INSIDER TRADING

LAW RELATING TO INVESTMENTS, SECURITIES AND COMPETITION

Chanakya national law university, Patna

Ankit Raj Roll No. 108 Semester IX

Acknowledgement

INTRODUCTION The project comprehensively deals with the different implications of the insider trading as well as the efficacy of the existing regulatory mechanism in place in the shape of SEBI (Prevention of Insider Trading) Regulation Act, 1992 to deal with this problem. The project has mainly focused on insider trading from Indian perspective. The Hindustan Liver Limited Case has been dealt at length which necessitated changes in the definition of the insider trading through the incorporation of a deeming provision. The author has also focused on insider trading from the United States and United Kingdom perspective which has a stringent law in place to deal with the problem of insider trading. In fact the SEBI (Prevention of Insider Trading) Regulation, 1992 is being inspired from the United States. The term insider trading is popularly used in the negative sense as it is perceived that the persons having access to the price sensitive and unpublished information used the same for their personal gains. However insider trading per se does not mean any illegal conduct. It encompasses both legal as well as illegal conduct. The legal version is when corporate insiders officers, directors, and employees buy and sell stock in their own companies. In order to legalize their transactions, the directors and employees of the company should inform about their dealing with the securities to the SEBI. However, commonly often we associate this term with the breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, non public information about the security. Insider trading is defined by the Blacks Law Dictionary in the following words -The use of material non public information in trading the shares of the company by a corporate insider or any other person who owes a fiduciary duty to the company A study by the international consultants Ernst & Young (E&Y) is reported to have noted that India has a low rate of fraud perpetrated by company insiders. Around 84 percent of the fraud involves the hand in glove relationship between the employees and a third party. Therefore, the surveillance mechanism in countries United States is quite tough to even rule out such a probability. However, lower rates of employee fraud do not mean that Indian company managements are honest and that shareholders get a better deal in India than elsewhere. Ernst and Young also came out with an interesting observation that in India company insiders with privileged access to information indulge in rampant insider trading for personal gains rather than to benefit the shareholders. Therefore, the obvious conclusion drawn by Economic Times was that the controlling interests and not the employees who take the shareholders for a ride.1

INSIDER & INSIDER TRADING DEFINED Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992, does not directly define the term "insider trading". But it defines the terms "insider" or who is an "insider;2

K.S Chalapati Rao, Company Law, Available at http://isid.org.in/pdf/CompLaw.PDF, accessed on 6th April, 2010. 2 Regulation 2(e) of the SEBI (Prohibition of Insider Trading) Regulations define insider as any person who, is or was connected with the company or is deemed to have been connected with the company, and who is

 who is a "connected person"; What are "price sensitive information".3 Obviously an insider, who has deep insight into the affairs of the corporate body and holding knowledge about "price sensitive information" relating to the performance of the corporate body that could have a decided impact on the movement of the price of its equity, is at a vantage position with regards to a prospective trading in the shares of the company to the detriment of the common investors. Taking this fact into account the Regulation prescribes several "do-s" and "don'ts" with reference to these "insiders". The effect of the regulatory measure is to prevent the insider trading in the shares of the company to earn an unjustified benefit for him and to the disadvantage of the bonafide common shareholders. According to the Regulations "insider" means any person who, is or was connected with the company or is deemed to have been connected with the company, and who is reasonably expected to have access, connection, to unpublished price sensitive information in respect of securities of a company, or who has received or has had access to such unpublished price sensitive information; The above definition in turn introduces a new term "connected person". The Regulation defines that a "connected person" means any person who(i) is a director, as defined in clause (13) of section 2 of the Companies Act, 1956 (1 of 1956) of a company, or is deemed to be a director of that company by virtue of sub-clause (10) of section 307 of that Act or (ii) occupies the position as an officer or an employee of the company or holds a position involving a professional or business relationship between himself and the company whether temporary or permanent and who may reasonably be expected to have an access to unpublished price sensitive information in relation to that company;

According to Regulation, unpublished Price-sensitive information means such information which is not in the public domain or the market is not aware about it. Such information has a material effect on the price of the shares and the value of the securities of the company. For instance the value of the shares of the company may undergo change after the acquisition or merger of the company. The scope of such information is very wide as there are many microscopic details in the course of the administration of the company which has a direct or indirect impact on the prices of the shares. The ambit of such information is mentioned in a nutshell below. # A significant business development or a proposed change in the nature of the Companys business # Details of material contracts that are being negotiated by the Company # Potential litigation that would have a substantial effect on the Company

reasonably expected to have access to unpublished price sensitive information in respect of securities of a company, or who has received or has had access to such unpublished price sensitive information 3 Regulation 2(ha) of the SEBI(Prohibition of Insider Trading) Regulations: price sensitive information is any information which relates directly or indirectly to a company and which if published is likely to materially affect the price of securities of company

# Proposed change in the share capital structure of the Company # A proposed change in the Companys dividend policy # A major change to the board or senior management 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 company. The following information would be considered as the price sensitive information within the purview of the SEBI regulations. # Periodical financial results of the company # Intended declaration of dividends (both interim and final) # Issue of securities or buy-back of securities # Any major expansion plans or execution of new projects # Amalgamation, mergers or takeovers # Disposal of the whole or substantial part of the undertaking # Significant changes in policies, plans or operations of the company

