INSIDER TRADING: A MODERN DAY CRIME?

It was only about three decades back that insider trading was recognized in many developed countries as what it was an injustice; in fact, a crime against shareholders and markets in general. At one time, not so far in the past, inside information and its use for personal profits was regarded as a perk of office and a benefit of having reached a high stage in life. It was the Sunday Times of UK that coined the classic phrase in 1973 to describe this sentiment the crime of being something in the city, meaning that insider trading was believed as legitimate at one time and a law against insider trading was like a law against high achievement. Insider trading is a term subject to many definitions and connotations and it encompasses both legal and prohibited activity. Though the term is popularly used in the negative sense as it is perceived that the persons having access to the price sensitive and unpublished information used the same for their personal gains.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. Insider trading takes place legally every day, when corporate insiders officers, directors or employees buy or sell stock in their own companies within the confines of company policy and the regulations governing this trading. It is the trading that takes place when those privileged with confidential information about important events use the special advantage of that knowledge to reap profits or avoid losses on the stock market, to the detriment of the source of the information and to the typical investors who buy or sell their stock without the advantage of inside information.[1] INSIDER & INSIDER TRADING DEFINED Insider dealing is seen as an abuse of an insiders position of trust and confidence and as harmful to the securities markets because outsiders can be cheated by insiders who are not able to deal on equal terms: as a result the ordinary investor loses confidence in the market. The rules are more important in relation to equities where prices are more sensitive to financial conditions. But the principles could impact upon bonds and of course upon convertibles or other bonds with an equity element. 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. Thus, essentially insider trading involves the deliberate exploitation of unpublished price sensitive information obtained through or from a privileged relationship to make profit or avoid loss by dealing in securities of a company when the price of securities would be materially altered if the information were disclosed. It is not hard to see that when company insiders trade on the secondary market, they speed up the flow of information and forecasts into prices. Company insiders are in a unique position to make forecasts about the future risk and return of the shares and bonds of their company, hence they might often correctly perceive market prices to be too low or too high. When they trade on the secondary market, they serve to feed their knowledge into prices, thus making markets more efficient. In other words, insider dealing is understood broadly to cover situations where a person buys or sells securities when he, but not the other party to the transaction, is in possession of confidential information because of some connection and such information would affect the value of those securities. Furthermore, the confidential information in question will generally be in his possession because of some connection which he has with the company whose securities are being dealt in or are to be dealt in by him (e.g. he may be a director, employee or professional adviser of that company) or because someone in such a position has provided him, directly or indirectly, with the information.[2]

RATIONALE BEHIND LAWS PROHIBITING 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. Thus, 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.[3] It is a known fact that the smooth operation of the securities market and its healthy growth and development depends on a large extend on the quality and integrity of the market. Such a market can alone inspire confidence in investors.[4] Insider trading leads to loose of confidence of investors in securities market as they feel that market is rigged and only the few, who have inside information get benefit and make profits from their investments. Thus, process of insider trading corrupts the level playing field as Public confidence in directors and others closely associated with companies requires that such people do not use inside information to further their own interests.[5] Consequently, it can be deduced from the above that the rationale behind the prohibition of insider trading is the obvious need and understandable concern. about the damage to public confidence which insider dealing is likely to cause and the clear intention to prevent, so far as possible, what amounts to cheating when those with inside knowledge use that knowledge to make a profit in their dealings with others.[6] Such misuse of confidential information is frowned upon for several reasons as: it involves taking a secret, unfair advantage; it gives rise to a potential conflict of interests in which the companys best interest may wrongfully take second place to the insiders self interest, and ; it brings the market into disrepute and may be a disincentive to investment. it is unethical as it amounts to breach of fiduciary position of trust and confidence.[7] It was keeping in tune with such sentiments that the Securities Appellate Tribunal, in the case ofSamir C. Arora v. SEBI,[8] observed that, activities like insider trading fraudulent trade practices and professional misconduct are absolutely detrimental to the interests of ordinary investors and .. no punishment is too severe for those indulging such activities. INSIDER TRADING LAWS IN OTHER JURISDICTIONS Insider Trading Laws in the United States The United States has been the leading country in prohibiting insider trading and the first country to tackle insider trading effectively. After the United States stock market crash of 1929, Congress enacted the Securities Act of 1933 and the Securities Exchange Act of 1934, aimed at controlling the abuses believed to have contributed to the crash. The 1934 Act addressed insider trading directly through Section 16(b) and indirectly through Section 10(b). Section 16(b) prohibits short- swing profits (profits realized in any period less than six months) by corporate insiders in their own corporations stock, except in very limited circumstance. It applies only to directors or officers of the corporation and those holding greater than 10% of the stock and is designed to prevent insider trading by those most likely to be privy to important corporate information. Section 10 (b) of the Securities and Exchange Act of 1934 makes it unlawful for any person to use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe. The broad anti-fraud provisions, make it unlawful to engage in fraud or misrepresentation in connection with the purchase or sale of a security5. While they do not speak expressly to insider trading, here is where the courts have exercised the authority that has led to the most important developments in insider trading law in the United States. However, these provisions were relatively easy to apply to the corporate insider who secretly traded in his own companys stock while in possession of inside information because such behavior fit within traditional notions of fraud. Far less clear was whether Section 10(b) prohibited insider trading by a corporate outsider. In 1961,

