Since the very first stock exchange was organized in the sixteenth century, numerous people have attempted various, unethical opportunities to earn money out of it. While some were able to trick the market to make sustainable profits, most of them are captured by the governing bodies. One such crime that most regulators keep an eye on is Insider's Trading. The stock market can function effectively when all investors have the same knowledge, creating fair competition. Investors here are compensated for their research and experience. Insider Trading forces this fair competition out of the window. Insider traders have access to confidential sensitive data and take advantage of investors who are blind to these details. Insider trading applies to transactions made based on material price sensitive non-public knowledge about the company.

Insider trading includes trading in the shares of a publicly owned company by somebody who, for some reason, has non-public confidential knowledge about that shares. Insider trading can be either illegal or legal based on when the insider trades. It is illegal because sensitive knowledge is still confidential, and this kind of insider trading has significant implications.

Insider Trading in India is regulated by the 1992 SEBI Act. Any person who has been found guilty of insider trading can be convicted for a period of 5 years and charged between Rs. 5 lakh and Rs. 25 crores or three times the profit earned whichever is higher. The laws regulating such trades and the extent of compliance differ considerably from country to country.

Regulation 2(g) of the SEBI (Prohibition of Insider Trading) Act defines insider means any person who is: i) a connected person; or ii) in possession of or having access to unpublished price sensitive information[1]. Regulation 2(d) defines connected person[2] and 2(e) defines generally available information[3], of the 2015 Act. Section 11(2)(e) of the Companies Act,1956 bars, but it does not define insider trading.

According to the US Securities and Exchange Commission (SEC), insider trading relates to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, based on material, non-public information about the security. Insider trading violations may also include "tipping" such information, securities trading by the person "tipped," and securities trading by those who misappropriate such information.[4]

The timing of the trade by the individual in question is also relevant. If the information in question is not yet public when the purchase/sale of shares occurs, it constitutes insider trading. It is also vital to know that if the person accused of insider trading is connected to anyone inside the company or to somebody who is affiliated with the company, both may be charged. Acting on the information does not only entail trading on the stock exchange of the company.

India's record of intervening against insider trading cases is particularly grim. There has been no single prosecution for insider trading in the last 30 years of SEBI 's existence.

Over the years, legislation on the prevention of insider trading (PIT) has grown, raising the pressure on businesses to safeguard price-sensitive information. However, SEBI has not been able to uncover a comprehensive case due to inadequate surveillance equipment, difficulties in establishing ties and gathering evidence. According to SEBI's annual reports in 2017 and 2018, 85 cases have been investigated by the agency and only 25 have been resolved so far. Most of these include a lack of transparency and manipulation of suspected insider knowledge. But there is a significant lack of a critical connection between who transmitted insider knowledge to whom and what were the profits made as a result of these trades. From the financial year 2011 to 2017, the regulator has completed probes in approximately 13-21 cases annually.

Examples of insider trading:
The CEO of a company discloses critical info about the acquisition of the company to an acquaintance who owns a significant stake in the company. the acquaintance acts on the information and sells all of their shares before the information is made available to the public.

A public servant simply acts on their knowledge of a new regulation to be passed that will benefit a sugar-exporting company and purchase its shares before the regulation becomes common information.
A high-level executive overhears some talk regarding a merger and realizes its effect on the market and, as a result, buys the stock of the company into their parent's account.

Who Can Be Implicated?
Normally, insider trading focuses on organizational members with material facts. Yet it necessarily one does not have to be a member of the company to be part of insider trading. Major decisions that may affect the share price involves parties who may not function within a company.

For example, a company preparing to merge with another company will include a variety of third parties, such as bankers, lawyers, and other experts, who provide their services to the company. If they act on the information they receive, they may be prosecuted for insider trading.

The application of the various decisions taken by the company requires prior government approval. Civil servants may also be indicted for acting on the classified decisions they have made when performing their duties. Nevertheless, insider trading is not reserved for white-collar relations.

Organizational members or workers may share information with peers, relatives, or friends. If this knowledge, which is yet to be publicly disclosed, is acted upon, it will then be prosecuted in the context of insider trading.

