This paper aims examine the role of insider trading, where it also focuses on the background of insider trading, elaboration on what is insider trading is all about. The objective of this paper is to analyse how insider trading is prohibits under SEBI regulation act. This report consists of three parts the first it includes what is insider trading, how insider trading develops in India, where insider trading is applicable, some practical example on insider trading. the second an overview of SEBI insider trading regulation Act- 2015 and the third why there is need to prohibition on insider trading. Consequently, this paper also looked in some judicial views on insider trading. Furthermore, the penalties for insider trading has also explained.

Insider Trading

Insider Trading in India:

• India’s Company Law was enacted in 1956, the Thomas Committee had pointed out the lack of a special legislation to deal with the, unfair use of inside information in 1948 itself, it took a few decades to actually formulate a legislation to control insider training.
   
• The provisions relating to Insider Trading were incorporated under the Sections 307 and 308.[1]
   
• Due to inadequate provisions of enforcement in the companies Act, 1956, the Sachar Committee in 1979, the Patel Committee in 1986 and the Abid Hussain Committee in 1989 proposed recommendations for a separate statute regulating Insider Trading.
   
• The rapidly advancing Indian Securities market needed a more comprehensive legislation to regulate the practice of Insider Trading, thus resulting in the formulation of the SEBI Regulations in the year 1992, which were amended in the year 2002 after the discrepancies, observed in the 1992 regulations.
   
• The amendment in 2002 came to be known as the SEBI (Prohibition of Insider Trading) Regulations, 1992. The regulations of 1992 seemed to be more disciplinary in nature while the 2002 amendment regulations on the other hand are precautionary in nature.
   
• SEBI issued and notified the SEBI (Prohibition of Insider Trading) Regulations, 2015 on 15th January, 2015 based on recommendations of Sodhi committee and became effective from 15th May, 2015, by repealing the SEBI (Prohibition of Insider Trading) Regulations 1992.

What is Insider Trading?

• Insider Trading as a term is subject to many definitions and it includes both legal and prohibited activities. Insider Trading happens on a daily basis, legally, when corporate management and Board of Directors buy or sell or deal with stocks of their own companies within confines of the company policies and regulations governing the trading[2].
   
• In other words, Insider trading refers to the practice of purchasing or selling a publicly-traded company’s securities while in possession of material information that is not yet public information. Material information refers to any and all information that may result in a substantial impact on the decision of an investor regarding whether to buy or sell the security.[3]

Examples of Insider Trading:

1. A government employee acts upon his knowledge about a new regulation to be passed which will benefit a sugar-exporting firm and buys its shares before the regulation becomes public knowledge.
2. Corporate officer, directors and employees who traded the company’s securities after learning of significant, confidentially corporate developments.[4]
3. Employees of law, banking, brokerage, and printing firms who were given such information to provide services to corporation whose securities they traded.
4. A high-level employee overhears some conversation about a merger and understands its market impact and consequently buys the shares of the company in his father’s account.
    

Applicability of SEBI Insider Regulations:

• The regulations only apply in listed entities.
• In case, the company is unlisted, its listing is also pending including listing application is pending, then also this company will fall under this regulation.
• No applicability on private company or public unlisted company.

Meaning of Insider Trading and Insider Trading Defined?

• Securities and exchange board of India (prohibition of insider trading) regulations, 1992 does not give direct define the term “Insider Trading”, but it defines the term:
  
  1. Insider or who is Insider?
  2. Who is connected person?
  3. What is price sensitive information?
      
• Insider:
  Under regulation 2(e)[5] any person who is or was “connected” with the company or “deemed” to have connected with the company and is expected to have access to “unpublished price sensitive information.”
  
  Sanction Act defines “Insider” as a company’s officers, directors, or someone in control of at least 10% of a company’s equity securities. The nexus of criminalizing an insider is for using non-public information that violates the fiduciary duty with which the company has entrusted the person. The definition for determining an insider provided by the Sanction Act is quantitative, whereas definition provided by the decisions of the court is subjective in nature and holds all the people who are in possession of price-sensitive information responsible under Sanction Act.
   
• Connected Person:
  Regulation 2(c) of the Insider Trading Regulations defines ‘connected person’ as any person who-
  Is a director[6] of a company, or is deemed to be a director of that company by virtue of section 307(10) of the Companies Act, 1956?
  Occupies the position as an officer or an employee of the company or holds a position involving a professional or business relationship between himself and the company whether temporary or permanent and who may reasonably be expected to have an access to UPSI in relation to that company.
   