in the case of In re Cady Roberts & Co.[9] the Securities and Exchange Commission, applying a broad construction of the provisions, held that they do. The Commission held that the duty or obligations of the corporate insider could attach to those outside the insiders realm in certain circumstances. The Commission adopted the disclose or abstain rule: insiders, and those who would come to be known as temporary or constructive insiders, who possess material nonpublic information, must disclose it before trading or abstain from trading until the information is publicly disseminated. Several years later in the case of SEC v. Texas Gulf Sulphur Co.[10] a federal circuit court supported the Commissions ruling in Cady, stating that anyone in possession of inside information is required either to disclose the information publicly or refrain from trading8. The court expressed the view that no one should be allowed to trade with the benefit of inside information because it operates as a fraud all other buyers and sellers in the market. This was the broadest formulation of prohibited insider trading. In the 1980 case of Chiarella v. United States,[11] the United States Supreme Court reversed the criminal conviction of a financial printer who gleaned nonpublic information regarding tender offers and a merger from documents he was hired to print and bought stock in the target of the companies that hired him. The case was tried on the theory that the printer defrauded the persons who sold stock in the target to him. In reversing the conviction, the Supreme Court held that trading on material nonpublic information in itself was not enough to trigger liability under the anti-fraud provisions and because the printer owed target shareholders no duty, he did not defraud them. In response to the Chiarella decision, the Securities and Exchange Commission promulgated Rule 14E-3 under Section 14(e) of the Exchange Act, and made it illegal for anyone to trade on the basis of material nonpublic information regarding tender offers if they knew the information emanated from an insider. In 1981, the Second Circuit adopted the misappropriation theory, holding in the case of United States v. Newman[12] that a person with no fiduciary relationship to an issuer nonetheless may be liable under Rule 10b-5 for trading in the securities of an issuer while in possession of information obtained in violation of a relationship of trust and confidence. Newman, a securities trader, traded based on material nonpublic information about corporate takeovers that he obtained from two investment bankers, who had misappropriated the information from their employers. Three years later in Dirks v. SEC,[13] the Supreme Court reversed the SECs censure of a securities analyst who told his clients about the alleged fraud of an issuer he had learned from the inside before he made the facts public. Dirks were significant because it addressed the issue of trading liability of tippers: those who receive information from the insider tipper. Dirks held that tippers are liable if they knew or had reason to believe that the tipper had breached a fiduciary duty in disclosing the confidential information and the tipper received a direct or indirect personal benefit from the disclosure. Because the original tipper in Dirks disclosed the information for the purpose of exposing a fraud and not for personal gain, his tipper escaped liability. A significant aspect of the decision was contained in a footnote to the opinion, which has come to be known as Dirks footnote 14. There, Justice Powell formulated the concept of the constructive insiders outside lawyers, consultants, investment bankers or others who legitimately receive confidential information from a corporation in the course of providing services to the corporation. These constructive insiders acquire the fiduciary duties of the true insider, provided the corporation expected the constructive insider to keep the information confidential. Over the next nine years, the misappropriation theory gained acceptance in federal courts. Then in 1995 and 1996, two federal circuit courts rejected the misappropriation theory[14] on the grounds that the theory requires neither misrepresentation nor nondisclosure and that the misappropriation theory is not moored in [section] 10(b)s requirement that the fraud be in connection with the purchase or sale of any security. However, in a landmark victory for the SEC, the Supreme Court reversed one of these decisions and explicitly adopted the misappropriation theory of insider trading in the case of United States v. OHagan[15] In the Courts words: The misappropriation theory holds that a person commits fraud in connection with a securities transaction, and thereby violates 10(b) and Rule 10b-5, when he misappropriates confidential information for securities trading purposes, in breach of a duty owed to the source of the information. Under this theory, a fiduciarys undisclosed, self-serving use of a principals information to purchase or sell securities, in breach of a duty of loyalty and confidentiality, defrauds the principal of the exclusive use of the information. In lieu of premising liability on a fiduciary relationship between company insider and purchaser