SEBI The Watchdog SEBI GUIDELINES ON INSIDER TRADING ARE PREVENTIVE IN NATURE The SEBI Act (Insider Trading) Regulations prohibit "insiders" from dealing in exchange-listed securities on his or another's behalf based on unpublished price sensitive information, communication of such information unless in the ordinary course of business, or counseling others based on that information.4 "Dealing in securities" means trading or agreeing to trade either as a principal or agent.8 Liability is not imposed on tippees, persons who have been given information by the insider. An "insider" is a person connected to a corporation, and is reasonably expected to have access to, has received, or has previously had access to unpublished price sensitive information. A "connected person" can include directors, officers, employees, or "professionals" who may be reasonably expected to have access to such information. The "professionals" included under this definition include stock exchange members, self-regulatory organization (SRO) members, and bankers. The "information" is any unpublished information that relates to the company that if published would materially affect the market. The recent draft guidelines issued by SEBI for public discussion are the latest of the developments in India in this direction. Earlier, one would recollect the 1992 regulations, which, at best, would be described as a sleeping beauty (or a sleeping giant) since they did not appear to be aggressively pursued or enforced. In this article, the latest guidelines as proposed have been discussed. The importance of these guidelines cannot be understated. The insider trading regulations are basically punitive in nature
4

See The Gazette of India Part III (1992), Securities and Exchange Board of India (Insider Trading) Regulations, 1992, under 30 of the Securities and Exchange Board of India Act, 1992, Securities and Exchange Board of India, Bombay, 19 Nov. 1992

in the sense that they describe what constitutes insider trading and then seek to punish this act in various ways. The new guidelines are basically preventive in nature. More importantly, they will have to be complied with by all listed companies; all market intermediaries (such as brokers) and all advisers (such as merchant bankers, professional firms, etc.). These guidelines require that each of these entities should take steps in advance. The guidelines provide for very detailed procedures that each of such entities would have to follow. In a sense, this approach makes sense since such offenses are easier to prevent but far more difficult to prove and prosecute. Even the classic cases in the west such as the celebrated Dennis Levine case in the United States shows the vigorous and extensive efforts the authorities had to take including pressurizing socalled tax havens to reveal information when such havens are otherwise known for their strict confidentiality. Such cases do serve as an example for those who may think of carrying out such acts. But preventive measures are likely to substantially reduce such acts as also educate the innumerable insiders of the law relating to insider trading. Interestingly, SEBI has sought to delegate most of the procedures almost up to the last stage on the entity concerned and usually it will be up to the entity to carry out initial investigation for final submission to SEBI for taking punitive action. Further, such entities have been required to provide for internal punitive measures such as monetary penalties, forfeiting Esops, etc. The guidelines provide for a set of procedures and code of conduct for those entities whose employees; directors and owners are most likely to be in a position to take advantage of inside information for personal gain. These guidelines are separately prescribed for listed companies, market intermediaries and professional firms. Quite expectedly, the guidelines for listed companies are given the most attention and place more responsibility on such companies. Before we go further, it is necessary to first understand what the offense of insider trading is. For this purpose, one has to understand two important terms. Further, they are also required to give monthly reports. Further, it would have been better if a cutoff point in this regard could have been laid down so that small transactions in shares need not be reported. Of course, this is not to encourage small offenses but there could be separate procedures for such acts. Similarly, a reporting should be only by exception and thus only where a person actually trades in the shares that he should report or clear such transaction. Presently, it appears that all listed companies, all market intermediaries and all professional firms having some connection to listed companies will be required to follow the same procedures and guidelines. It may be worthwhile to consider whether some cut off can be made so that companies and firms below a certain size are either exempted or can follow alternative summary procedures. Since the requirements are quite detailed (perhaps the largest of companies and firms have also been kept in mind), not all such entities can afford or even require such detailed procedure and infrastructure such as an elaborate compliance department headed by a compliance officer. Nor would it be possible for professional firms in all cases to have the so-called Chinese walls. Incidentally, to explain the term Chinese Walls, it means those physical and intangible barriers created between departments of a firm whereby those departments having access to such inside information of companies are separated with other departments which have no concern with such information or who may misuse such information. It may also be not out of place to mention here that the success of maintaining Chinese Walls in controlling insider trading is at best mixed in the West. The Securities and Exchange Board of India's (SEBI) new regulations on insider trading has made it mandatory for investors to disclose their holding in a company beyond five per cent, for every additional two per cent stake acquired. In addition, any fall in the holding below five per cent will also have to be disclosed mandatory, according to the new guidelines. Earlier regulations had provision for disclosure just after crossing the five per cent for the first time and there was no provision for

