for maintaining robust surveillance systems to detect suspicious trading patterns and promptly reporting any violations to SEBI. Intermediaries play a critical role in enforcing the regulations and ensuring market integrity.
•Investigation and Action by Board :This regulation empowers SEBI to investigate insider trading cases and take appropriate actions against violators. SEBI has the authority to summon documents, conduct inquiries, and impose penalties, including fines, disgorgement of illegal gains, and debarment from the securities market.
•Penalties : The regulation explicitly prohibit insiders from trading in securities while in possession of UPSI. Violations of these prohibitions can result in severe penalties, including monetary fines, disgorgement of illegal gains, debarment from the securities market, and even imprisonment the fine can extend up to 25 crores for three times the profit which has been made which ever is higher
•Burden of Proof: The burden of proof in insider trading cases lies with the regulatory authorities to establish that a trade was conducted based on non-public, material information. Courts have examined the evidentiary requirements and standards of proof to ensure fair treatment of both the prosecution and the accused.
Recent Case Laws
Securities and Exchange Board of India (SEBI) v. Rajat Gupta:
In a landmark case, the SEBI accused Rajat Gupta, a former director of Goldman Sachs, of insider trading. The case revolved around Gupta sharing confidential information about Goldman Sachs with Raj Rajaratnam, a hedge fund manager. The court held Gupta liable for violating insider trading regulations, emphasizing the duty of confidentiality and the need to safeguard non-public information
SEBI v. Reliance Industries Limited:
In a significant case involving Reliance Industries Limited (RIL), SEBI investigated alleged insider trading violations related to the trading of RIL’s shares in the futures and options segment. The case focused on the timing of trades and potential abuse of market positions. The court emphasized the importance of upholding market integrity, and RIL was directed to disgorge illegal gains along with imposing monetary penalties.
SEBI v. DLF Limited: The DLF Limited case drew attention to the disclosure obligations of companies and the consequences of non-compliance. SEBI found DLF guilty of suppressing material information and providing misleading disclosures during its initial public offering (IPO). The court stressed the significance of accurate and transparent disclosures, imposing penalties on DLF and its key management personnel.
SEBI v. HDFC Bank Limited:
In a recent case, SEBI conducted an investigation into alleged insider trading by employees of HDFC Bank. The probe centered around the trading activities of certain individuals who were privy to price-sensitive information. The case underscored the need for robust internal controls, surveillance mechanisms, and strict compliance with insider trading regulations within organizations
Conclusion:
Insider trading remains a significant concern in the Indian securities market. However, with the stringent regulations implemented by SEBI, India has taken significant steps to combat this malpractice. Continued efforts in strengthening surveillance mechanisms, investor awareness, and effective enforcement will be crucial in curbing insider trading and maintaining the integrity of the Indian capital markets. A fair and transparent market environment will not only attract domestic and foreign investors but also contribute to the sustained growth and development of India’s economy.
Reference
1. https://blog.ipleaders.in/insider-trading-in-india-regulations-and-controlling-authority/?amp=1
2. https://www.taxmann.com/post/blog/overview-of-sebis-prohibition-of-insider-trading-regulations/?amp
4. Law Relating To Insider Trading (Fourth Edition) by Dr K R Chandratre, Bharat Law House Pvt Ltd
WRITTEN BY: By Pooja Yadav
