“INSIDER TRADING – A Study based on Cases”

Manipal University Jaipur

School of Law

Supervised by- Submitted by-

Ms MARYANKA SINGH Anshul Ranjan Srivastava
161401020
B.A.LL.B (Hons.)
VI Semester

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CERTIFICATE

This is to certify that Mr. Anshul Ranjan Srivastava, student of B.A. LL.B. (Hons.) semester VI,
School of Law Manipal University Jaipur has completed the project work entitled “INSIDER
TRADING – A Study based on Cases”under my supervision and guidance.
It is further certified that the candidate has made sincere efforts for the completion of this project.

Ms MARYANKA SINGH

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ACKNOWLEDGEMENT

I hereby acknowledge the help and support of the teachers, who helped me in compiling this
project. I thank the faculty and management of Manipal University Jaipur, School of Law, as the
resources that were necessary to complete the project were provided by them.
I am highly indebted to my teacher “Ms MARYANKA SINGH” for her guidance and constant
supervision as well as for providing necessary knowledge regarding the subject at hand and also
for her support in completing the project.
I would like to express my gratitude towards my parents and friends for their kind cooperation and
encouragement which help me in completion of this project.

Anshul Ranjan Srivastava

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Table of Contents
CERTIFICATE .................................................................................................................................................. 2
ACKNOWLEDGEMENT .................................................................................................................................. 3
Insider trading laws in India ......................................................................................................................... 5
INTRODUCTION ............................................................................................................................................. 5
Case Study - Insider Trading ......................................................................................................................... 7
WEBLIOGRAPHY ......................................................................................................................................... 12
BIBLIOGRAPHY............................................................................................................................................ 12

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Insider trading laws in India

INTRODUCTION
Insider trading denotes dealing in a company’s securities on the basis of confidential information
relating to the company which is not published or not known to the public used to make profit or
loss. It is fairly a breach of fiduciary duties of officers of a company or connected persons towards
the shareholders.

The prevention of insider trading is widely treated as an important function of securities regulation.

*Section11(2)E of companies act,1956 prohibits the insider trading but does not define it.

*Prohibition of insider trading is necessary to make securities market-

· Fair and transparent.

· To have level playing field for all the participants in the market.

· For free flow of information and avid information asymmetry.

Insider is defined under the SEBI Prohibition of Insider Trading regulation2(e) as -

Insider is the person who is connected with the company,who could have the unpublished price
sensitive information or receive the information from somebody in the company.

*Information deemed to be price sensitive are-

· Periodical financial results

· Intended decalaration of the dividends

· Issue of securities or buy-back of securities

· Any major expansion plans or execution of new projects

· Amalgamation and mergers or takeovers

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· Any significant changes in policies, plans or operations of the company.

Insider trading is the trading of a corporation's stock or other securities (such as bonds or stock
options) by individuals with access to non-public information about the company. In most
countries, trading by corporate insiders such as officers, key employees, directors, and large
shareholders may be legal, if this trading is done in a way that does not take advantage of non-
public information.

However, the term is frequently used to refer to a practice in which an insider or a related party
trades based on material non-public information obtained during the performance of the insider's
duties at the corporation, or otherwise in breach of a fiduciary or other relationship of trust and
confidence or where the non-public information was misappropriated from the company.

In the United States and several other jurisdictions, trading conducted by corporate officers, key
employees, directors, or significant shareholders (in the US, defined as beneficial owners of 10%
or more of the firm's equity securities) must be reported to the regulator or publicly disclosed,
usually within a few business days of the trade. Many[citation needed] investors follow the
summaries of these insider trades in the hope that mimicking these trades will be profitable. While
"legal" insider trading cannot be based on material non-public information, some investors
believe[citation needed] corporate insiders nonetheless may have better insights into the health of
a corporation (broadly speaking) and that their trades otherwise convey important information
(such as about the pending retirement of an important officer selling shares, greater commitment
to the corporation by officers purchasing shares).

The authors of one study claim that illegal insider trading raises the cost of capital for securities
issuers, thus decreasing overall economic growth. However, economists cannot be confident of
this conclusion because data on illegal insider trading is not available; the nature of the activity
renders it impossible to gather data.

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Insiders can easily profit using "open market repurchases." Such transactions are legal and
generally encouraged by regulators through safe harbors against insider trading liability.

Case Study - Insider Trading

As a result of the phenomenal Bull Run in almost all the major stock markets throughout the world,
the shareholding population has grown up. India is one of the well regulated and fast growing
emerging markets.

The market regulators are always concerned about the health of the capital markets since any kind
of malpractice may make the retail investors lose their hard earned money. One such scam was
unearthed in 1992 in India.

The term 'insider trading' means act of buying or selling a security in the open market by an insider.
By virtue of being an insider he may have access to some confidential, price sensitive information
not disclosed to the media or public. ("Price-sensitive information" means periodical financial
results of companies, dividend declaration, issue or buy back of securities, any major expansion
plans or execution of new projects, amalgamation, mergers, demergers or takeovers, disposal of
whole or substantial part of business and significant changes in policies, plans or operations of the
company). He may indulge in accumulating the stock over a period of time, and when the news is
out in public domain he may sell his holdings in the market. This is considered to be a serious
economic offence.

Now with the capital markets being transparent, many countries have actually imposed legislative
sanctions on insider trading. The United States formed the Securities Exchange Commission,
which, under the insider trading sanctions act, may impose civil penalties in addition to initiating
criminal proceedings. In India SEBI or the Securities Exchange Board of India is the market
regulator; SEBI has drawn guidelines to prevent insider trading and price over manipulation.