disclosure if the holding falls below the five-per cent limit. The regulations follow the final recommendations of the SEBI Insider Group headed by Mr Kumarmangalam Birla on March 31, 2001, that was approved by the SEBI Board on May 14, 2001. According to the Section 13 of the Insider Trading Regulations, any person who holds more than five cent shares in any listed company shall disclose to the company the number of shares held and change in shareholding, even if such changes result in shareholding falling below five per cent. If the holding falls below five cent, it has to be disclosed if there has been change in such holdings from the last disclosure which has been made. Investors will have to continuously disclose acquisition of additional shares every time such acquisition rises by two per cent above the threshold limit of five per cent. In its bid to tighten insider-trading norms, the SEBI group has prescribed a code of internal procedures and conduct for listed companies and for entities associated with the capital marketIn this case, we are talking of events like declaration of dividend, company results etc.,'' he said. The trading window would thereafter be opened a day or two after information is made public. The code also prescribes mandatory pre-clearance of trades and reporting to compliance officer. Further, it prescribes a minimum holding period of one month for directors, officers and designated employees. Violation or non-compliance of this would attract a penalty. The code of procedures and conduct for intermediaries or entities associated with capital markets includes stock exchanges, legal firms, professional firms, depositories, and associations such as AMFI, AMBI etc. DUTIES/ OBLIGATIONS OF THE COMPANY Every listed company has the following obligations under the SEBI(Prohibition of Insider Trading)Regulations , 1992: (a) To appoint a senior level employee generally the Company Scecretary , as the Compliance Officers; (b) To set up an appropriate mechanism and to frame and enforce a code of conduct for internal procedures, (c) To abide by the Code of Corporate Disclosure practices as specified in Schedule ii to the SEBI (Prohibition of Insider Trading)Regulations , 1992 (d) To initiate the information received under the initial and continual disclosures to the Stock Exchange within 5 days of their receipts; (e) To specify the close period; (f) To identify the Price Sensitive Information (g) To ensure adequate data security of confidential information stored on the computer; (h) To prescribe the procedure for the pre- clearance of trade and entrusted the Compliance Officers with the responsibility of strict adherence of the same. PENALTIES Following penalties /punishments can be imposed in case of violation of SEBI (Prohibition of Insider Trading) Regulations , 1992 : (a) SEBI may impose a penalty of not Rs 25 Crores or three times the amount of profit made out of insider trading; whichever is higher. (b) SEBI may initiate criminal prosecution. (c) SEBI may issue orders declaring transactions in securities based on unpublished price sensitive information.

(d) SEBI may issue orders prohibiting an insider or refraining an insider from dealing in the securities of the company. SEBI is the watchdog of all the stock exchanges in India. It has been obligated to protect the interest of the investors in the securities market and to regulate the stock market through such other regulations as it deems fit. The SEBI acts as the regulator in the share market by taking all precautionary measures in order to repose the confidence of the investors who are investing in the market. It is due to the very fact that the investors invest on the shares being speculative, but when the prices of the shares could be predicted well before in hand then they may take a decision accordingly. Hence, pre determined price may result in undesired consequences as people may buy huge amount of shares whose value may appreciate. The SEBI has dealt with a wide ranging plethora of cases on insider trading concerning the following aspects. The secret agreement often involves individuals who have a relationship. It may be family relationship or a business relationship. Some of them are mentioned below. Corporate officers, directors, and employees who traded the corporations securities after learning of significant, confidential corporate developments; Friends, business associates, family members, and other tippees of such officers, directors, and employees, who traded the securities after receiving such information; Employees of law, banking, brokerage and printing firms who were given such information to provide services to the corporation whose securities they traded; Government employees who learned of such information because of their employment by the government; and Other persons who misappropriated, and took advantage of, confidential information from their employers. Because insider trading undermines investor confidence in the fairness and integrity of the securities markets, the SEBI has treated the detection and prosecution of insider trading violations as one of its enforcement priorities. NEED FOR PREVENTING INSIDER TRADING The ideal securities market is concerned with the allocation of capital in the economy. This function is enabled by market efficiency, the situation where the market price of each security accurately reflects the risk and return in its future. The primary function of regulation and policy is to foster market efficiency, hence we must evaluate the impact of insider trading upon market efficiency. Insider trading appears to be biased especially to the speculators who invest in the market expecting there would be an appreciation in the value of the shares. The individual and institutional speculators are badly hit due to insider trading. Indeed, inside traders competing with professional traders is not unlike foreign goods competing on the domestic market -- the economy at large benefits even though one class of economic agents suffers. I. CODE OF BUSINESS PRINCIPLES

The Code of Business Principles is the Company's statement of values and represents the standard of conduct which all the employees are expected to meet in their business endeavours. This code of business is also reflective of the ethical and moral standards which are expected from the employee in discharging their duty. The commitment of the company to foster a healthy climate of transparency, and fairness is reflected in this code of conduct.4

II.