or seller of the companys stock, the misappropriation theory premises liability on a fiduciary-turned-traders deception of those who entrusted him with access to confidential information. In the course of its opinion, the Court identified two discrete arguments for prohibiting insider trading: First, the Court stressed that prohibiting insider trading is well tuned to an animating purpose of the Exchange Act: to insure honest securities markets and thereby promote investor confidence. Although informational disparity is inevitable in the securities markets, investors likely would hesitate to venture their capital in a market where trading based on misappropriated nonpublic information is unchecked by law. An investors informational disadvantage vis-vis a misappropriator with material, nonpublic information stems from contrivance, not luck; it is a disadvantage that cannot be overcome with research or skill. Second, the Court acknowledged the information as property rationale-underlying insider trading prohibitions: A companys confidential information qualifies as property to which the company has a right of exclusive use. The undisclosed misappropriation of such information in violation of a fiduciary duty constitutes fraud akin to embezzlement the fraudulent appropriation to ones own use of the money or goods entrusted to ones care by another.[16] The European Community Directive on Insider Trading The first wide-ranging development outside the United States in efforts to ban insider trading was the European Community Directive Coordinating Regulations on Insider Trading, adopted on November 13, 1989 (the EC Directive).[17] In the 1980s, highly publicized insider trading scandals in New York involving Ivan Boesky and Michael Milken, among others, and in Europe involving the Guinness brewing group, gave a new urgency to developing a European-wide ban on insider trading.[18] In sum:

It defines inside information as information of a precise nature about security or issuer which has not been made public which, if it were made public, would likely have a significant effect on the price of the security (Article 1); It prohibits insiders from taking advantage of inside information (Article 2); It prohibits insiders from tipping or using others to take advantage of inside information (Article 3); It applies its prohibitions to tippers with full knowledge of the facts (Article 4); It requires each member to apply the prohibitions to actions taken within its territory with regard to securities traded on any members market (Article 5); It provides that members may enact laws more stringent than set out in the Directive (Article 6); It requires issuers to inform the public as soon as possible of major events that may affect the price of the issuers securities (Article 7); It requires members to designate an enforcement authority, to give it appropriate powers and to bind it to professional standards of confidentiality (Articles 8 and 9); It requires members to cooperate with each other in investigation efforts by exchanging information (Article 10); It leaves it up to individual members to decide on penalties for insider trading (Article 13); and, It required all members to enacted legislation complying with the Directive by June 1, 1992 (Article 14).[19]

