‘Insider trading’ in financial markets refers to trading in securities such as equities and bonds by company insiders who have access to privileged information about the issuer of a specific security before such material is disclosed to the wider public. This permits insiders to advantage from buying or selling shares before they vary in price.
ABSTRACT
Insider trading has been present throughout the history of financial markets, and was notably prominent during periods of elementary years of Indian stock markets. Insider trading is widespread in underdeveloped countries like India, where it is performed by a wide range of market participants, corporate officers and regulative authorities. Primary insiders obtain access to information by virtue of their position, occupation or responsibility. They include controlling stockholders, business executives and officers, as well as financial-market specialists who assemble information on a firm’s activity. Government officials with access to insider information also fall into this group. Secondary insiders are acquaintances or relatives of primary insiders. Dynamic laws not only help decrease the impact of such incidents but also help in restoring stability.
INSIDER TRADING – An Introduction
Insider Trading essentially means dealing in a company’s securities on the basis. Any sensitive information, belonging to the company, which is not publicised or not known to the public, sometimes described as unpublished price sensitive information, utilised to gain personal profits or avoid loss. It is fairly a breach of fiduciary responsibilities of officers of a firm. It arises when an somebody having possible access to non-public information about a corporation buys or sells shares or stocks of that corporation. The practice of Insider Trading came into existence ever since the very concept of trading of securities of joint stock firms grew prominent among the investors worldwide and has now become a formidable problem.
The expanding size of the worlds’ financial markets wherein trade in shares, derivatives and bonds takes place at international levels has further exacerbated the worries of the regulators all over the world. Insider trading grabbed attention of the public and the government owing to them suspecting extraordinary profit/gain of businessperson as well as shareholders. The Companies Act in India has displayed shortage of expertise to resolve business difficulties together with limiting unfair trading. The SEBI Act was enacted in the year 1992 to give a regulatory framework to encourage healthy trading and defend investors’ interest to assure expansion of securities market. Under Section 11(1), 11(2) of SEBI Act and Section 30, SEBI has the legal ability to interfere and prohibit insider trading while the said parts also establish extra rules to limit illicit actions. The first case relating breach of insider trading regulation was registered against Hindustan Lever Limited in India. Insider trading is an incredibly intricate issue and it is practically impossible to get rid of it because it evolves from a very basic human drive i.e., greed. One who is having insider facts and arrive at a conclusion of future profit or decrease of loss by discounting such information, it is quite tough for him to keep himself abstaining from trading depending on that information. Present effort is an initiative to comprehend the extent of this problem and regulatory practices that exist to combat it.
OBJECTIVE OF THE STUDY
This study focuses on the assumption that the protection granted against insider trading in the existing legal frame work is thought to be inadequate in the present international era of financial market.
HYPOTHESIS OF THE STUDY
There is no association between the characteristics like annual income, age, gender, financial literacy, etc. and investing in the stock market.
RESEARCH METHODOLOGY
The present study is exploratory cum descriptive in nature as the researcher has to explore the investment pattern in the securities market in India and influence of insider trading on the same.
RESEARCH FINDING
Insider trading is when some persons generate extra gains in stock market through usage of some concealed information, including information on planned dividends, expected fall or rise in profitability, any information on acquisition, merger, potential threats etc. or any other price sensitive information. In the Indian context, the term insider is used for persons who have direct or indirect link to the organization or otherwise and have access to unpublished pricing sensitive information. Insiders can be related individual or family but fact to be examined in this Respect is the accessibility to unpublished price sensitive information. The individual who have any scope to get access or obtain unpublished price sensitive information of one company or consortium of firms is likewise vulnerable to be recognised as a insider. Accessibility and possession of unpublished price sensitive knowledge is a crucial component to be recognised as insider in Indian legal context.
The Indian legislation directs initial disclosure, continuing disclosure and disclosure by other folks related. The promoters, directors and key managerial staff are obligated to disclose and report their shareholdings within 30 days of time while newly appointed promoters, directors and key managerial staff get a term of seven days. The traded value that crosses the margin of ten lakh, in any calendar quarter the disclosure of the same by the promoter, director or employee shall be made within two days. The regulations mandates every insider to establish a trading plan, in advance and transmit it to the Compliance Officer for approval & public dissemination, pursuant to which Transactions may be carried out by him or on his behalf. The laws compels every listed firm in India to formulate and publish on its official website, a code of practice and procedure for fair disclosure of unpublished pricing sensitive information and also a rule of conduct.