SHARE DEALING CODE

In furtherance of the SEBI (Prohibition of Insider Trading) Regulations, 1992, the Company Law has established systems and procedures to prohibit insider trading. The Share Dealing Code of the Company is an important governance code to prevent any insider trading activity by dealing in shares of the Company. The Code restricts the Directors of the Company and other specified employees to deal in the securities of the Company on the basis of any unpublished price sensitive information available to them by virtue of their position in the Company. The objective of this Code is to protect the interest of shareholders at large, to prevent misuse of any price sensitive information and to prevent any insider trading activity by dealing in shares of the Company by its Directors and employees. A copy of the Share Dealing Code of the Company is made available to all the employees of the Company and the compliance of the same is ensured. The Securities and Exchange Board of India (prohibition of insider trading) Regulations, 1992 is a regulatory mechanism is put in place to oversee the fact that there is no leakage of such information. According to the regulations two things should be established in order to establish the fact that there is a disclosure of the price sensitive information. First and foremost the fact that there is a divulgence of the price sensitive information concerning the issuer company and secondly the person who dealt had the information in a position of trust or was tipped about so much information by a person in fiduciary capacity or in any position of trust. At the outset it is pertinent to define the person who may be treated as an insider within the scope and ambit of the regulation of the Securities Exchange Board of India. Section 2 (e) of the SEBI (Prohibition of Insider Trading) Regulations, 1992 defines insider in the following words. Insider means any person who, is or was connected with the company or is deemed to have been connected with the company, and who is reasonably expected to have access to unpublished price sensitive information in respect of securities of company, or who has received or has had access to such unpublished price sensitive information. REGULATORY MECHANISM IN INDIA: HISTORICAL BACKDROP Insider trading continued unabated until 1970 which in sum and substance would imply that it was practiced for 125 years in a country like India. The security market in India developed through the establishment of the Bombay Stock Exchange was way back in 1875. It was realized that such a system is detrimental to the interest of the Indian stock exchange. In 1979, the Sachar committee said in its report that company employees like directors, auditors, company secretaries etc. may have some price sensitive information that could be used to manipulate stock prices which may cause financial misfortunes to the investing public. The company recommended that there should be amendments in the companies Act in order to curb and prevent such practice. In 1986, the Patel committee recommended that the securities contracts (Regulations) Act, 1956 may be amended to make curb insider trading through a regulatory mechanism. In 1989 the Abid Hussain Committee also recommended that the insider trading activities may be penalized by civil and criminal proceedings and also suggested that the SEBI formulate the regulations and governing codes to prevent unfair dealings. Complying with the recommendations by these committees, India through Securities and Exchange Board of India (Insider Trading) Regulations 1992 prohibited this mal practice. A person convicted of this offence is punishable under Section 24 and Section 15G of the SEBI Act 1992. These regulations were drastically amended in 2002 and renamed as SEBI (Prohibition of Insider Trading) Regulations

1992. These acts are stringent to quit an extent as they impose sanctions and punish the offender. All the listed companies and market intermediaries have to comply with the directions of these regulations. The merchant bankers and the professional firms also comply with it. NEED FOR AN INSIDER TRADING REGULATIONS: TAKING A LEAF OUT OF LESSON FROM UNITED STATES The United States has been the leading country in prohibiting insider trading. It has set benchmarks in having a regulatory regime for insider trading. United States has the distinction of being the first and the foremost country in the world to have a comprehensive legislation on insider trading in place. It has tackled these menacing problems effectively and efficiently. Therefore it is imperative that we should have a conceptual understanding about the insider trading from the American Perspective. Unlike Indi where we find that the insider trading regulations came into being as late as 1992, insider trading regulations were in vogue in America from1929. The year 1929 has a special significance due to the fact that the great economic depression which engulfed the entire world came into effect from this year. It engulfed the entire world. Due to the economic debacle Congress gave mandate to protect the investors and keep markets free from fraud. This catastrophe led to the enactment of the Securities Exchange Act of 1933. Section 17 Securities Exchange Act, 1933 contained prohibitions to deal with the fraud in the sale of the securities in the most stringent manner possible. The Act addressed insider trading directly through Section 16(b) and indirectly through Section 10(b). Section 16(b) of the Securities Exchange Act, 1934 prohibits the purchase and sale of the shares within six month period involving the directors, officers, stock holders owning more than 10% of the shares of the company. The rationale behind the incorporation of this provision is that it is only the substantial shareholders and the persons concerned with the decision and management of the company who can have access to the price sensitive information and therefore there should be bar upon them to transact in securities. Section 10(b) of the Securities Act, 1933, SEC Rule 10b-5 prohibits fraud related to trading in the securities. Furthermore the Insider Trading Sanctions Act of 1984 and the Insider Trading and Securities Fraud Enforcement Act of 1988 provide for penalties for illegal insider trading. The penalties are indeed burdensome and stringent in nature. It may be as high as three times the profit gained or the loss avoided from the illegal trading. DEALING IN SECURITIES Dealing in securities would mean an act of selling and buying securities or subscribing or agreeing to subscribe the securities. It must involve a transaction or an agreement for such sell and purchase of the securities. Section 2(h) is the deeming clause. It defines the fact that who could be deemed to be considered as a connected person. A company operating under the same management or group which means the relationship subsisting between the holding and the subsidiary company is of such a nature that the holding company by virtue of its substantial shareholding to the tune of above 50 percent has control and management over the other company.9 Intermediary specified in the in section 12 of the Act, Investment company, Trustee Company, Asset Management Company or an employee or director thereof or an official of a stock exchange or of clearing house or corporation would fall within the purview of the connected person.10 CONNECTED PERSON The Act defines connected person as the director as anyone who is deemed to be the director of the company under section 2(13) of the Companies Act, 1956. He may be deemed to be a Director of that