History behind the regulatory mechanism in India:

Insider trading in India was unhindered in its 125 year old stock market till about 1970. It was in
the late 1970's this practice was recognized as unfair.

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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 amendments to the company’s act, 1956 to restrict or prohibit the dealings
of employees / insiders. Penalties were also suggested to prevent the insider trading.

In 1986 the Patel committee recommended that the securities contracts (Regulations) Act, 1956
may be amended to make exchanges curb insider trading and unfair stock deals. It suggested heavy
fines including imprisonment apart from refunding the profit made or the losses averted to the
stock exchanges.

In 1989 the Abid Hussain Committee 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.

Following the recommendations by the committees, India through Securities and Exchange Board
of India (Insider Trading) Regulations 1992 has prohibited this fraudulent practice and 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. Both the Insider Trading Regulations are basically punitive in nature
in the sense that they describe what constitutes insider trading and then seek to punish this act in
various ways. More importantly, they have to be compiled with by all listed companies; all market
intermediaries (such as brokers) and all advisers (such as merchant bankers, professional firms,
etc.).

Initially the term "insider" was used to mean a person who has access or connection to the
unpublished price sensitive information. However, if one comes to know about the information
independent of such a connected person, then he may not, theoretically, be called an insider.

The insider trading allegation against Hindustan Lever (HLL) for purchasing eight lakh shares of
Brooke Bond Lipton India (BBLIL) from Unit Trust of India a month before the merger of the two
companies was announced. After the case against HLL (Hindustan Lever Limited) SEBI amended

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the regulations and defined "insider" as a person who is reasonably expected to have access to such
unpublished price sensitive information.

Also the definition of "price sensitive information" has been changed after the case against HLL.
It meant earlier that any information which related to the listed matters or was of concern, directly
or indirectly, to a company, and was not generally known or published by such company for
general information, but which if published or known, was likely to materially affect the price of
securities of that company in the market. Now it is modified like this: '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. "Unpublished" means information,
which is not published by the company or its agents and is not specific in nature.

Regulation 3 of the SEBI Regulations prohibits dealing, communication or counseling on matters

relating to insider trading. It states that no insider shall either on his own behalf or on behalf of
any person, deal in securities of a company listed on any stock exchange when in possession of
any unpublished price sensitive information or communicate, counsel or procure directly or
indirectly any unpublished price sensitive information to any person who while in possession of
such unpublished price sensitive information shall not deal in securities.

Thus, according this regulation, insider trading means:

1. Involvement of Insiders;

2. Presence of unpublished Price Sensitive Information;

3. Using such information for dealing in securities.

Regulation 3A was also added in the the SEBI (Prohibition of Insider Trading) Regulations, 1992.
Regulation 3A reads "No company shall deal in the securities of another company or associate of
that other company while is possession of any unpublished price sensitive information." No such
provision directly prohibiting companies from dealing in securities existed prior to the amendment.

Regulation 4A provides that where the Board suspects that any person has violated any provision
of these regulations, it may make any enquiries to form a prima facie opinion as to whether there

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is any violation of the Regulations. Where the Board, is of prima facie opinion that it is necessary
to investigate, and inspect the books of account, records or documents of an insider for the purpose
of investigating the complaints received from investors, or to investigate motto upon its own
knowledge to protect investors, it has been given the power to do so under Regulation 5. Further,
the procedure to be followed in such investigation has been laid down in Regulation 6.

The Securities and Exchange Board of India Act, 1992 under Section 15G provides for penalty for
the offence of insider trading. It is submitted that this section is basically preventive as well as
punitive in nature as it puts the penalty for insider trading extraordinarily high at Rupees twenty
five crores or three times the amount of profits made, whichever is higher. In addition to this
section there is also a general section 24 that deals with all kinds of violations of the Act and the
Regulations. This section provides for a maximum imprisonment of ten years or a fine, which may
extend to rupees twenty five cores, for any violation of the provisions of the Act or the Regulations
made there under.

In 2002, Regulation 11 that was invoked by SEBI to justify it's actions in the case, was also
radically modified. The Appellate Authority in the above mentioned case had held that under the
Regulations, SEBI had no power to give compensation to the effected party, something that SEBI
had done. The amendment sought to remove this limitation on SEBI's power by providing in
clauses (d) and (e) that SEBI could declare the transaction in securities null and void and direct
the person who acquired the securities in violation of these regulations to deliver the securities
back to the seller. If the buyer is not is a position to deliver such securities, the market price
prevailing at the time of issuing such directions or at the time of transaction whichever is higher
shall be paid to the seller.

In 2004 there was an allegation of Global Trust Bank prices being manipulated. It was alleged that
2 crore shares of GTB shares were sold in the market before Reserve Bank of India declared a
moratorium. In the four preceding working days before July 24, the National Stock Exchange
(NSE) and the Bombay Stock Exchange (BSE) showed heavy trading of GTB shares. During these
four days, 68.27 lakh shares were sold and delivered at the NSE and 19.84 lakh shares at the BSE.

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Insider trading allegations surfaced again when Orbitech Solutions was merged with Polaris. There
were media reports for about one month on the possibility of a merger between them. In a reply to
media reports, Polaris informed the stock exchanges that the board of the company had approved
of acquisition plans but had not decided on which company to acquire. But later the company
announced the details of the merger of OrbiTech with it.

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WEBLIOGRAPHY

1.) http://www.legalservicesindia.com/article/1421/Insider-trading-laws-in-India.html

BIBLIOGRAPHY

1.) TAXMANN’S Company Law Manual.

2.) COMPANY LAW by Avtar singh

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