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An Overview of Insider Trading: Historical Perspective, Regulations, and Notable Cases.

Abstract

Insider Trading concerns mainly the equity markets and is one of the most frequent securities frauds. Stating it in simpler terms involves trading Stocks or Securities of a Company that has not been made available to the public. The insider’s Term generally includes the Company’s Executives, Employees, and any other individuals with access to the Material Non-Public Company details. Illicit Facet of this term arises when the person accessing such Confidential information uses it for their gain and to Avoid Losses by trading the securities based on that information.

It is not considered as the Easiest fraud to detect and the evidence in Such cases is mainly found through the Whistleblower’s or investigations which can be carried out in a similar way to the classic organized crimes. Insider Trading is considered as a violation of The Securities Laws and regulations.

By weaving together historical insights, regulatory scrutiny, and case analyses, this overview provides a holistic understanding of insider trading, fostering a nuanced appreciation of its impact on financial integrity and market fairness. Furthermore, it delves into notable cases that have left an indelible mark on the legal and ethical dimensions of insider trading. Through detailed examinations of these cases, the paper elucidates the evolving nature of legal interpretations, enforcement mechanisms, and the broader implications for financial markets and stakeholders. It aims to contribute to the ongoing discourse on regulatory strategies, deterrence mechanisms, and the ethical considerations surrounding insider trading in contemporary financial landscapes.

Keywords

Insider Trading, Securities Laws, court Decisions, Ethical Considerations, SEBI Regulations, Compliance.

Introduction

Ever since the Trading of Securities became well-known among investors worldwide, the concept of Insider Trading came into existence. This concept of Insider Trading has now become an alarming term to investors worldwide. Due to the increase in the Globalization of businesses, worldwide concerns have been raised. The First country to pay attention to this rising problem was the United States of America. Following them many other countries have made necessary Legal provisions to restrict Insider trading and to sustain the Investor’s trust in the capital market. Due to growing concerns in the field of Securities India also acknowledged the rising problem of Insider Trading.

Its Core Element is that it creates a Disparity of Information between the general public and the one with Insider Knowledge. Trading is to be based on the information available to the general public which ultimately contributes towards the market efficiency whereas using private information gives an unfair advantage which in turn disrupts the price discovery process in financial markets.

There are many Instances in which Legal Insider Transactions happen in the Stock Market and the question of its legality arises From the SEC’s attempt to maintain a fair marketplace. The question of legality does not arise as long as these Trades are Reported to The SEC’S. Engaging in Insider Trading is considered Illegal unless the Guidelines of the SEC are followed.

Research Methodology
This Research paper follows the Qualitative method approach and is based on secondary sources that help to gain an overview of Insider Trading. Information from Published Rules & and regulations, Websites, and Preceding Case Laws are used as Secondary Sources.

Review of Literature

The Case Aditya Omprakash Gaggar Vs. SEBI[1] as mentioned in the Notable Cases was an example in which the circulation of UPSI took place through WhatsApp Messenger, which claims to erase any traces when deleted and hence was spread selectively. If this act was legitimized then the confidence of the Investors would have Increased and would have been discriminatory therefore having an impact on the prices of the Securities at the cost of Investors. In the case of Mr. B. Renganathan (‘Noticee’) in the matter of Edelweiss Financial Services Ltd. Vs. SEBI[2] There was Noticee expressed Non-compliance in closing the Trading window when Necessary. In this case, a Repetitive violation of the Rules arose as the Noticee used technical Issues as an excuse for Delaying the Procedure and hence the court did not deem it as a Technical Issue.

Historical Perspective

As mentioned before in this article the Country to first act and make Rules against the practice of Insider Trading was the USA. While other countries followed their lead, India was also not late in recognizing the Detrimental impact of Insider Trading. In India the History of Insider Trading Traces back to the 1940s, Mr. P.J. Thomas was the Chairman of the Thomas Committee which was formed by the Government. The role of this committee was to evaluate Section 16 of the Securities Exchange Act, of 1956 which states the laws of Short Swing Profits in the USA. Short-swing profits are those that are created by Selling and Purchasing concurrently the Company’s Securities in a Certain Time Limit. Shareholding disclosures by the directors and Managers of a Company were required under the regulations stated under sections 307 & and 308 of the Companies Act, 1956. [3]

