You are on page 1of 13

INSIDER PROJECT REPORT

SUBMITTED TO : MS VINEETA PATNAIK

Harsh Pandey
TRADING AND PG 21714

IT’S LEGAL
MECHANISM IN
INDIA
TABLE OF CONTENTS

INTRODUCTION...................................................................................................................................... 2

CHAPTER 1 .................................................................................................................................................... 3

AN OUTLINE OF INSIDER TRADING REGULATIONS, 2015 AND ITS VITAL FEATURES .................................... 3

CHAPTER 2 .................................................................................................................................................... 5

INSIDER LAWS UNDER SECTION 195 OF COMPANIES ACT .......................................................................... 5

CHAPTER 3 .................................................................................................................................................... 6

COMPARISON BETWEEN INDIA, US AND UK OF INSIDER TRADING LAWS .............................. 6

UNITED STATES .................................................................................................................................... 6


UK ............................................................................................................................................................. 7
INDIA ....................................................................................................................................................... 7
CHAPTER 4 .................................................................................................................................................... 8

CASE STUDIES ................................................................................................................................................ 8

RAKESH AGGARWAL VS SEBI..................................................................................................................... 8


SECURITIES EXCHANGE COMMISSION VS RAJAT GUPTA .......................................................................... 9
DILIP PENDSE VS SEBI .............................................................................................................................. 9
CONCLUSION AND SUGGESTIONS ..................................................................................................... 10

CONCLUSION........................................................................................................................................... 10
SUGGESTIONS ......................................................................................................................................... 10

1
INTRODUCTION

” Invest Today in Tomorrow News”

The beginning of the Insider Trading in India can be outlined back in late 1920 but the main
codified law was brought in the form of regulations in later 1980’s1 It took almost 10 years to
convert that regulation to prohibition. The sole responsibility was given to the SEBI to protect and
safeguard the interests of the investors so the markets remain safe for Investments and Trading. In
1992, when SEBI gained the stature of statutory body it drafted and framed rules for the Insider
Trading Regulations with the approval of the Central Government. With globalization and
liberalization the Indian Economy, the gates of Indian capital markets was opened, which led to
several changes and the insider trading laws were amended to meet the demands of the Structural
market growth and development that is required for any promising nation.

2
CHAPTER 1
AN OUTLINE OF INSIDER TRADING REGULATIONS, 2015 AND ITS VITAL FEATURES

The New Insider Trading Regulations has brought down under the Chairmanship of Justice
N.K.Sodhi. The comprehensive changes amended the 1992 act by redefining various aspects
currently required for securities market and ensure compatibility of domestic laws with global set-
up which prevails in the whole world. The salient features of the Regulations are;

a) Underneath the new regulation the explanation of Insider2 has been supported by intensifying
the definition of “Connected Person”3.Now every connected person comes under the ambit of
insider if he is directly or indirectly or somehow associated with a company. It includes directors,
officers, public servants/persons holding statutory information, deemed relatives, having
contractual or fiduciary relationship, or holds any business or professional relationship between
himself and a company or such persons who have directly or indirectly access to Unpublished
price sensitive information

b) The classification of Unpublished Price Sensitive Information(UPSI) has been widened. It says
any information that is not generally available, which upon becoming generally available, is likely
to materially affect the price of the securities to which it relates and will ordinarily include
information relating to the following aspects:

i) Financial results

ii) Dividends

iii) Change in Capital Structure.

iv) Mergers, Demergers, Acquisitions, Delisting, Disposals and expansion of business and such
other transactions.

v) Changes in key management personnel.

2
Regulation 2(g)
3
Regulation 2(d)

3
c) Trading Plans4 are fresh concepts introduced under the New Regulations of 2015, wherein
Insiders who are accountable to have UPSI for twelve months can formulate trading plans with
following appropriate safeguards. It was drafted to smooth functioning of compliant trading by
Insiders who are frequently in possession of UPSI. It has been borrowed from Rule 10b5-1 of the
U.S. Securities Exchange Act, 1934.

d) The new regulations encompass a code of fair disclosure and conduct5. Here the Board of every
company which is listed on a stock exchange is required to formulate and publish a code of
practices and procedures to be followed for fair disclosure of UPSI in accordance with the
principles set out in Schedule A6 to the Regulations.

e) Another significant aspect is in relation with notional trading windows which are used as an
instrument to monitor compliant trading by designated persons within the company. The concept
of notional trading windows is applicable to external agencies having contractual or fiduciary
relationships with the company which includes law firms, accountancy firms etc. The time frame
for re-opening of trading windows has been set to 48 hours after the UPSI becomes accessible.