company by virtue of section 310 (10) of the Companies Act. Any person occupying the position of an officer or an employee of the company or holds a position involving a professional or business relationship between himself and the company would be deemed to be a company. It is immaterial whether the person concerned happens to be temporarily or permanently involved in the company. The most important factor which determines the price of the product is that the concerned employee should have an access to such price sensitive information involving the company. Officer of the company would mean any person as defined in clause (30) section 2 of Companies Act, 1956 including an auditor of the company. Merchant banker, share transfer agent, registrar to an issue, debenture trustee, broker, portfolio manager, Investment Advisor, sub-broker, Investment Company, employees of the Board of Trustees of the Mutual Fund are also considered to be connected person. Members of the Board of Directors of the Asset management Company or the company or an employee having fiduciary relationship is considered to be a connected person.11 Relative of any of the above persons would be also considered to be connected person. A relative of the connected is also considered to be the connected person who is related to the decision making and the administration of the company. It is clear from the above comprehensive definition that SEBI has not left any stone unturned to give a broad and all comprehensive definition of the insider trading. Relative of the person who is involved in the company is also considered to be the connected person. UNITED STATES PERSPECTIVE ON INSIDER TRADING The United States Sanction Act, 1984 imposes fines up to three times the profit gained or loss avoided by use of such material non-public information. It is not out of place to mention here that Section 16 of the Exchange Act, requires all officers and directors of a company and beneficial owners of more than 10 per cent of its registered equity securities to mandatorily file an initial report with the commission as well as with the exchanges on which the stock may be listed,. They should disclose their holdings of each of the company's equity securities. The United States law is much more stringent in comparison to the Indian regulations which are often being castigated as paper tiger for its lack of efficacy in curbing such insider trading. It is pertinent to mention here that the United States law provides that the profits obtained from the purchases and sales from such securities within any six month period may be recovered by the company or by any security holder on its behalf. The United States Supreme Court in US Vs Hogan5 has expanded the concept of the insider trading by approving the MISAPPROPRIATION THEORY and stating that a person commits insider trading when he obtains material confidential information and uses it in securities transactions in breach of fiduciary duty or similar relationship of confidence to the source of information but not necessarily to the shareholders of the company whose stock are traded. It is noteworthy to mention here that in the United States the finance market is well developed and the regulatory regime is also stringent which is able to cope up with different difficulties concerning adherence to strict corporate governance norms. In SEC v. Texas Gulf Sulphur Co.,6 a federal circuit court held that anyone in possession of inside information must either disclose the information or refrain from trading. In 1984, the Supreme Court of the United States ruled in the case of Dirks v. SEC. 7 that the (tippers) receivers of the second hand
5 6

U.S Vs Hogan 521 U.S. 642, 655 (1997) SEC v. Texas Gulf Sulphur Co. 1968, CA2 NY 7 Dirks Vs SEC 483 U.S. 350

information are liable if they have reason to believe that there is a breached fiduciary duty in disclosing confidential information and the tipper had received personal benefits for the same. Since Dirks disclosed the information in order to expose a fraud, rather than for personal gain, nobody was liable for insider trading violations in his case. This case holds significance owing to the fact that the courts are dynamic in judging the culpability of the insider. In the instant case since the insider has acted with good faith and without any vested and parochial interest for personal gains, hence the court did not find him guilty. The Dirks case also defined the concept of constructive insiders. Constructive insiders are like whistle blowers who bring to the public forefront any corrupt practice which is prevalent in their organization. The lawyers and investment bankers who bring such corrupt practice into light are not considered to be guilty due to the very fact that they disclose the internal fact to prevent the leakage and punish the culprit. Constructive insiders are also liable for insider trading violations if the corporation expects the information to remain confidential, since they acquire the fiduciary duties of the true insider. In United States v. Carpenter8 the U.S. Supreme Court cited an earlier ruling while unanimously uphold mail and wire fraud convictions for a defendant who received his information from a journalist rather than from the company itself. The journalist was also convicted, on the grounds that he had misappropriated information belonging to his employer. The employer in this case happened to be the Wall Street Journal. In that widely publicized case, Winans traded in advance of "Heard on the Street" columns appearing in the Journal. The court ruled in Carpenter: "It is well established, as a general proposition, that a person who acquires special knowledge or information by virtue of a confidential or fiduciary relationship with another is not free to exploit that knowledge or information for his own personal benefit but must account to his principle for any profits derived there from." UNITED KINGDOM PERSPECTIVE Insider trading was deliberated in the UK in Para 22 of the White Paper on the Conduct of Company Directors 19776. The United Kingdom legislation was implemented in the year 1981 which preceded the enactment of the Company Securities (Insider Trading) Act, 1985. The Act prohibits an individual from dealing on a recognized stock exchange in the securities of the companies which are listed, with which he is or has been, in the past six months, connected and by virtue of his connection, has acquired unpublished price sensitive information. The contravention of the provisions of the Act involves both civil and criminal liabilities. ESSENTIAL CONDITIONS FOR INSIDER TRADING UNDER UK LAW As per the United Kingdom law the insider trading regulations would come into picture only when the four essential ingredients are present. These are the principles on the touchstone of which the regulations are applied: It must relate to the securities and the particular issue of the securities and not just be concerned with the securities and issuer of securities in general. Thus information would constitute insider information if it relates to the particular industry even if it does not relate to the issuer.