In India, this concept started to Ferment and became Popular and Significantly Noticeable in the 80’s and 90’s. The SEBI (Insider Trading) Regulations, 1992[4], the Systematic Code to Prevent this Practice was Formulated as the Rapid Advancement of the Markets in India needed more thorough Laws to modulate this Illegal Practice. Amendments were made after some loopholes were found in the Laws in some cases. A massive need to guarantee a clear Administrative Policy that is not only easily accessible but also explicit was felt. For this reason, a committee whose Chairman was Justice N.K.Sodhi. The SEBI Regulations, 1992 were reviewed by this committee and the report was submitted to SEBI on December 7, 2013. Several Recommendations and suggestions were made to improve the Combination of principles-based rules regarding Prohibition in India which are backed by legal framework.

Regulations Under SEBI (Prohibition of Insider Trading) Regulations, 2015 Last amended on November 24, 2022[5]

Regulation 3: Communication or Procurement of Unpublished Price Sensitive Information (UPSI)

Under this Provision, it is stated no one shall be allowed access or shall be able to procure any Private Document or information of the company that is concerning the securities which are to be listed or are already listed. The exception to this is that the said information is to be gained for legitimate purposes for carrying out duties and is gained as per legal obligations. A policy shall be made by the board of directors of a listed company as a part of the “Codes of Fair Disclosure and Conduct” formulated under regulation 8. The person Procuring such sensitive information shall be termed an “insider” under these regulations and a notice to maintain the secrecy of such data. An obligation is made under regulations to create an open offer; or with the consent of the BOD in the interest of the listed Company, the information is made accessible to the public 2 trading days before the proposed transaction. A Structural Digital database should be maintained containing the nature of UPSI and Information of the People having access to such UPSI such as Name, PAN Number, OR any Identification Number. Time stamping and audit trails should be done to Internally maintain the database. Such a Database should not be outsourced and should be preserved for at least 8 years after the relevant Transactions are Concluded, if necessary until completion of proceedings.

Regulation 4: Trading when in Possession of Unpublished Price Sensitive Information (UPSI) Permission &Limitation.

Trading securities regarding which a person has UPSI is not allowed unless the transfer, both Parties have access to the same user Sensitive Information it is an Off-Market inter-se Transfer, and the transfer is carried through a block deal window mechanism. The parties to the trade must have access to the same UPSI and it should not have been a breach under Regulation (3). These Off-market trades carried out by the Insiders must be informed to the company within two working days, the company then shall notify the Stock Exchange where the Securities are listed within two Working Days of becoming aware of such trades. These transactions must be bona fide a must be carried out according to the Statutory and regulatory Obligations. There is a Difference between the People making Decisions and the ones who possess the UPSI are contrasting and when the conclusion is being made the Individuals should not have Such UPSI. Adequate Precautions must be made so that no Regulations are being violated and no arrangements are breached. The Trade that is being Carried out must be per Regulation 5.

Regulation 5: Trading Plans

Under Regulation 5 A Trading plan must be formulated beforehand and presented for Approval to the Compliance Officer and also carry out a Public Disclosure Pursuant on his behalf. This Trading plan can commence Trading in the name of the Insider 6 months from public Disclosure; after the announcement, no trading should take place between the 20th trading day before the closure of any financial period; there should not be any overlap of the period between already existing trading plans by the Insider; The Securities must not be traded for Abuse. This Trading Plan will be assessed by the Compliance Officer to look out for any violation of Rules and Regulations and is also entitled to take express undertakings. He will be in charge of approving and monitoring the progress. Prior approval of Trade is optional. The plan that is Approved is irrevocable and the Insider is entitled to carry out the plan and is also not allowed to trade securities that are not mentioned in the plan. If the information is not generally available to the Public at the time of trading, then the compliance officer can put a stop to the commencement of The Trading plan until the Information is available to the general public.

Regulation 6: Disclosure of Trading by Insiders.

The disclosures regarding trading that are made by the trader’s Family or anyone whose advice is followed by the trader are considered a Disclosure of Trading. This derivative trading is for now permitted and lawful. The company should maintain such disclosures for a period of up to a minimum 5 Years, in any specified form.

Regulation 7(1): Initial Disclosure

As on the Date of These Regulations, within 30 days from these Regulations Taking effect the members of the company listed securities on any recognized SEs be it any key managerial Person, Promoter or Director must disclose all of his shareholdings. Disclosure of his shareholdings of the company in which he is appointed as a Key managerial person or a promoter must be made by him on the date of appointment or within 7 days of the Appointment.