Few Famous Insider Trading Cases
Dilip Pendse:
He worked as Managing Director of Nishkalpa, a wholly-owned subsidiary of TATA Finance Ltd. (TFL). On March 31, 2001, Nishkalpa had lost 79.37 crores. This detail was to be made public just a month later on 30 April. This information was price sensitive since it would lead to a decline in prices if it were released. Dilip Pendse was in the process of obtaining this information because of the role he played in the business. During this time, Dilip disclosed this price-sensitive information to his wife. Between that time, 90,000 shares owned by his wife and a company jointly run by his wife and father in law in Nishkalpa were sold to maintain profitability. Dilip Pendse, his wife, and the business jointly owned by his wife and his father-in-law were found guilty of insider trading. A fine of Rs 500,000 has been levied on each of them and Dilip Pendse has been barred from the stock market for three years.

Martha Stewart:
A famous TV personality who also won an Emmy for her performance at the 'Martha and Snoops Dinner Party.' In 2001, Martha Stewart held up to 4000 shares of the Biopharma Company 'ImClone Systems.' Her broker was informed that the CEO of ImClone Systems had sold all of his investments in ImClone. The CEO did this because he got reports that the FDA was going to reject one of ImClone's cancer treatment products. Soon after this news became public, ImClone's shares fell by 16 percent in one day. Martha Stewart was able to save herself from damages of $45,676. In 2004, Martha Stewart was convicted of trading in the information that the CEO sold his share, which was non-public information. Martha Stewart and her broker have been found guilty. She received a fine of $30,000 for five months at the federal correctional center. The CEO of ImClone Systems was also convicted and sentenced to 7 years and with a fine of $ 4.3 million.

Rajesh Jhunjhunwala:
He was investigated by SEBI in January 2020 on the grounds of suspected insider trading. These claims were founded on the trades made by him and his family at the IT education company Aptech. Aptech is the only company in the portfolio of Jhunjunwala which he holds management control. SEBI also questioned Jhunjhunwala 's wife, brother, and mother in law. This, however, is not the first time that Rakesh Jhunjhunwala has been involved in insider trading. In 2018, he was also questioned about suspicion of insider trading in Geometric shares. Rakesh Jhunjunwala settled the case by means of a consent order mechanism. For consent, SEBI and the accused are seeking a compromise to prevent a prolonged period of litigation. In this case, the accused may settle the alleged infringement by paying SEBI a fee without admission or denial of guilt.

Brett Kennedy:
Former Amazon.com Inc. (AMZN) financial analyst Brett Kennedy was convicted of insider trading in September 2017. Authorities said Kennedy gave Washington University fellow alumni Maziar Rezakhani details on Amazon's 2015 first-quarter earnings prior to publication. Rezakhani paid $10,000 to Kennedy for the details. In a similar case, the SEC said that Rezakhani made $115,997 of Amazon's trading shares based on Kennedy's tip.

Yoshiaki Murakami:
In 2006, Yoshiaki Murakami made $25.5 million by the use of confidential information held about Livedoor, a financial services firm that was preparing to buy a 5% stake in Nippon Broadcasting. His fund acted on this knowledge and purchased two million shares. He was arrested by officials for the same.

Raj Rajaratnam:
He made around $60 million as a billionaire hedge fund manager by sharing information with other investors, hedge fund managers, and key IBM, Intel Corp, and McKinsey & Co employees. In 2009, he was convicted of 14 counts of conspiracy and bribery and fined $92.8 million.

Joseph Nacchio:
Nacchio made $50 million by selling his shares on the market while giving stakeholders, as Chief of Qwest Communications, positive financial forecasts at a time when he was aware of the serious challenges affecting the company. He was found guilty in 2007.

Reliance Industries Ltd.:
The Indian Securities and Exchange Board barred RIL from the derivatives market for a year and imposed a fine on the firm. The Exchange Regulator charged the company intending to make profits by bypassing its legally permissible trading limits and lowering the prices of its stock in the money markets.

Insider Trading Regulations In India
In 1948, India took the initial step towards limiting insider trading by setting up a committee to determine and recommend effective constraints that could be placed on short-swing profits. The first few laws dealing with insider trading were enacted in 1992 in the form of the Securities and Exchange Board of India ('SEBI'), the SEBI Act 1992 ('SEBI Act'), and the SEBI Regulations 1992 ('1992 Regulations') issued under the Act. The definition of the prohibition of insider trading in shares was introduced in Section 195 by the enactment of the Companies Act, 2013. In 2015, SEBI replaced the 1992 Regulations with the SEBI (Prohibition of Insider Trading) Regulations, 2015 ('2015 Regulations') in an attempt to revamp the current regulatory framework of the stock market.

