Insider trading and its implications on Competition law

“There is no other kind of trading in India, but the insider variety” remarked a former
president of the Bombay Stock Exchange in 1992. Insider trading has utterly no place in any
fair-minded law-abiding economy – stated the then Securities Exchange Commission (“SEC”)
Chairman Mr. Arthur Levitt in 1998. Between these two extreme quotes lies the entire debate
on insider trading.
The market watchdog, Securities Exchange Board of India (SEBI) has laid down the SEBI
(Prohibition of Insider Trading) Regulations, 1992 to curb and prevent this malpractice. Insider
trading is a term subject to various interpretation, connotations and definitions. “Insider"
means any person who is a connected person or in possession of or having access to
unpublished price sensitive information.1 "Trading" means and includes subscribing, buying,
selling, dealing, or agreeing to subscribe, buy, sell, deal in any securities, and "trade" shall be
construed accordingly.2
Insider trading refers to transaction in securities of a public listed company, by any insider or
any person connected with the company, based on any material yet non-published
information, which have the ability to impact on said company's securities market price, for
their personal advantage. Corporate insiders such as employees, directors, managers, and
other connected persons get access to the critical price sensitive information easily. When
these persons use this price sensitive and non-public information for their own economic
advantage, they not only breach the fiduciary duty they have been imposed with, but also
impair the interests of shareholders. The act of insider trading is a result of asymmetric
information. Insiders enjoy the privilege of being in the company and close to the primary
source of information while general shareholders at large are dependent upon the secondary
sources of information. This paper is a humble attempt to· discuss illegal and legal insider
trading, and the magnitude of the insider trading and its implications on competition law.
Insider Trading – A Menace to Corporate Governance
Corporate Governance refers to a terminology which is often associated with the aspect of
ensuring transparency to Stake Holders3. It is founded on four pillars namely righteousness,
truth, perseverance, and social justice. In India most of the big companies are listed on any
one of the recognized stock exchanges namely BSE or NSE. The actions of the companies that
are listed in the stock exchanges have a bearing on their stock prices in the market when their
securities are traded. In such cases care must be taken to ensure that the actions of the
company are fair and not detrimental to its investors.
But unfortunately in today’s corporate world most of the corporate actions are detrimental
to the interest of the investors resulting in injustice and pecuniary problems. Stock prices
often respond to corporate actions such as Mergers, Acquisitions, Issuance of Bonus Shares

1
Section 2 (g) of the SEBI (Prohibition of Insider Trading) Regulations, 2015.
2
Section 2 (l) of the SEBI (Prohibition of Insider Trading) Regulations, 2015.
3
The term Stake Holders with regard to a company includes Shareholders, Employees, Regulatory Authorities,
Government Agencies, Creditors and Suppliers.
and Rights Shares, Stock Split etc. when it is executed much ahead of public announcement.
Insider trading strikes at the very root of market integrity as it is the most heinous frauds that
take place in the corporate sector.
Insider trading and Corporate Governance are opposed to each other as they are
contradictory in nature. They are contradictory in the sense that the former curbs
transparency to the shareholders of the corporate entity while the latter promotes the same.
Hence it is regarded as a menace to Corporate Governance.
Effects of Insider Trading
An efficient and effective stock market should have excellent information processing ability.
But the fact is that the most active stock markets in the world sometimes lack these attributes.
The ill effects of insider trading are as follows:
i) Insider trading undermines investor confidence in the fairness and integrity of the capital
market.
ii) The privileged few benefit and the common investors are left to suffer.
iii) Rampant insider trading defers foreign investors from the capital markets.
iv) Insider trading is often coupled with rigging of share prices to attract investors or lure
genuine investors into deals of mergers and acquisitions etc. The ultimate gain accrues to an
unscrupulous investor and ultimate loss to a genuine investor
Need for Change of Regulations in India
Insider trading has been practiced in India for the last 50-60 years. Two expert committees
namely the Patel Committee in 1985 and the Sachar Committee in I 987 had made
recommendations to curb such type of trading. However, no such concrete steps were ever
been taken by the government in this direction prior to the formation of SEBI. Securities and
Exchange Board of India was set-up as the apex investor protection body in the year 1992. It
framed regulations on insider trading named SEBI, Securities and Exchange Board of India
(Insider Trading) Regulations, 1992. But these regulations suffer major drawbacks in respect
of curbing insider trading and protecting investors. In the year 2002 they have thoroughly
revised these Regulations. An important example of this revision is, prior to amendment,
Regulation 2. Clause (k) defined 'unpublished price sensitive information' under 8 parameters.
After amendment, clause (ha) has been inserted to define 'Price Sensitive information' and
clause (k) has been amended to define the word 'unpublished' .The amendment seeks to take
away the defence which was provided by the definition earlier i.e. any information ~hich is
generally in the media or otherwise, cannot qualify as 'unpublished price sensitive
information'. This defence was relied upon by the Directors of MIS Hindustan Lever Ltd. (HLL)
when they were charged with the offence of insider trading in connection with the merger of
MIS Brook Bond Lipton India Ltd. (BBLIL) with HLL.
Regulations on insider trading
The regulations on insider trading is based on the proposition that if an insider corporate
entity possesses visual information but has a business reason for giving it forget it may be told
that information from the Marketplace the law builds on this premise dark silence is Golden
in its instruction to disclose or abs train in the absence of disclosure and inside me not trade
on the basis retail information I must also refrain from tipping inside of issues to trade
insecurities that are affected by the secret to which he is privy he must first disclosed
information and continue to ups train from trading until it has dissmeniated18. The definition
of insiders is in the legal practice very wide.
The vital add on to the definition lies on the concept of fiduciary duty and the misappropriation
of the information any trading based on the confidential; information obtained when the
directors, officers and key employees of the firm who owes fiduciary duty may be viewed as
either breaching their fiduciary duty or misappropriating information that belongs to the firm
19. thus agents who are not directors officer or key employees of a firm but who bare fiduciary
duty to the firm such as firm contracted lawyers , consultants and investment bankers would
also be banned from trading on any information about the firm they also have obtained when
performing their duties in order to ban insider trading 20. India is one of the countries which
recognize the imminent danger that insider trading could inflict upon the shareholders financial
markets and the corporate governance in pursuance of the Thomas committee, 1948 India
incorporated in the section 307 and 308 of the companies act 1956 which made it mandatory
for the directors and managers to disclose their trading activities in the public. after the
establishment of SEBI an all embracing regulation (prohibition of insider trading) was enacted
in 1992 (22) it prescribe two type of insider firstly, the person who are connected to the
company and who are expected to have unpublished price sensitive information and secondly
the person who are not connected to the company or deemed to be connected to the company
but have actually received or had access to the unpublished price sensitive information.(23)
The primary regulating of the securities marketed India, SEBI has given new and improve form
to the entire structure governing the insider trading phenomenon in the country with a name of
plugging in the loop holes and insufficiencies of 1992 regulations. Provided in the new
regulation 2015 acts as a unique and effective tool in interpreting the regulations. These new
regulations provide for much need validity and coherence in the concerned legal regime. But
as far as its efficiency is concerned, it depends upon the way in which it is to be implemented
by the regulator an dits interpretation by the appellate authority.