United States v. Carpenter 463 U.S. 646 (1983)

However, the information pertaining to the Government economic policy and bank rate would not come within the purview of the unpublished information. Information may be either specific or precise. The information regarding the takeover bid is specific information but the price at which the bid would take place is precise information. Information must not have been made public. One interesting aspect of the Act in UK is that the prohibition extends to dealing in the securities of a company, apart from that with which the individual is connected, if the information relates to another company or to any other transaction involving both companies. Furthermore, the recipient of such unpublished price sensitive information is also prohibited from dealing, with the exception of certain circumstances. FLAW IN UK LAWS It is seen by practical examples that the success of Insider Trading laws in the UK has been pretty low. Most of the defendants have been acquitted on technicalities owing mainly to the rigidity in the definition of Insider Trading and partly because of the inadequate powers granted to the Securities and Investments Board (SIB). Another aspect that emphasis should be laid on is the undesirable degree of burden of proof required to prove any case of Insider Trading. INDIAN CASE LAWS Rakesh Aggarwal Vs SEBI9 The facts of the Case is explained in brief. Rakesh Agarwal, the Managing Director of ABS Industries Ltd. (ABS), was involved in negotiations with Bayer A.G (a company registered in Germany), regarding their intentions to takeover ABS. Being the Managing Director with such high portfolio it goes without saying that he has access to the price sensitive information. Rakesh Aggarwal in order to escape from the vigilant eyes of SEBI played a trick. He wanted to circumvent the provisions of law through tactful manner. Before the announcement of the merger is made public through announcement, he made a collusive agreement with his brother to take over the shares of ABS from the market. Thereafter he tendered the same shares through the open offer making a huge profit. These clandestine agreements could be traced by SEBI through their thread bare investigation. Bayer AG subsequently acquired ABS. Further he was also an insider as far as ABS is concerned. The secretive agreement entered between Rakesh Aggarwal and brother in law to acquire the shares before the merger is carried out is a violation of section 319 and 4 of the Securities Exchange Board of India prohibition of Insider Trading Regulations, 1992. Rakesh Aggarwal vehemently denied the allegations leveled against him by the SEBI stating that he has acted in such a manner for the benefits of the company and he has no intention to have personal gains. He said that he wanted to acquire 51 percent shares of the company of ABS through Bayer and he wanted to plan to be executed in clinical precision. The SEBI directed Rakesh Agarwal to deposit Rs. 34, 00,000 with Investor Education & Protection Funds of Stock Exchange, Mumbai and NSE (in equal proportion i.e. Rs. 17, 00,000 in each exchange) to compensate any investor which may make any claim subsequently. A case against Rakesh Aggarwal is made out under section 24 of the SEBI Act.

Adjudication proceedings under section 15I read with section 15 G of the SEBI Act against Rakesh Aggarwal.
9

Rakesh Agrawal v SEBI Appeal No 33 of 2001

Rakesh Aggarwal made an appeal to Securities Appellate Tribunal, Mumbai. The Tribunal held that the part of the order of the SEBI directing Rakesh Agarwal to pay Rs. 34, 00,000 couldnt be sustained, on the grounds that Rakesh Agarwal did that in the interests of the company (ABS), as is mentioned in the facts above. Criical Analysis The case testify the fact that the SEBI lacks the thorough investigative mechanism and a vigilant approach due to which the culprits are able to escape from the clutches of law. In most of the cases, SEBI failed to adduce evidence and corroborate its stance before the court. Unlike the balance of probabilities that is required in proving a civil liability, a case involving criminal liability requires the allegations to be proved beyond reasonable doubts. Therefore there should be thread bare investigation and all the loopholes if any should be properly plugged in. HINDUSTAN LIVER LIMITED Vs SEBI Hindustan Liver Limited happens to be the subsidiary of the Unilever Limited. The merger of the HLL with BBILL was on the cards. The controversy involved purchase of 8 lakhs shares of Brooke Bond Lipton India Limited two weeks prior to the public announcement of the merger of the two companies. SEBI suspecting foul play conducted investigation. After a comprehensive investigation spanning 15 months SEBI issued a show cause notice to the Chairman, all Executive Directors, the Company Secretary and the then Chairman of HLL. Later in March 1998 SEBI passed an order charging HLL with insider trading. SEBI felt that there is something wrong in the entire scheme of things. SEBI sensed that HLL had access to some un published and price sensitive information and therefore issued show cause notice showing that there was prima facie evidence that the company was indulging in insider trading through the use of 'Unpublished price sensitive information' prior to its merger with Brooke Bond India Lipton Limited. It was indeed a danger bell which was rang by SEBI asking them to desist from indulging in such nefarious activities. It was only after about 15 months of detailed analysis that SEBI issued a notice to HLL asking why it shouldn't be slapped with an insider trading charge. The Hindustan Liver Limited faced the music from all quarters as it was found to divulge price sensitive information. Hindustan Liver Limited was about entering into a merger agreement with the Brooke Bond Upton India Limited. Before the merger was actually effected, Hindustan Liver Limited purchased the shares of the Brooke Bond Upton India Limited. It goes without saying that HLL had knowledge and information about the impact of the merger on the value of the shares of the company. In March 1998, SEBI passed an exhaustive order which sent shockwaves down the spine in the corporate sector. The SEBI analyzed the facts in the touchstone of the SEBI (Prohibition of Insider Trading) Regulations, 1992. HLL had access to price sensitive and unpublished information as a result of which found guilty of insider trading. SEBI directed HLL to pay UTI Rs 3.4 crore in compensation, and also initiated criminal proceedings against the five common directors of HLL and BBLIL. The SEBI decision to prosecute country's second largest corporate, Hindustan Lever, and its five senior directors has brought into sharp focus the grey areas of insider trading laws as well as the absence of any corporate transparency and governance among Indian companies. There is a divergence between the corporate lawyers and the former justices regarding the definition of the insider. The counsel for SEBI interpreted the term insider in such a manner so that they would be in a