Insider Trading Laws in the United Kingdom In the UK insider dealing was made a specific criminal offense in 1980 and was incorporated in theCompany Securities Insider Dealing Act 1985 which was reenacted in 1993 and is contained in Part V of the Criminal Justice Act of 1993 (CJA). Under the UK regulation inside information[20] means information which relates to particular securities or the issuer of particular securities and is specific or precise and has not been made public and if it were made public would have a significant effect on the price of any securities. Further insider dealing was made a specific criminal offense in 1980 and was incorporated in theCompany Securities Insider Dealing Act 1985 which was reenacted in 1993 and is contained in Part V of the Criminal Justice Act of 1993 (CJA). 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. However, 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 an unpublished price sensitive information is also prohibited from dealing, with the exception of certain circumstances. 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.

INSIDER TRADING LAW IN INDIA 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.[21] A person convicted of this offence was made punishable under Section 24 and Section 15G of the SEBI Act, 1992. However, these regulations were drastically amended in 2002 and renamed as SEBI (Prohibition of Insider Trading) Regulations 1992 [hereinafter SEBI Regulations]. These Regulations are stringent to quite 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 SEBI Regulations do not directly define the term insider trading. But it defines the terms insider or who is an insider; who is a connected person; what are price sensitive information. According to the Regulation 2(e) 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 2(c) defines that a connected person means any person whoi) 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; Furthermore, a Person is deemed to be connected if such person is a company, an intermediary, a merchant banker, an employee, a member of Board of Directors, an official, an employee of a self-regulatory organization recognized by SEBI, a relative of aforesaid persons, a banker of the company, relative of the connected person, or is a firm, a trust, an Hindu Undivided Family, a company or association of persons.[22] Thus, there are two categories of insiders: Primary insiders, who are directly connected with the company, and Secondary insiders, who are deemed to be connected with the company since they are expected to have access to unpublished price sensitive information. The jurisprudential basis for the person-connected approach seems to be founded in the equitable notions of fiduciary duty. Consequently, the persons seen indulging in secret agreements (insider trading) usually are: Corporate officers, directors, and employees who traded the corporations securities after learning of significant, confidential corporate developments. Friends, business associates, family members, and other tippers 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. The SEBI Regulation 2(k) defines the term unpublished to mean information which is not published by the company or its agents and is not specific in nature. Further Regulation 2(ha) provides that 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. 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. Some examples of such price sensitive information are
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; Any significant changes in policies, plans, or operations of the company. Further, Listing Agreement requires all listed companies to immediately inform Stock Exchange(s) in respect of the some events which are considered to be price sensitive. These are:

Disruption of operations due to natural calamity; Commencement of Commercial Production/ Commercial Operations; Developments with respect to pricing/ realization arising out of change in the regulatory framework; issue of any class of securities; Acquisition, merger, de-merger, amalgamation, restructuring, scheme of arrangement, spin off or setting division of the company, etc.; Change in market lot of companys shares, sub-divisions of equity shares of the company; Voluntary delisting by the company from the Stock Exchange (s); Forfeiture of shares;

Any action which will result in alteration in the terms regarding redemption/ cancellation/ retirement in whole or in part of any securities issued by the company; Information regarding opening, closing or status of ADR, GDR or any other class of securities to be issued abroad; Cancellation of dividend/ rights/ bonus, etc. Litigation/ dispute with aerial impact; Any other information having bearing on the operation/ performance of the company as well as price sensitive information which but not restricted to: The crux of the Insider Trading Regulation is there in Regulation 3, which provides for the prohibition in dealing, communication or counseling on matters relating to insider trading and it also applies to all those information, which can be termed as unpublished price sensitive information. Further, Regulation 3A provides that no company shall deal in the securities of another company or associate of that other company while in possession of any unpublished price sensitive information. A person found to be violating the above stated regulations is found to be guilty of insider trading.[23] Besides, every listed company has the following obligations under the SEBI(Prohibition of Insider Trading)Regulations , 1992: To appoint a senior level employee generally the Company Scecretary , as the Compliance Officers; To set up an appropriate mechanism and to frame and enforce a code of conduct for internal procedures, To abide by the Code of Corporate Disclosure practices as specified in Schedule ii to the SEBI (Prohibition of Insider Trading)Regulations , 1992 To initiate the information received under the initial and continual disclosures to the Stock Exchange within 5 days of their receipts; To specify the close period; To identify the Price Sensitive Information To ensure adequate data security of confidential information stored on the computer; To prescribe the procedure for the pre- clearance of trade and entrusted the Compliance Officers with the responsibility of strict adherence of the same. Moreover, following penalties /punishments can be imposed in case of violation of SEBI (Prohibition of Insider Trading)Regulations , 1992:

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 SEBI may initiate criminal prosecution SEBI may issue orders declaring transactions in securities based on unpublished price sensitive information SEBI may issue orders prohibiting an insider or refraining an insider from dealing in the securities of the company.[24]

IMPORTANT CASES DEALING WITH INSIDER TRADING Hindustan Lever Ltd. v. SEBI [25] Hindustan Lever Ltd. (Herein after HLL) and Brooke Bond Lipton India Ltd (BBLIL) were companies controlled by Unilever Inc. of U.K and were under the same management; HLL purchased 8 lacs shares of Brooke Bond Lipton India Ltd (BBLIL) from U.T.I on the 25th March 1996 @ Rs. 350.35 per share; 25 days after the said transaction viz. on the 19th April 1996,HLL announced its merger with BBLIL and notified the Stock Exchanges; After the announcement of the merger, BBLILs price shot up to Rs. 400 and even beyond that ; SEBI after 15 months of investigation came to a conclusion that HLL, BBLIL and its common directors were liable for Insider Trading and has violated the provisions of the SEBI (Prohibition of Insider Trading) Regulations, 1992. This resulted in causing a huge loss to UTI. SEBIs charge was based on the following factors: On the date of acquisition of shares HLL had full knowledge of the impending merger and this knowledge was in fact unpublished price sensitive information under the Insider Trading Regulations and hence was in an advantageous position as compared to public investors; HLL made misuse of this unpublished

price sensitive information since it did not disclose the fact of impending merger to U.T.I and neither did it make the same public before the deal to acquire 8 lac shares of BBLIL ; U.T.I suffered a loss of Rs. 3.4 crore due to the concealment of the information since it sold the shares at a price of Rs. 350.35 per share, whereas after the public disclosure of the merger the share price of BBLIL shot up beyond Rs. 400. U.T.I could have got a better price for its shares had the disclosure been made by HLL. SEBI the regulatory body directed HLL to compensate Unit Trust of India (UTI) to the extent of Rs 3.04 crore for the notional loss incurred by it and also ordered that prosecution proceedings should be initiated against Hindustan Lever Limited and its five directors who were party to the decision of the purchase of shares. On appeal to the Appellate Authority SEBIs charge was demolished on the ground that there was no unpublished price sensitive information involved since prior to the announcement of the merger, leading financial newspapers had reported the possibility of the merger and hence it was public knowledge. U.T.I could not allege that the information was undisclosed since it had the best of market analysts and experts who were fully familiar with the market trends. As a fall out of this case SEBI amended its Regulations in 2002 to specifically provide that speculative reports in the media would not be treated as publication of price sensitive information.

Rakesh Aggarwal v. SEBI [26] One of the most prominent cases dealing with insider trading was Rakesh Aggarwal v. SEBI.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. 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 was carried out in a violation of Regulation 4 of the SEBI Regulations. He 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% shares of the company of ABS through Bayer and he wanted the plan to be executed in clinical precision. The SEBI directed him 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 was made against him under section 24 of the SEBI Act. However, he made an appeal to Securities Appellate Tribunal, Mumbai. The Tribunal held that the part of the order of the SEBI directing him to pay Rs. 34, 00,000 couldnt be sustained, on the grounds that he did that in the interests of the company (ABS), as is mentioned in the facts above.