•  The Regulation 2(c) of the Insider Trading Regulations states that the words ‘connected person’ shall mean any person who is a connected person six months prior to an act of insider trading.
   
• Price Sensitive Information:
  
  • Regulation 2(ha) of the Insider Trading Regulations defines ‘price sensitive information’, Price Sensitive Information means any information, which relates directly or indirectly to a company and which if published, is likely to materially affect the price of securities of the company.[7]
     
  • Following are some examples of Price Sensitive Information:
    
    1. Financial results of the company.
    2. Intended declaration of Dividends.
    3. Issue of shares by way of public rights, bonus, etc.
    4. Any major expansion plans or execution of new projects.
    5. Amalgamation, mergers and takeovers.
    6. Disposal of the whole or substantial of the undertaking.
    7. significant changes in policies, plans or operations of the company.

Case Laws:

1. Reliance Industries:
   The Securities and Exchange Board of India banned RIL from the derivatives sector for a year and levied a fine on the company. The exchange regulator charged the company with the intention of making profits by skirting regulations on its legally permissible trading limits and lowering the price of its stock in the cash market.
    
2. Amazon Insider Trading Case:[8]
   In September 2017, former Amazon.com Inc. (AMZN) financial analyst Brett Kennedy was charged with insider trading. Authorities said Kennedy gave fellow University of Washington alumni Maziar Rezakhani information on Amazon's 2015 first quarter earnings before the release. Rezakhani paid Kennedy $10,000 for the information. In a related case, the SEC said Rezakhani made $115,997 trading Amazon shares based on the tip from Kennedy.
    
3. Rakesh Agrawal vs. SEBI: [9]
   In this case Rakesh Agrawal, was MD of ABS industries ltd. was involved in negotiations with Bayer A.G.(which is a company registered in Germany), regarding their intentions to takeover ABS. the insider trading transaction here, Rakesh Agrawal through his brother in law, Mr. I. P. Kedia had purchased shares of ABS from the market and tendered the said shares in the open after made by Bayer thereby making a substantial profit and thus was held for acting in violation of regulation 3 and 4 of the insider trading regulation.
   
   • Hon’ble SAT held that: dealing in securities while possessing the unpublishes price sensitive information is not sufficient to hold appellant guilty, the dealing should result in an advantage to him, the law prohibits the gaining of the unfair advantage by the insider, and the appellant has acted in the interest of the company and was not held guilty.
   
   ·
4. Dilip Pendse vs. SEBI:[10]
   Nishkalpa was a wholly owned subsidiary of Tata Finance Ltd (TFL), which was a listed company. Pendse was the Managing Director of TFL.
    
5. On 31st March 2001 Nishkalpa had incurred a huge loss of Rs. 79.37 crores and this was bound to affect the profits of Tata Finance Limited. This was basically an Unpublished Price Sensitive Information (UPSI) which Pendse was aware. This information was disclosed to the public only on 30th April 2001. Thus, any transaction by an Insider within the period of 31/03/2001 and 30/04/2001 was bound to fall within the scope of Insider Trading. Dilip Pendse passed on this information to his wife who sold 2,90,000 shares of TFL held in her own name as well as in the name of the companies controlled by her and her father-in-law. SEBI levelled charges against Dilip Pendse for Insider Trading.
   
   • This case testifies the fact that SEBI lacks a thorough investigative mechanism and a vigilant approach due to which culprits are able to escape from the clutches of law. In most of the cases, SEBI failed to adduce evidence and corroborate its stance before the Court.

An Overview- SEBI Insider Trading Regulation:

• SEBI has notified and issued SEBI(Prohibition of Insider Trading) Regulations, 2015 on January 15, 2015. These regulations are notified to replace the earlier framework of SEBI (Prohibition of Insider Trading) Regulations, 1992 which are in place for the past two-decades.
• In addition to broadening the definitions of unpublished price-sensitive information, insider and connected persons in SEBI Regulations, 2015 the legal perspective also imposes graver consequences for company officials involved in selective exchange of price-sensitive information.[11]
• Under the new regulations, simple correspondence of UPSI would be culpable, anyway in prior, SEBI Regulations, 1992 simple correspondence of UPSI (without any trade) would not be continued against. Corporates are presently needed to raise their eye temples on uncovering the UPSI specifically.