position to prove the fact there is insider trading in the instant case involving Hindustan Liver Limited. The term insider is still considered to be a grey area in our country. The brokers had a different story to tell in the context of the case. According to the brokers, nobody made any profits through the insider trading. It was a negotiated deal at a price above the market price. The deal helped the Unilever to retain 51 percent stake in the HLL after the merger with the Brooke Bond Lipton India. The SEBI is of the firm opinion that HLL acted as an insider. However, Former Chief Justice of India P.N Bhagwati had a different view point altogether. He was of the opinion that the SEBI should take some technical assistance from the Securities Exchange Commission of the United States so as to streamline our insider trading regulations. With the SEBI, HLL, former justices (hired by the multinational), and corporate lawyers interpreting `insider trading' to suit their requirements, it has confused the common investors and shareholders who have been witnessing insider trading almost on a daily basis on the Indian bourses. In March 1998, SEBI announced criminal prosecution of five HLL directors for insider trading and asked it to pay Rs. 3.04 crores to UTI as compensation. One of the recent cases that can illustrate this trend is allegation against Reliance Petroleum, that it has indulge in insider trading activity on large scale, which is evident from the fluctuation in its share price in the past fifty two weeks, the share has fluctuated in a wide range of between sixty seven rupees and two hundred ninety five rupees, as per information available with the stock exchange. But according to company sources 'the sale of Reliance Petroleum shares was conducted by transactions through the Stock Exchanges and has helped to further broad base the shareholding pattern of Reliance Petroleum'. It will be interesting to find out whether SEBI, will be able to prosecute the insiders involved in the case or they would be let off for the want of evidence. The insiders often escape stating that their action is actuated by a good motive which is often not the case but the law becomes soft on them which is really the plightful side of the story. It is high time that we should make an introspection regarding the fact that the regulations should serve the purpose rather than being paper tigers. Thread bare investigation should be done in a systematic manner. As a result the Enforcement of restrictions upon insider trading runs the risk of either being ineffective or being a witch hunt.

INSIDER TRADING A CRITICAL ANALYSIS Certainly I am at an advantage when I posses information others lack. Nearly everyone in the marketplace is in that position to a One main problem in Rawls defense of justice as fairness is that Rawls believes that no one can deserve his or her advantages or assets in lifeits all a matter of luck. As he puts it, No one deserves his greater natural capacity nor merits a more favorable starting point in society. The reason? Because even a persons character (i.e., the virtues he or she practices that may provide him with ways of getting ahead of others) depends in large part upon fortunate family and social circumstances for which he can claim no credit (104). If one rejects this deterministic account of virtues, then a traders prudence cannot be discounted as one assesses whether he or she

deserves to gain from how trade is conducted. One might even wish to call this unfair in the sense in which any kind of good fortune may be to some peoples but not to others advantage. More precisely, though, the concept of fairness does not apply in this context, even though many believe otherwise. For someone to act fairly requires some prior obligation to distribute burdens or benefits among a given number of people in some suitable proportion or in line with certain specified procedures. But to act fairly does not amount to a primary moral dutyfor example, thieves can fairly enough distribute their loot and yet are morally delinquent. Only when one ought to treat others alike, which may occur in special circumstances such as paying attention to all the students in ones class or feeding all of ones children equally well, does fairness count for something morally important. As this applies to insider trading, if I have a prior obligation to share my information with others, that is, a fiduciary duty to clients or associates, then it is not that the information is from the inside but that it is owed to others that makes my dealings morally and possibly legally objectionable. It is only in such cases that fairness is obligatory, as a matter of ones professional relationship to others, one established by the promise made or contract one has entered into prior to the ensuing duty to be fair. It is only then that one cause injury by refusing to do what one has agreed to do, namely, divulge information prior to using it for oneself. Accordingly, Hetheringtons objection to insider trading is without moral force. What he should have objected to is the breaching of fiduciary duty, which may occur on occasion by means of failing to divulge information (possibly gained from the inside) that has beenperhaps even contractuallypromised to a client. Furthermore, if I have stolen the informationspied or bribed for or extorted itagain the moral deficiency comes not from its being inside information but from its having been ill gotten. What if the information was come by accidentally? In emergency situations, when others are in dire need or have met with some natural disaster, virtues such as generosity and charity are usually binding on those who are able to assist. Yet these are not obligations in the sense of something the law must enforce. Indeed, enforcing generosity or charity is impossible the moral significance of a virtue is destroyed if it is practiced at the point of a gun! Furthermore, in the context of the normal hustle and bustle of life, no such virtues are called for toward strangers, only toward those one is related to by prior commitments, intimacy, and love. Instead, in the ordinary course of life one ought to strive to live successfully, to prosper, to make headway with ones legitimate projects, not embark upon the tasks of emergency crews during an earthquake. Unless one is professionally suited for those professions that address those in special need, one has no business to meddle in the lives of others and ought to carry forth without compunction in those tasks that advance the lives of those one has freely embarked upon to promote. From the viewpoint of common sense ethics, the idea that there is something morally amiss with insider trading has little to support it. One clearly has no moral , let alone legal, obligation to share information with strangers that may benefit one in other familiar circumstances.