Samir. C. Arora v. SEBI [27] In the case of Samir.C.Arora v. SEBI, Mr. Arora was prohibited by the SEBI in its order not to buy, sell or deal in securities, in any manner, directly or indirectly, for a period of five years. Also, if Mr. Arora desired to sell the securities held by him, he required a prior permission of SEBI. Mr. Arora in contested this order of SEBI in the Securities Appellate Tribunal. SAT set aside the order of SEBI on grounds of insufficient evidence to prove the charges of insider trading and professional misconduct against Mr. Arora.

Dilip Pendse v. SEBI [28] The facts were that Nishkalpa was a wholly owned subsidiary of TATA Finance Ltd (TFL), which was a listed company. Pendse was the Managing Director of TFL. On 31/03/2001, Nishkalpa had incurred a huge loss of

Rs. 79.37 crore and this was bound to affect the profits of TFL. This was basically the unpublished price sensitive information of which Pendse was aware. This information was disclosed to the public only on 30/04/2001. Thus any transaction by an Insider between the period 31/03/2001 to 30/04/2001 was bound to fall within the scope of Insider Trading; DP passed on this information to his wife who sold 2, 90,000 shares of TFL held in her own name as well as in the name of companies controlled by her and her father-in-law. SEBI leveled charged against Dilip Pendse for Insider Trading. However, the SAT in its recent ruling turned down the charges of insider trading charges as against Pendse on account of failure to adhere to the fundamental principle of permitting cross examination of a person on whose statement such charges were established and consequent lack of evidence.

These cases 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.

Mr. Anil Harish (M/s Valecha Engineering Ltd.) v. SEBI [29] SEBI had alleged that Anil Harish traded in the shares of the company based on price sensitive information that the company had bagged projects worth Rs. 172 crores before the announcement was made public. SEBI had observed that in the meeting held on July 31, 2009,which was chaired by Mr Harish, the board of directors had discussed this matter and therefore alleged that he was privy to the information regarding awards of contracts which the regulator had considered to be price sensitive information. SEBI had imposed a penalty of Rs 20 lakhs. However, overturning this decision SAT held that when a company which is in the business of infrastructure projects, bags an order in the normal course of its business, although it may be required to give intimation to the stock exchanges under Regulation 36(7) of the Listing agreement, the information need not necessarily be price sensitive. Moreover, it was found that the information regarding the companys tenders was generally known to the market, as the tenders were drawn and awarded by government departments which followed transparency norms. The conclusion that can be drawn from SATs order is that the information was neither price sensitive nor did it remain unpublished at the timing of trading. On both counts, the ruling went in favour of the appellant.

Securities Exchange Commission v. Rajat Gupta [30] The SECs complaint alleged that, Rajat K. Gupta tipped his business associate Raj Rajaratnam, Galleon Managements founder and managing general partner, to confidential information Gupta learned in the course of his duties as a member of the Board of Directors of The Goldman Sachs Group, Inc. The complaint alleged that Gupta disclosed material nonpublic information concerning Berkshire Hathaway Inc.s $5 billion investment in Goldman Sachs in September 2008, and concerning Goldman Sachss financial results for both the second and the fourth quarter of 2008. Rajaratnam used the information he learned from Gupta to trade profitably in certain Galleon hedge funds. By engaging in this conduct, Gupta and Rajaratnam violated Section 10(b) of the Securities Exchange Act of 1934, Exchange Act Rule 10b-5, and Section 17(a) of the Securities Act of 1933. On June 15, 2012, in a parallel criminal case arising out of the same facts, Gupta was convicted of one count of conspiracy to commit securities fraud and three counts of securities fraud. On October 24, 2012, Gupta was sentenced to two years in prison and one year of supervised release, and ordered to pay a $5 million criminal fine. The Final Judgment in the SECs case orders Rajaratnam to disgorge his share of the profits gained and losses avoided as a result of the insider trading plus prejudgment interest on that amount.