Regulation 7(2): Continual Disclosure

If the amount of the Securities which are Traded Exceeds Rs. 10 Lakhs with Transition then within 2 Receipt Days such information shall be disclosed by every employee, Promoter, and Board of Directors to the Company. Within Two Days of Disclosure, Such Particulars must be informed to the respective SE by the Company.

Informant Incentives and Rewards

 Any Person who voluntarily puts forward a Voluntary Information Disclosure Form relating to any information regarding Insider Trading being carried out in the company; or, if the person believes that Insider Trading is being practiced in the company even if he does not qualify for any reward. A chapter relating to Rewards for the Informant has been introduced under SEBI which is Chapter II.

Regulation 7(B): Submission of Original information to the board

The Voluntary Disclosure Information Form shall be submitted by the Informant or his Legal Representative with all Original Information according to the Format and manner stated in Schedule D at the Office of Informant Protection. If the form is not submitted by the legal Representative, then the Informant is required to appear in Person for his Identity Verification. The Informant is given the Freedom to exclude the Information that may reveal his Identity and if is not viable then he can recognize the Document that he has confidence can reveal his identity.

Regulation 7(D): Informant Reward

The Informant will be deemed eligible for the Reward upon the recovery of the Amount at least amounting to Twice the Reward. at the sole discretion of SEBI, as per Regulation 7(F) the informant or the Legal Representative will be asked to make an Application as stated under “Schedule E” to claim the Reward, and the Informant must Disclose his Identity directly or through his Legal Representatives and provide any other additional Information required y SEBI. The amount of Reward Cannot exceed Rs. 1 Crore or any excess amount specified by SEBI at that time and shall be 10% of the amount recovered. An Interim award can be granted if deemed fit by SEBI which shall not exceed Rupees 10 Lacs. The money should be divided equally in case of two or more Informants.

Regulation 7 (g): Rejection of Claim for Reward

The reward shall not be made to the person unless he submits original information; the Information submitted is acquired by the Informant through a regulatory Industry. If there is already an ongoing case relating to the Provided Information. If the Informant knows that the provided information is False, Incomplete, or Fraudulent and nevertheless submits it, he will not be eligible for the Award.

Regulation 7(i): Protection against Retaliation and Victimization

There is a Code of Conduct which provides protects the employee who signs the Voluntary Information Disclosure form against threats of discharge, Termination, Suspension, etc. By the Employer regardless the information is rejected or accepted by SEBI. If the Informant is subject to any such retaliation then he can approach the Tribunals or Competent Courts for Relief. The Employer may be charged a Penalty if he is deemed Guilty and will be required to pay compensation to the employee.

Schedule B: Minimum Standards of Code of Conduct

Reports must be submittedby the compliance officer according to the time stipulated by the BOD. The people to whom this law is applicable shall be monitored under the Internal COC and a National Trading Window shall be used for it. It shall be imposed on such securities that have UPSI and will be closed when it is determined that these people are allowed to have access to such Information. The timing for reopening the Trading Window is decided by the compliance officer and it must not be opened earlier than 48 hours after the information is available generally. If the Trade is pre-cleared then they have to be executed in not more than 7 days, if not then the applicant needs to pre-clear the shares again. If the COC is not followed then disciplinary actions may be imposed by the person in charge of formulating the COC and shall be informed to the board promptly.

Schedule A: Principles and Procedure of Fair Disclosure

To ensure that the credible and finalized Information comes out to the general public a public disclosure of UPSI is necessary to make an impact. To avoid Selective Disclosure Consistent Circulation of UPSI is necessary and to ensure efficient circulation a Chief Investor is to be appointed. To ring about efficient circulation the UPSI should be made known specifically, accidentally, or with some other method to make such information available to the general Public. Regulatory authorities must provide Fair responses to Queries on news reports. The information shared with analysts must not be sensitive.

Provisions for Penalty due to Breach of the Statutes.

Violators are not allowed to deal with Securities in any manner nor can they dispose of the acquired Securities and all existing Transactions will be considered null& and void. The insider is not allowed to communicate with any other person belonging to the company. The Violator has to transfer an amount to the Investor Protection Fund which is Equivalent to the Cost Price or Market Price of the securities which is higher than the other.

