Insider Trading & its Implications

Insider Trading or Insider Dealing is an illegal practice of trading in stock exchanges for the benefit of you by obtaining confidential information. Internal trading to buy or sell securities is a person who has access to non-public information about the security. Internal trading can be done illegally or legally depending on when the insider is doing the trade. It is illegal in the context where material information has not yet been made public. Trading illegally involves investing in others if you have illegal information. Internal legal trading occurs when company executives buy or sell shares but disclose their transactions legally.

It is well known that high standards of corporate governance and transparency are essential to the development of capital markets. The disclosure of information regarding a company enables investors to make decisions regarding investments in securities of such a company. For prices of securities to accurately reflect relevant information about a company – an essential precondition for the efficient functioning of capital markets - such information should be equally available to all

market participants at the same time. Naturally, distortions occur in the market if company insiders possess superior information that they use to trade in the securities of their company, which is unavailable to the counterparties with whom they trade or to the market generally. Hence, countries generally tend to enact laws that prohibit insider trading.

For example:

  • Previous information about the bonus may result in the insider receiving significant disclosures, especially from the fund, knowing that his / her catch will increase significantly after the announcement of the bonus.

  • Business executives, directors and employees who have sold company security after learning about the remarkable, confidential development of companies.

  • Legal practitioners, bankers, brokers, and printers - are provided with such information to provide services to the securities organization.

  • Public servants - educated with that knowledge because of their employment by the government.

The concept of Insider Trading in India started fermenting in the ’80s and ’90s and came to be known and observed extensively in the Indian Securities market. The rapidly advancing Indian Securities market needed more comprehensive legislation to regulate the practice of Insider Trading, thus resulting in the formulation of the SEBI (Insider Trading) Regulations in the year 1992, which were amended in the year 2002 after the discrepancies observed in the 1992 regulations in the cases like Hindustan Levers Ltd. vs. SEBI8, Rakesh Agarwal vs. SEBI9, etc. to remove the lacunae existing in the Regulations of 1992. The amendment in 2002 came to be known as the SEBI (Prohibition of Insider Trading) Regulations, 1992. SEBI also appointed a high-level committee (HLC) for an overhaul of insider trading regulations, and this committee issued its report in December 2013. Based on the HLC report, SEBI issued the SEBI (Prohibition of Insider Trading) Regulations, 2015. The SEBI Prohibition of Insider Trading Act 1992 has been amended thrice till now. The latest amendment came into effect on 17th September 2019. The recent amendment made many unexpected changes in the previous one.

The case of Hindustan Lever Limited (HIL) vs SEBI, was one of the earliest cases where SEBI acted against Insider trading, in this particular case around 8 lakhs shares were bought by HIL from the Unit Trust of India, and after some weeks a merger was announced between HIL and the other subsidiary. SEBI held that, since, HLL and BBLIL were subsidiaries of the same London based Unilever, and were effectively under the same management, HLL and its directors had prior knowledge of the merger. Thus, HLL was covered under the definition of insider trading. As per SEBI, the fact that the information about the merger was available with HLL was enough to satisfy the requirement of Section 2(k) of the 1992 Regulations.

In another case of Reliance Industries Limited (RIL) vs SEBI, RIL had a stake of around 5 % in the L&T company and further, there were two nominees for the company Mr Mukesh and Anil Ambani. Further, RIL went on purchasing stakes in L&T and almost got around 10 %. RIL further made a sale of these shares above the market price to Grasim Industries as a result of which the two nominees were removed and RIL was prohibited from further trading in shares of L&T. SEBI carried out an investigation and a case was filed against RIL in which they were held to be guilty of Insider trading.

Recently, The Securities and Exchange Board of India (SEBI) barred Future Group founder Kishore Biyani from the capital markets for a period of one year for alleged breach of insider trading regulations. The regulator directed Biyani and three other entities to disgorge more than Rs 20 crore made wrongfully by dealing in shares while in possession of unpublished price sensitive information (UPSI). Further, FCRL, Kishore Biyani and Anil Biyani have also been barred from dealing with the securities of Future Retail Ltd (FRL), whether directly or indirectly, for a period of 2 years.

As we have seen, the substantive law relating to insider trading has been considerably strengthened over the years. SEBI has also acquired greater enforcement powers, which it is likely to exercise given that insider trading can potentially cause a serious dent on market integrity. Regulations issued by SEBI, their enforcement by SEBI as well as rulings by SAT and various courts have highlighted the need for companies to take serious note of insider trading concerns. In any event, companies and insiders would be well-advised to take precautions to not fall afoul of the legal regime.

With as many new stories, front-page articles, and documentaries as there are surrounding the subject, you would think that people would understand that insider trading is illegal. Yet, from time to time, scandals erupt that cause it to re-enter the public consciousness in a big way. Some investors’ desire to make money is so strong, it causes them to ignore the rules and regulations designed to protect them and keep the market fair for all investors. However, when they are caught, they are going to have to live with the consequences.

"Insider trading tells everybody at precisely the wrong time that everything is rigged, and only people who have a billion dollars and have access to and are best friends with people who are on boards of directors of major companies - they're the only ones who can make a true buck." - Preet Bharara
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