f) It also that it covers a specific carve out for communicating and procurement of information, for
conducting due diligence7 regarding mergers and acquisitions. It states that till the Board thinks
that the transaction is in the best interest of the company due diligence can be directed.

g) For monitoring & implementing the Codes Specified in the New Regulations the Compliance
Officer is appointed who should be financially literate and have good knowledge of legal &
regulatory compliances of the companies. He is answerable for acquiescence of policies,
maintenance of records, procedures, monitoring adherence to the rules for the preservation of
unpublished price sensitive information, monitoring of trades and the implementation of the codes
under supervision of the board of directors of the listed company;

4
Regulation 5
5
Regulation 8 & 9 read with Schedule A & B
6
Schedule A of the Regulations sets out certain minimum standards such as equality of access to information,
publication of policies such as those on dividend, inorganic growth pursuits, calls and meetings with analysts,
publication of transcripts of such calls and meetings etc.
7
Regulation 3(3)

4
i) Even the disclosures obligations8 have also been defined as the initial and continual disclosures
made by the various categories such as key personnel , directors and connected person of company
whose securities are listed in stock exchange.

CHAPTER 2

INSIDER LAWS UNDER SECTION 195 OF COMPANIES ACT

When Companies Act 2013 came into force for the first time it talked about the unfair insider
trading. Formerly numerous committees were established to include this term but it couldn’t be
conscripted to the Companies Act 1956, it was dead silent and numb about the said definition of
insider trading. Section 195 of the Companies Act dealt with the probation of insider trading of
the securities wherein it prohibits the directors or any key managerial personnel of the company
in the illegal practice of insider trading , irrespective of whether the company is listed, private,
public or unlisted. Nevertheless, if we see the definition of section 195 it talks about the dealing
of the securities which have the same meaning as mentioned Securities Contracts (Regulation)
Act, 1956. Those securities are termed as “marketable securities”. But in the private company
securities cannot be marketable as only listed companies can deal in selling or buying of securities.
Some authors and experts have often argued that section 195 only talks about the public company
or listed company and it is very difficult to bring private companies in the ambit of the above
provision9. Another reason can be section 458 of the Companies Act 2013 empowers the SEBI to
prosecute insider trading in securities of ‘listed companies or those companies which intend to get
their securities listed. but now the dilemma is due to the ambiguous nature of the section it is very
hard to recognize that whether private companies will come under ambit or not. As nothing has
been clarified by the Ministry of Corporate Affairs related to such provision Moreover if we see
from the another viewpoint then we can say that if comparison is made between private and public
companies regarding insider trading the danger is bigger in private company as compared to public
company. As public Companies follow strict Disclosure norms. They are legally binding in every

8
Regulation 6&7
9
Mayson, Stephen W. et. al., Company Law (First Indian Reprint, Universal Law Publishing Co. Pvt. Ltd., 2000) 359.

5
aspect of checks and balances. Additionally they have to comply through strict and stringent
functioning Companies Act or SEBI Regulations or SEBI (Issue of Capital and Disclosure
Requirements) Regulations 2009 or SCRA whichever when needed, Further they also have to
provide audit and financial reports, any developments , investments criteria , trading and many
important disclosures at regular intervals10. if they fail to do so then there can be serious
consequences and penal provisions can be initiated against violating company . Moreover,if any
ambiguity is there or confusion can also be checked in given website of stock exchange where he
company is listed. So if going by the procedures we are not denying the possibility of unpublished
price-sensitive information of being leak but it is not that easy to bypass the extensive and
regressive disclosure requirements, so it often contended that such unrevealed information is a
sporadic commodity in the framework of public companies. On the other hand private companies
have negligible obligations and responsibilities. As most the information of the company is
available only to the directors and persons in authority or employees who hold certain position or
edge over other individuals in terms of information as shareholders/ stakeholders are dependent
on these key managerial personnel only for their grievances. So very little scope is there for
improvement. Such vibrant and transparent provision should be brought down into force so that
the confusion regarding vagueness of the said section can be ratified and private companies can
also come under the purview of section 195 .

CHAPTER 3
COMPARISON BETWEEN INDIA, US AND UK OF INSIDER TRADING
LAWS

UNITED STATES

The Prohibition of insider trading laws first originated from US only. The regulatory policies
framed by Securities and Exchange Commission(SEC) is accountable for the proper functioning
in securities market. The law prohibiting the” insider trading” was introduced in 1934, which is

10
Chahar, Himanshu and Sodhi, Sumeer, Insider Trading: A Critical Analysis, available at
http://www.legalserviceindia.com/article/l199-Insider-Trading.html (accessed on26/8/2017).