The penalty imposed under SEBI Act, 1992

Under Section 15G:

The penalty provided under this Section is a Minimum of Rupees 10 Lacs & Maximum of Rupees 25 Crore OR 3 times of number of profits made out of Insider Trading whichever is Higher.

Under Section 24:

This Penalty is Imposed by the Adjudicating Officer on a Person who Fails to Act in Accordance with any orders or Directions. There will be a Prison penalty for a minimum term of 1 Month & Maximum of 10 years A fine will be imposed of a minimum of Rupees 25 Crore OR both.

Notable Cases

  • Aditya Omprakash Gaggar Vs. SEBI[6]

A Penalty was imposed of Rupees 15,00,000/- on the Noticee under S.15G, S.12A (d) & 12A(e) of the SEBI Act 1992. The Noticee was ordered to pay the Fine which is to be paid before completion of the 45 days from when the Receipt of this order is made.

  • Mr. Amalendu Mukherjee (Noticee) In the matter of Ricoh India Limited Vs. SEBI[7]

The Noticee was directed to discharge Rupees 2,30,34,010/- for Engaging in Insider Trading with a 12% interest within 45 days and the Noticee was restricted from accessing the securities Market for 7 Years.

  • Mr. B. Renganathan (‘Noticee’) in the matter of Edelweisis Financial Services Ltd. Vs. SEBI[8]
  • There was a series of Repetitive Violations on the Part of the Noticee that could not be disregarded and hence a penalty of Rupees 5,00,000/- was Imposed on the Noticee which was ordered to be paid from when the Receipt of this order was made.
  • Dr. Udayant Malhoutra (Appellant) Vs. SEBI (Respondent)[9]

There was no case of Urgency found in which the Respondent passed an Ex-Parte Interim without considering the injury that would be caused and will be irreparable. Therefore, the Impugned order could not be sustained and was at the Admission stage itself Repealed.

Suggestions & Conclusion

This Research provides a Comprehensive Understanding of the Historical Context, Regulations, and Landmark Cases. There have been many Amendments to improve the law and to increase its efficiency in protecting the Investors. Many challenges are being faced due to the increasing development in technology which is why it remains a Focal point for Investors. In-depth Research should be done considering the Psychological and behavioural analysis of the Investors. Careful Observation and flexibility will be required to counter the Emerging challenges. It can be done by Promoting Combined effort Internationally by using different Technological solutions which can in turn lead to minimizing this Insider Trade and gaining the Trust and confidence of the Investors.

Mrunmayee J. Gavande.

Government Law College, Mumbai.


[1] Mr. Aditya Omprakash Gaggar vs Sebi, THE SECURITIES APPELLATE TRIBUNAL MUMBAI, Nov. 25, 2020, (India), https://indiankanoon.org/doc/76437769/.

[2] Mr. B. Renganathan vs Sebi, THE SECURITIES APPELLATE TRIBUNAL MUMBAI, Mar. 24, 2021, at (India), https://indiankanoon.org/doc/164377736/.

[3] COMPANIES ACT, 1956, No. 307 ; 308, Jan. 18, 1956, (India), https://www.mca.gov.in/Ministry/pdf/Companies_Act_1956_13jun2011.pdf.

[4] SEBI (Prohibition of Insider Trading) Regulations 1992, Nov. 19, 1992, (India), https://www.sebi.gov.in/sebi_data/docfiles/20180_t.html.

[5] Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015, Jan. 15, 2015, (India), https://www.sebi.gov.in/legal/regulations/nov-2022/securities-and-exchange-board-of-india-prohibition-of-insider-trading-regulations-2015-last-amended-on-november-24-2022_65864.html.

[6] Mr. Aditya Omprakash Gaggar vs Sebi, THE SECURITIES APPELLATE TRIBUNAL MUMBAI, Nov. 25, 2020, (India), https://indiankanoon.org/doc/76437769/.

[7] Amalendu Mukherjee vs Sebi, THE SECURITIES APPELLATE TRIBUNAL MUMBAI, Jan. 19, 2021, at (India), https://indiankanoon.org/doc/22190235/.

[8] Mr. B. Renganathan vs Sebi, THE SECURITIES APPELLATE TRIBUNAL MUMBAI, Mar. 24, 2021, at (India), https://indiankanoon.org/doc/164377736/.

[9] Dr. Udayant Malhoutra vs Sebi, THE SECURITIES APPELLATE TRIBUNAL MUMBAI, June 27, 2020, at (India), https://indiankanoon.org/doc/27800969/.

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