CONCLUSION Likewise, the smooth operation of the securities market, its healthy growth and development depends to a large extent on the quality and integrity of the market. Such a market can alone inspire the confidence of investors. Factors on which this confidence depends include, among others, the assurance the market can afford investors, that they are placed on an equal footing and will be protected against improper use of inside information. Inequitable and unfair practices such as insider trading, market manipulation, price rigging and other security frauds affect the integrity, fairness and efficiency of the securities market and impairs the confidence of the investors. But as 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 lakh 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. In summary, the enhanced insider trading scrutiny in the recent past has forced corporations across the globe to reassess and rethink their internal processes and approach towards insider trading. The need to address insider trading goes beyond policy objectives of governments, and into the core of corporate existence, having a bearing on the commercial interests of an enterprise in todays connected world. Enforcement approaches adopted by a regulator in one part of the world may be replicated by other regulators, the same holds true for corporate best practices to be adopted to prevent such violations. In a globalized world lessons may be learned and applied across borders, in the process addressing issues which may crop up in future.[31]

[1]

Pankaj Singh, Insider Trading in India (2004). Available at: http://works.bepress.com/pankaj_singh/2.

[2] Simon Goulding, COMPANY LAW (2nd Ed. 1999). [3] Byomakesh Nayak, Amaresh Nayak, An Overview Of The Insider Trading Regulations In India. Available at http://airwebworld.com/articles/index.php?article=1264. [4] A.K. Sharma, G.S. Batra, INDIAN STOCK MARKET (1st Ed. 2008).

[5] Nishith M. Desai, Krishna A. Allavaru, Insider Trading: A Comparative Study, Nishith Desai Associates Papers. Available at: http://www.nishithdesai.com/Research-Papers/insider.PDF. [6] [7] [8] [9] Attorney Generals Reference No.1 of 1988 (1988) BCC 765. Christopher L. Ryan, Company Directors Liabilities, Rights & Duties (2nd Ed.) at 213. (2002) 38 SCL 422. 40 SEC 907 (1961).

[10] 401 F.2d 833 (2d Cir. 1968). [11] 445 U.S. 222 (1980). [12] 463 U.S. 646 (1983). [13] 31791 F.2d 1024 (2d Cir. 1986), affd 484 U.S. 19 (1987). [14] United States v. OHagan, 117 S.Ct. 2199, 2211 (1997) (quoting the Eighth Circuits opinion in OHagan, 92 F.3d at 618). [15] 521 U.S. 642, 655 (1997). [16] Warren, The Regulation of Insider Trading in the European Community, 48 Wash. & Lee L. Rev. 1037 (1991). [17] Council Directive 89/592 Coordinating Regulations on Insider Trading, 1 Common Mkt. Rep. (CCH) 1761 (EC Directive). [18] William Dawkins and Hugo Dixon, EEC Proposes Action on Insider Trading, The Financial times (London April 29, 1987) at I, 48. [19] Insider Trading Accord Creates Dual Definitions for Insider, Eurowatch, Financial Services, Vol. 9, No. 16 (October 17, 1997). [20] Section 56(1) of Part V of CJA. [21] Supra note 3. [22] Regulation 2(h), SEBI Regulations. [23] Regulation 4, SEBI Regulations. [24] Insider Trading And its Legal Mechanism. Available at: http://www.legalserviceindia.com/article/l147Insider-Trading-And-its-Legal-Mechanism.html. [25] 1998 SCL 311. [26] (2004) 1 CompLJ 193 SAT. [27] (2002) 38 SCL 422. [28] (2009) 84 CC 454. [29] Appeal No. 217 of 2011, Date of decision: 22.06.2012. Available at: http://www.sebi.gov.in/cms/sebi_data/attachdocs/1340344874686.pdf.

[30] Civil Action No. 11-cv-7566 (SDNY). [31] Ruchi Biyani, Aditya Shukla, Nishchal Joshipura, Insider Trading: World View, Money Control (October 9, 2012).