6
Securities Exchange Act where section 10 states about the general anti-fraud provisions which
occur in stock market transactions. However, the legislative setup went ahead and added section
10(b)11 specially aimed for prosecuting insider trading cases but still no was explicit mention of
the word insider trading. The judiciary came in the picture and enacted Rule 10b-5 which
eventually became the cornerstone of US insider trading laws. Moreover, Rule 10b – 5(1) outlines
the meaning of insider trading and Rule 10b-5(2)12 talks about the duty of trust or confidence.
Moreover considering the need of that hour, it enacted Insider Trading Sanction Act, 1984
(“ITSA”), the Insider Trading and Securities Fraud Enforcement Act, 1988 (“ITSFEA”) to look
after the criminal as well as the civil liability of insider trading13. In US, the sanctions and
punishments for insider trading are the stringent one14. It is both a Civil and a Criminal Offence in
nature. The imprisonment is of twenty years and a fine of 5 million US Dollars if a person is found
in the unlawful practice of insider trading.

UK

The statutory laws dealing with Insider Trading Regulation in UK is the Criminal Justice Act
,1993 and Financial Services and Markets Act (FSMA), 2000. The Criminal Justice Act 1993(
CJA) provided only the criminal penalty for insider dealing but later on Financial Services and
Markets Act, (FSMA)15 brought down civil/administrative sanction for market abuse under which
insider trading is included as one of the offence. In UK is not as strict as USA but still here as well
the sanction is both a Civil and a Criminal Offence in nature. If one found carrying the act of
insider trading then an imprisonment of seven years and a fine which is unlimited i.e. can depend
upon case to case

INDIA

11
Section 10(b) is codified at 15 U.S.C. § 78j (b).
12
SEC Rule 10b-5 is codified at 17 C.F.R . § 240.10b-5.
13
Sekhar, K., Guide to SEBI Capital Issues, Debentures and Listing (2nd Edn., Wadhwa and Company Law
Publishers, 1996) 3
14
See, Insider Trading – A U.S. Perspective, available at
http://www.sec.gov/news/speech/speecharchive/1998/spch221.htm visited on 26/8/2017
15
Part VIII of FSMA contains the provisions relating to market abuse and section 118 (1) defines the specific
offence of market abuse

7
India through Securities and Exchange Board of India (Insider Trading) Regulations 1992
prohibited any illegal and unlawful practice in respect of the insider trading. The market regulator
in SEBI acts as watchdog for trading fraudulent trade practices and professional misconduct are
detrimental to the interests of ordinary investors16. A person in violation of the norms od insider
trading laws will be dealt under section 24 and section 15G of the SEBI Act 1992. The regulation
does not contain any provision prescribing penalty for insider trading it’s just the general provision
. Section 15G provides for insider trading penalty of ‘twenty-five crore rupees or three times the
amount of profits made from insider trading, whichever is higher’17 as the criminal penalty is
imposed on the violation of any provisions of SEBI Act 1992 or any rules or regulations as
prescribed18. So in other words it just an Economic Offence and not a Criminal Offence, Several
debates have been made but still no clear picture has been formulated till now.

CHAPTER 4

CASE STUDIES
RAKESH AGGARWAL VS SEBI
Rakesh Aggarwal was the Managing Director of ABS Industries Ltd (ABS) and was involved in
discussions with Bayer A.G ( a company incorporated in Germany) concerning their take
over ABS Industries Ltd. Subsequently before the merger was made public, being the managing
director he had certain unpublished price sensitive information, so making use of that he entered
into the agreement with his brother of buying the shares of ABS so that he can make profit on the
same shares when company goes for open offer. The agreement entered between Rakesh Aggarwal
and his brother to acquire the shares before merger was held violative Regulation 4 of the SEBI
Regulations also section 24 of the SEBI Act in which it asked him to deposit RS.34,00,000 in the
Investor Education and Protection Funds if any investor suffered any loss due to this illegal
agreement. But he alleged that he did for the interest of the company just to acquire 51% share.
He appealed against such order of SEBI and got the desired relief from SAT.

16
Samir C Arora Vs SEBI
17
SEBI (Amendment) Act, 2002 substituted it for ‘not exceeding five lakh rupees’
18
Sharma, Vaibhav, ‘Prohibition on Insider Trading: A Toothless Law’ Law School Research Paper No. 996. 27,
available at SSRN: http://ssrn.com/abstract=1400824.