CONCLUSION The Securities Exchange Board of a country has a central objective i.e., protecting the interests of the investors and regulating the business in stock markets and other securities markets. The Indian Exchange Commission, i.e., SEBI seeks to look after and secure the same. The Primary function of SEBI is to ensure that the interest of the innocent investors are protected since they repose complete faith and trust on SEBI as an able and efficient regulator. The prevention of an insider trading is a is

just an extension of its primary function of safeguarding the interest of the investors. The principle of business standards and ethics demands that some discipline and decorum should be followed in the administration of the company as well as the stock market. From the point of view of the internal administration of the company, it is really an uphill task to keep an eagle eye on the use of sensitive information for personal gains since the people at the helm of the affairs such as directors who owe a fiduciary duty to keep the company in proper shape are the one who give preference to their vested interest over the interest of the company. In the modern era of Liberalization, Privatization and Globalization, there is heavy inflow of Foreign Direct investment where we find that there is participation from foreign companies and all. The disclosure of price sensitive information before the publication really casts aspersion on the role of the SEBI as an efficient regulator. India has to strengthen its enforcement of recently amended insider trading act, so as to prove to both the domestic and foreign investor that they are investing in fair and transparent securities market, where strict compliance of the prohibition is ensured by the enforcement agencies. It is seen that the insider trading is done under disguised names and entities so that they can maintain a shareholding over and above the trigger limit of SEBI without making it public. Such kind of ill founded and mischievous design should be dealt with iron hands and precautionary measures should be undertaken. Prevention is always better than cure. Enforcement of insider trading can be made more efficient in India, if the time limit for disclosure of holding to the company by any person having a holding of more than five percent (four days) and further the disclosure by the company to the stock exchange of information received about the above transaction (five days), should be reduced to one day in total. Also like other developed countries the above stated disclosure should be made to both exchanges and the regulator, instead of exchange alone. Further, there should be a provision of civil penalties, like in US, where the penalties are based on the profit made or loss avoided, also SEC lets off the offender, if he pays without admitting to offence, but merely publishes the settlement, which acts as a deterrent to the society and prevents cases from being locked up in the court. Additionally, the maximum penalty limit of five lakh106 rupees should be increased, as the profit reaped by the insider runs into a huge amount. Finally, preventing insider trading is not about a set of rules or filling alleged loopholes. It is about a determination to go after illicit trades and the power to punish offenders. Until SEBI shows it is serious about checking insider trading, the activity will continue to thrive unchecked. For that the regulatory authority has to ensure that the SEBI Regulations on Insider trading is a separate code by itself. Preferably, it must be made into a separate Act as a part of general law relating to frauds, as is the case in the US. This will ensure that SEBI does not have to draw concepts and principles from the UK and US laws to strengthen its case. At the same time it must also avoid the impression that there is ambiguity or weakness in the Indian Insider Trading Regulations.

BIBLIOGRAPHY

ARTICLES REFERRED: Shah, Why Forbid Insider Trading?

Available at www.ccsindia.org/policy/money/studies/wp0029.pdf

P. Haldea Insider Trading A critique of regulations and practices, Available at www.icsi.edu/portals/70/newsletter/April2008.pdf

Shantanu Kumar Singh Insider Trading; Available at www.indlawnews.com/display

Arindam Pal, Insider Trading: A Global Perspective, Available at http://www.tradelawonline.com/search/articles/?737251a4-04bd-4de3-b21fc763c9da280

Sekhar K, SEBI Capital Issues Debentures and Listing, 3 rd Ed, 2003, Vol.1, Wadhwa Publishers

CASES REFERRED Hindustan Lever Ltd. v SEBI (1998) 3 Comp LJ 473 Samir C. Arora v SEBI (2002) 38 SCL 422 Rakesh Agrawal v SEBI Appeal No 33 of 2001 SEC v. Texas Gulf Sulphur Co. 1968, CA2 NY Dirks Vs SEC 483 U.S. 350 United States v. Carpenter 463 U.S. 646 (1983) U.S Vs Hogan 521 U.S. 642, 655 (1997

COMMITTEE REPORTS REFERRED: Sachar Committee Report 1979. Patel Committee Report 1986.

Abid Hussain Committee Report 1989

Statutes referred:

Companies Act 1956 Securities and exchange board of India (Prohibition of Insider Trading) Regulation1992

SEBI (Insider Trading) (Amendment) Regulations, 2002 SEBI (Prohibition of Insider Trading) (Second Amendment) Regulations, 2002, Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997.