The Chinese wall arrangement works as a defence against the allegation of insider trading. The defences that might be deployed in case of demonstrating innocence or defending own position following the ground of – information parity. to regulate, monitor & report trade by its workers & other associated persons, so as to comply with these.
Securities and Exchange Board of India
SEBI is the supervisory body of all the stock exchanges in India. It is duty-bound to defend the interest of the investors in the securities market and to regulate the stock market through such restrictions as it deems suitable. The SEBI works as the regulator in the share market by adopting all precautionary precautions in order to build the confidence of the investors who are investing in the market.
SEBI is responsible for carrying out the investigation on complaints received from the shareholders about any wrongdoing in share market. SEBI is also duty obliged to ban dishonest and unfair trade behaviour linked to securities markets. SEBI as an independent body carries its functions as outlined by the Securities and Exchange Board of India Act, 1992. Any order given by the SEBI is appealed before the Securities Appellate Tribunal.
Securities Appellate Tribunal
It is a statutory body constituted under the requirements of Section 15K of the SEBI (Securities and Exchange Board of India Act), 1992 to hear and dispose of appeals against orders taken by the Securities and Exchange Board of India, regarding enforcement of penalty or by a adjudicating officer under the Act and to exercise jurisdiction, powers. Every authority conferred on the Tribunal by or under this Act or any other law for the time being in force.
Insider trading is an incredibly complex issue and it is almost impossible to get rid of it because it evolves from a very basic human drive i.e., greed. One who is having insider information arrive at a conclusion of future profit or avoidance of loss by discounting such information, it is exceedingly tough for him to keep himself abstaining from trading based on such information. Present effort is a initiative to comprehend the extent of this problem and regulatory practices that exist to combat it. Stock market is equally significant and an effective means of allocating scarce resources from surplus unit to deficit unit.
However, this is only conceivable where distinct portions of the financial markets are able to operate efficiently. The struggle for external financing amongst small, developing and expanding financial markets has led in a greater understanding of the importance of investor protection legislation if markets are to be competitive and hence a need to govern the behaviour of insiders who are engaging in illicit insider trading is felt.
The incidence, intensity and ramifications of insider trading could vary in any country but any level of insider trading has a tremendous effect on the reputation of the country. Every shareholder puts his money in the market with the prior confidence in transparency and efficiency in the market. Any investor while making his judgement on investment (to sell, purchase or hold stock) relies upon the available price sensitive information provided by the listed company in the stock exchange. The investment into securities market has expanded many folds in recent decades. The globalization has offered several possibilities to invest money and investment is being made all over the world by inhabitants of different nations.
When a investor relies upon the accessible price sensitive information, he has the prior sense of trust regarding the validity of the value of the security he is trading. Even after making the price sensitive information public, nonetheless one portion of the organisation has the information which finally decides the value of the security. When such folks use this information to invest in the market they are known as ‘Insiders’. Such insiders get the price sensitive information prior to the listing of the equities in the market because of the position they are holding in the company. When such persons communicate such information to other or utilise the same for their profit either to acquire or sell the shares, they are participating in insider trading. Over the previous three decades, world securities markets have evolved much more sophisticated in terms of how securities are exchanged as well as the range of securities traded. The integrity of securities markets is crucial to the economy of a country and it is necessary for regulators to enforce rules, preventing market abuse in order to safeguard market integrity. As a result of these changes, markets are becoming truly global, consequently, allowing traders to trade almost instantaneously across a wide array of products and in markets around the world.
References
The Bombay Securities Contracts Control Act, 1925
The Companies Act, 2013
The SEBI Act, 1992 7. The Securities Contracts (Regulation) Act, 1956
The Securities Contracts (Regulation) Rules, 1957
Insider Trading by Corporate Finance Institute
Insider Trading policy by https://www.sec.gov/Archives/edgar/data/1164964/000101968715004168/globalfuture_8k-ex9904.htm
Written By:
Pradip Sharma
5th year BA.LLB
Jagannath University Bahadurgarh