8
SECURITIES EXCHANGE COMMISSION VS RAJAT GUPTA
USA’s Securities Exchange Commission’s (SEC)(complainant) alleged that Rajat.Kr
Gupta helped his business counterpart Rajaratnam who happens to be Managing Partner of
Galleon Management by providing some alleged that non- public information regarding
Berkshire Hathaway Inc’s 5 million investment in Goldman Sachs was disclosed when Rajat was
the member of the Board of Directors of the Goldman Sachs Group Inc. Rajaratnam utilized
this vital information and traded hedge funds in his own company, that resulted in the violation
of the Section 10(b) of the Securities Exchange Act, 1934 , Exchange Act Rule 10b-5 and Section
17(a) of the Securities Act of 1933

Subsequently Rajat Gupta was sentenced to two years in prison on the account of conspiracy and
securities fraud and was asked to pay a fine of 5 million US Dollars and Rajaratnam was ordered
to return the profit he made and the losses he avoided with the certain interest rate due to carrying
out the activities of illegal Insider Trading.

DILIP PENDSE VS SEBI


Nishkalpa was the wholly owned subsidiary of Tata Finance Ltd (TFL) Dilip Pendse was the
Managing Director of TFL. Nishkalpa suffered a massive loss of around 80 crores and this
affected the profits of Tata Finance Limited also. Later on it was determined this was due to some
Unpublished Price Sensitive Information ( UPSI) was passes by Dilip Pendse to his wife who
sold 2,90,000 shares of TFL of her as well her father-in-law. SEBI brought charges against Dilip
Pendse for Insider Trading.

However he was acquitted by the SAT on charges of Insider Trading as it fall short of the necessary
evidence and nothing could be proved in cross examination as a case involving criminal liability
has to be proved beyond he reasonable doubts then only the offender can be liable.

So SEBI by enacting the new regulation tried to fullfill the ambiguities which are very much there
in the system, its effectiveness and efficiency can only be known after a passage of time only as it
is very early to comment about the performance of the new regulation and how competent is it to
curb the menace of insider trading.
9
CONCLUSION AND SUGGESTIONS
CONCLUSION

Greed has always been the driving factor behind the irregularities that prevail in the stock market,
it can range from price rigging, bid rigging or insider trading. There is a proverb that “ Insider
trading is as old as trading in itself ”.So it is not a new concept it has been always there. It’s like
making more profit from the desired outcome In Present Day scenario , insider trading can be
regarded as the poison which eats the vital components of the stock market, undermining the
investor confidence in dealing, buying and selling of securities, it is prohibited in every country
whether it have a developed market or developing market, .Now comng to the Indian law, the
complexities of undertaking , and their implementations has lead them to treat as an economic
offence rather than criminal offence, in contrast to USA where convictions happen in the
infringement of insider laws here, till now still India is still waiting for its first conviction,
whenever an offender commits an illegal trading, he gets saved by paying nominal penalty or the
consent mechanism so that both the party can have amicable solution to given problem but the
real questions remains unanswered.

SUGGESTIONS

Firstly ,all the companies which are susceptible to this offence should determine and describe what
is ‘insider area’, which should consist of only the confidential information, and safeguard that
unlawful access to anyone shouldn’t be permitted. The “insider area” should be separated from
public area as well, a compliance department should be made to ensure that every confidential
information is within insider area , also there should be regularity between what is price sensitive
information and what is not.

Secondly, in order to have an effective and strong mechanism the laws for preventing insider
trading should be reviewed within a particular time frame to make such necessary amendments as

10
required,it shouldn’t be like to wait for another two decade to implement any changes or alterations
if required, so that the purpose of the effective law does gets hindered.

Thirdly, government should create a separate department which will only deal with complaints
regarding insider trading and such information providers will be awarded if they give any such
information regarding any insider trading or potential insider trading or a separate mechanism can
be established in stock exchanges to check and restraint the practices of insider trading.19

Although the new regulations tried to provide a balanced approach in consonance with global
practices and approach, it appears to be a stricter law as compared to the old law all the loopholes
which were present were rectified. A plethora of new concepts have been drafted but still in various
fields and aspects many clarifications and explanations are needed so as to completely curb the
menace of insider trading and its effect on market. And to rectify the loopholes which were there
in previous regulations. Still the definition of Insider and Due Diligence is debatable but still we
have a long way to go as necessary change is the need of the Society at large.

19
Siladitya Dasgupta 1 Deepsikha Bhowal Insider trading” laws in India – Status before and after the enactment of
Indian Companies Act, 2013 http://ijlljs.in/wp-content/uploads/2015/08/15-Insider-Trading-Laws.pdf ( visited on
27/8/2017)

11
12

You might also like