3.1 SEBI Act, 1992 and 2015 Regulations According to the legislation defines insider means any person who is either a linked person or owns or has access to undisclosed price sensitive information. It hence includes individuals connected on the basis that they are in some contractual, fiduciary, or employment relationship which gives such individuals exposure to unpublished price sensitive information ('UPSI'). UPSI has been described as information that is not commonly accessible and which may have an impact on the price. This definition provides a test for the identification of price-sensitive information, trying to align it with the Listing Agreement and offering a framework for disclosure. The penalty for insider trading has been expanded to stocks listed and expected to be listed on the stock exchanges.

The Regulations of 1992 were only applicable to the securities listed. Each provision of the Regulation is followed by clear notes setting out the legislative intent for which that regulation has been formulated. As India attempts to transition from a 'form approach' to a 'substance approach,' these notes will help to capture the essence of the law and how regulatory authorities are likely to interpret its compliance.

Limitations on communication, acquisition, and trading of securities were put in the possession of UPSI. The Regulations allow for such exceptions, which include, in the conduct of due diligence, for off-market transactions, transactions carried out in the lack of any disclosure of information, and transactions carried out in compliance with trading plans. Qualification requirements have been set for compliance officers who, as the circumstance may be, report to the board of directors of the organization or the head of the organization.

Under the SEBI Act, Insider Trading is liable to a penalty of INR 250,000,000 or triple the profit from insider trading, whichever is higher. Any person who contravenes or attempts to contravene or abet a contravention of the Act may extend a penalty of up to 10 years or a fine of up to INR 250,000,000 or both. The Regulations also set down some punitive actions that can be levied on companies or business intermediaries to require due compliance with the Regulations.

3.2 Companies Act, 2013
Section 195 of the Act[6] forbids directors or key management staff of a corporation from participating in insider trading. According to the Act, "insider trading" means an act of subscribing, buying, selling, trading, or agreeing to purchase, sell, or trade-in any securities by any director or key management staff or any other member of the company, either as principal or agent, whether it is reasonably expected to have access to any non-public price confidential information relating to the securities of a company.

Evaluation Of The Efficiency Of The Insider Trading Legislation
From the major issues that SEBI has to resolve, the regulation of insider trading has proven to be the most challenging. The implementation of such a rule, which attracted the unflattering label of 'unwinnable battle,' prompted a reconsideration of the issue. According to SEBI's annual report for the year 2016-2017, insider trading accounted for 14 percent (34 cases) of SEBI's investigations in the year 2016-2017, compared with 12 cases in the previous year.

Insider trading is widespread and is on the rise every year. In addition, as against 34 cases taken for review, only 15 cases have been concluded. This is indeed a matter of great concern. Even though insider trading allegations are mostly based on circumstantial evidence, it is hard to trace and prove them. Even in instances where it has been identified, the rate of successful prosecution has been close to zero.

Despite the emergence of a comprehensive regulatory framework, SEBI lacks the technical capabilities needed to carry out the investigations effectively. Acute shortages of capital and manpower have arisen. As a result, the number of successful convictions is exceptionally poor. Furthermore, under Indian law, there is no provision to impose penalties or even an investigation on a foreign national who has committed insider trading.

Conclusion
Indeed, the recent steps taken by SEBI in the form of setting up committees to recommend measures to enhance market surveillance and to reprimand Axis Bank to reinforce its internal structure concerning the 2017 WhatsApp leakage case are commendable. The need for the hour is for the suitable modifications and adjustment of the existing regulations to make the practice of insider trading more dissuasive so that insiders are discouraged from engaging in such transactions, thus ensuring and increasing consumer trust in the stock market.

References:

• George, R., n.d. SEBI On Insider Trading. [online] Legalserviceindia.com. Available at: Chopra, P., n.d. Insider Trading Laws In India. [online] Legalservicesindia.com. Available at: [Accessed 12 October 2020].
• Upadhyay, J., 2020. How India Cracks Down on Insider Trading? [online] mint. Available at: [Accessed 12 October 2020].
• Singh, K., n.d. Insider Trading Laws in India In Comparison with The Laws in US And UK. [online] Legalservicesindia.com.
• PTI, 2017. SEBI Seeks Bank Details, Call Records of Officials in WhatsApp Leak. [online] Business-standard.com. Available at: Almeida, A., 2020.
• Famous Insider Trading Cases in India Archives - Trade Brains. [online] Trade Brains. Available at: https://tradebrains.in/tag/famous-insider-trading-cases-in-india/
• Ganti, A., 2020. Insider Trading Definition. [online] Investopedia. Available at: https://www.investopedia.com/terms/i/insidertrading.asp#citation-3
• Takahara, K., 2006. Murakami arrested over insider trading: NBS chat with Livedoor pair a mistake: fund guru. The Japan Times, [online] Available at Corporate Finance Institute. n.d.
• Insider Trading - Definition, Examples, and Penalties for Insider Trading. [online] Available at: Investor.gov. n.d. I
• insider Trading | Investor.Gov. [online] Available at: Vivro.net. n.d.
• Overview of The SEBI (Prohibition Of Insider Trading) Regulations, 2015. [online] Available at:

 
End-Notes:

• SEBI (Prohibition of Insider Trading) Regulations, 2015, 2(g).
  Note: Since generally available information is defined, it is intended that anyone in possession of or having access to unpublished price sensitive information should be considered an insider regardless of how one came in possession of or had access to such information. Various circumstances are provided for such a person to demonstrate that he has not indulged in insider trading. Therefore, this definition is intended to bring within its reach any person who is in receipt of or has access to unpublished price sensitive information. The onus of showing that a certain person was in possession of or had access to unpublished price sensitive information at the time of trading would, therefore, be on the person leveling the charge after which the person who has traded when in possession of or having access to unpublished price sensitive information may demonstrate that he was not in such possession or that he has not traded or he could not access or that his trading when in possession of such information was squarely covered by the exonerating circumstances.
• SEBI (Prohibition of Insider Trading) Regulations, 2015, 2(d) - Connected persons specified in clause (i); or (b) a holding company or associate company or a subsidiary company; or(c).an intermediary as specified in section 12 of the Act or an employee or director thereof; or (d).an investment company, trustee company, asset management company or an employee or director thereof; or (e).an official of a stock exchange or of clearing house or corporation; or(f).a member of the board of trustees of a mutual fund or a member of the board of directors of the asset management company of a mutual fund or is an employee thereof; or (g).a member of the board of directors or an employee, of a public financial institution as defined in section 2 (72) of the Companies Act,2013; or(h).an official or an employee of a self-regulatory organization recognized or authorized by the Board; or(i). a banker of the company; or (j).a concern, firm, trust, Hindu undivided family, company or association of persons wherein a director of a company or his immediate relative or banker of the company, has more than ten percent of the holding or interest; NOTE: It is intended that a connected person is one who has a connection with the company that is expected to put him in possession of unpublished price sensitive information. Immediate relatives and other categories of persons specified above are also presumed to be connected persons but such a presumption is a deeming legal fiction and is rebuttable. This definition is also intended to bring into its ambit persons who may not seemingly occupy any position in a company but are in regular touch with the company and its officers and are involved in the know of the company's operations. It is intended to bring within its ambit those who would have access to or could access unpublished price sensitive information about any company or class of companies by virtue of any connection that would put them in possession of unpublished price sensitive information. SEBI (Prohibition of Insider Trading) Regulations, 2015, 2(e) - "Generally Available Information" means information that is accessible to the public on a non-discriminatory basis;
• NOTE: It is intended to define what constitutes generally available information so that it is easier to crystallize and appreciate what unpublished price sensitive information is. Information published on the website of a stock exchange would ordinarily be considered generally available. Investor.gov. 2020. Insider Trading | Investor.Gov. [online] Available at: [Accessed 1 October 2020].
• Vivro.net. 2017. Overview of The SEBI (Prohibition of Insider Trading) Regulations, 2015. [online] Available at: [Accessed 2 October 2020].
• Companies Act 2015. 195. Prohibition on insider trading of securities:
  No person including any director or key managerial personnel of a company shall enter into insider trading: Provided that nothing contained in this sub-section shall apply to any communication required in the ordinary course of business or profession or employment or under any law. Explanation: For the purposes of this section:
  insider trading means:
  an act of subscribing, buying, selling, dealing, or agreeing to subscribe, buy, sell or deal in any securities by any director or key managerial personnel or any other officer of a company either as principal or agent if such director or key managerial personnel or any other officer of the company is reasonably expected to have access to any non-public price-sensitive information in respect of securities of the company; or an act of counseling about procuring or communicating directly or indirectly any non-public price-sensitive information to any person;
  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.
  If any person contravenes the provisions of this section, he shall be punishable with imprisonment for a term which may extend to five years or with a fine which shall not be less than five lakh rupees but which may extend to twenty-five crore rupees or three times the amount of profits made out of insider trading, whichever is higher, or with both.