Exceptions to Insider Trading:

• The distinction between legally permitted trading and illegal insider trading must be carefully understood.
• It is but natural for an Insider to know some inside information of a company which is expected of their job.
• It would be violation of human rights and would resist the rationale openly tradable securities if Insiders are not allowed to trade for themselves. That would be irrational. It is unreasonable to prevent advertisers of a company from managing in their securities.
• Thus, the restriction on the corporate insider is directly or indirectly using the price sensitive information that they hold to the exclusion of the other shareholders in arriving at trading decisions.
• There is absolutely no restriction on insiders in trading in securities of the company if they do not hold any price sensitive information that the public is not already aware of. During the short while promoters and insiders can use the information to their advantage by guessing market reaction to the news or information.

Prohibition on Insider Trading
In India, the trial of whether an individual person is guilty of insider trading is determined on whether that person has breached Regulations 3 or 3A of the Insider Trading Regulation the Regulation 3 of the Insider Trading Regulations prohibits insider trading in the following manner:

1. Communication or procurement of unpublished price sensitive information:
   
   • Insider cannot communicate to outsider; no person shall procure from or cause the communication by Insider of any UPSI relating to a company or its securities listed or proposed to be listed to any other person except where such communication is in furtherance to legitimate purpose or performance of duty or discharge of legal obligation.
      
   • EXAMPLE: “A”, is the CEO of the company ABS ltd. and have all the access of every information, and there was new upcoming plan in market, ‘A’ has taken into consideration and sale his own share this will be consider as insider trading.

Exceptions:[12]
Need an obligation to make an open offer under the takeover regulations, Insider can communicate if needed under or by the law.
In case, where board are in opinion, and need to inform outsider for the benefit of company, Board approval, if the information is disseminated two days prior to effecting the proposed transaction.

Trading when in possession of unpublished price sensitive information: No insider shall be able to trade in securities that are listed or propose to be listed on a stock exchange when in possession of unpublished price sensitive information.

1. Off market inter-se transfers between promoters
2. Existence of Chinese wall if insider is a company
3. The trade pursuant to a trading plan

In case of connected person, the burden of proving innocence shifted on connected person for other persons, it continuous to lie with SEBI.

• Trading, while in possession of USPI is presumed to be violative of the regulations.
• The reason of trade or application of proceeds irrelevant.

Significant Penalties:

1. SEBI may impose a penalty of not more than Rs. 25 Crores or three times the amount of profit made out of Insider Trading; whichever is higher.
2. SEBI may initiate criminal prosecution,
3. SEBI may issue order declaring transactions in Securities based on unpublished price sensitive information,
4. SEBI may issue orders prohibiting an insider or refraining an insider from dealing in the securities of the company.

Conclusion
The SEBI has strengthened the laws on Insider Trading by introducing amendments in the year 2002. Insider Trading is the misuse of Privileged position and breach of trust which affects the whole structure of Securities market. The Companies that are affected by Insider Trading becomes inefficient.

The leak of price sensitive information can be beneficial to some investors but harmful to others. The investors with the price sensitive information takes abnormal gains at the cost of other investors and this affects the transparency of the market. Insider Trading is the practice that is prevalent from the start and it is not possible to end it completely, but efforts can be made to curb this evil practice to reach at a greater extent.

References:

1. The Companies Act, 1956.
2. Insider Trading in India”, http://www.riskpro.in/download/insider_wp.pdf, last accessed on 31st August,2020
3. Insider Trading”, https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/what-is-insider-trading/, last accessed on 31st August, 2020.
4. Rakhda Rizwan’, “Insider Trading”, https://www.slideshare.net/rakhda_1987/insider-trading-11217548, last accessed on 31st August,2020.
5. SEBI (prohibition of insider trading), regulation 2015.
6. As defined under section 2(13), of Companies Act, 1956.
7. Insider Trading Regulation- A Primer”, Insider_Trading_Regulations_-_A_Primer.pdf (nishithdesai.com) last accessed on 1st September, 2020.
8. U.S. Securities and Exchange Commission”, litigation no: 23931, filed on 7th September,2017.
9. MANU/SB/0208/2003.
10. 80/2009, Date of Decision: 19/11/2009.
11. CS D Hem Senthil Raj”, ‘Analysis of SEBI (prohibition of insider trading) Regulations, 2015’, 18th April,2015, https://taxguru.in/sebi/analysis-sebi-prohibition-insider-trading-regulations-2015.html, last accessed on 1st September,2020.
12. SEBI (prohibition of insider trading) Regulation, 2015”, https://www.icsi.edu/media/portals/70/mss165.pdf, last accessed on 1st September,2020.

Written By:

1. Dhyey Vyas And
2. Pooja Dhruve