INSIDER TRADING

Introduction – Anuj Chawla

Impact on market – Bhawna Sharma
Theories and Concept – Rama Mittal
Case on Enron – Dipali Goyal
Regulations by SEBI – Neha Aggarwal
INSIDER TRADING

Insider trading is the trading of a

corporation's stock or other
securities (e.g. bonds or
stock options) by individuals with
potential access to non-public
information about the company. ]
 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 duty or

 other relationship of trust and confidence or where the non-

public information was misappropriated from the company.
Definition of "insider"

Corporate insiders are defined as a company's

officers, directors and any beneficial owners of
more than ten percent of a class of the company's
equity securities.

Trades made by these types of insiders in the

company's own stock, based on
material non-public information, are considered to
be fraudulent since the insiders are violating the
trust or the fiduciary duty that they owe to the
shareholders.
Legal insider trading

 if a corporate insider plans on retiring after a

period of time and, as part of his or her retirement
planning, adopts a written, binding plan to sell a
specific amount of the company's stock every
month for the next two years,
during this period the insider comes into possession
of material nonpublic information about the
company, any subsequent trades based on the
original plan might not constitute prohibited insider
trading.
 Illegal insider trading

•Illegal insider trading refers generally to buying or

selling a security, in breach of a fiduciary duty or

•other relationship of trust and confidence, while in

possession of material, nonpublic information about
the security.

•Insider trading violations may also include

"tipping" such information, securities trading by the
person "tipped," and securities trading by those who
misappropriate such information.
Illegal insider trading would occur if the chief
executive officer of Company A learned (prior
to a public announcement) that Company A will
be taken over, and bought shares in Company A
knowing that the share price would likely rise.

Illegal insider trading is decreasing overall

economic growth.
Penalties
Civil Penalties: any profit made or loss avoided
and penalty of up to three times this amount.

Individuals face up to 25 years in prison for

securities fraud and fines of up to $1 million.
IMPACT ON MARKETS
One can also say that the biggest difficulty created by insider trading is a lack of faith
in the exchange markets where these illegal trades take place.

When entire markets are widely perceived to be tainted by insider trading, average
people who are also potential investors will avoid markets altogether.
 INSIDER TRADING

Only a company’s insiders or employees can

commit insider trading. Need to trade and be
caught in the act.
 TRUTHs
The law applies to anyone who knows material
nonpublic information at the time of the trade or
tip
Applies to trades of stock in customers, suppliers,
clients
Tipping, even without the tipper trading, is illegal
Most cases based on circumstantial evidence
REASONS FOR REGULATING
INSIDER TRADING

Unfair practice to public investors

Prohibiting it ,promotes efficiency of markets

Property of material information belongs to the

corporation for business purposes.

13
Misappropriation theory
It states that anyone who misappropriates (steals)
information from their employer and trades on that
information in any stock (not just the employer's
stock) is guilty of insider trading.
 Proof of responsibility

Proving that someone has been responsible for a

trade can be difficult, because traders may try to hide
behind nominees, offshore companies, and other
proxies.
U.S. Securities and Exchange Commission
prosecutes over 50 cases each year, with many being
settled administratively out of court.
The SEC and several stock exchanges actively
monitor trading, looking for suspicious activity.
Trading on information in
general
 SEC regulations
•SEC regulation FD ("Full Disclosure") requires
that if a company intentionally discloses material
non-public information to one person, it must
simultaneously disclose that information to the
public at large.

• In the case of an unintentional disclosure of

material non-public information to one person,
the company must make a public disclosure
"promptly."
 Security analysis and
Insider trading
•Security analysts gather and compile
information, talk to corporate officers and
other insiders, and issue recommendations
to traders. Thus their activities may easily
cross legal lines if they are not especially
careful.
•The CFA Institute in its code of ethics
states that analysts should make every effort
to make all reports available to all the
broker's clients on a timely basis.
•Analysts should never report material
nonpublic information, except in an effort to
make that information available to the
general public.
 CASE ON

ENRON
Corporation
SEBI REGULATIONS ACT, 2002
Prohibition on dealing
3. No insider shall—

(i) either on his own behalf or on behalf of any other

person, deal in securities of a company listed on any
stock exchange any unpublished price sensitive
information; or

(ii) 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

[3A. 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.]
 Investigation

4A. (1) If the Board suspects that any person

has violated any provision of these
regulations, it may make inquiries with such
persons

(2) The Board may appoint one or more

officers to inspect the books and records of
insider(s)
 Board’ right to
investigate.
5. (1) Where the Board, 26[is of prima
facie] opinion that it is necessary to
investigate and inspect the books of
account, either records and documents
of an insider, it may appoint an
investigating authority for the said
purpose.
 Procedure for
investigation
6. (1) Before undertaking any
investigation under regulation 5, the
Board shall give a reasonable notice to
insider for that purpose.

(2) where the Board is satisfied that in the

interest of investors or public no such
notice should be given, it may by an
order in writing direct that the
investigation be taken up without such
notice.
(3) On being empowered by the Board, the
investigating authority shall undertake the
investigation and inspection of books of account
and the insider against whom an investigation is
being carried out.
Obligations of insider on
investigation by the Board.
7. (1) It shall be the duty of every insider,
who is being investigated to produce to
the investigating authority such books,
accounts and other documents in his custody
or control and furnish the authority with the
statements and information relating to the
transactions in securities market within such
time as the said authority may require.
2) The insider shall allow the investigating
authority to have reasonable access to the
premises occupied by such insider and also
extend reasonable facility for examining any
books, records, documents and computer data
in the possession of the stock-broker or any
other person and also provide copies of
documents or other materials which, in the
opinion of the investigating authority are
relevant.
(3) The investigating authority, in the
course of investigation, shall be entitled to
examine or record statements of any
member, director, partner, proprietor and
employee of the insider

(4) It shall be the duty of every director,

proprietor, partner, officer and employee of
the insider to give to the investigating
authority all assistance in connection with
the investigation, which the insider may be
reasonably expected to give.
Communications of findings

1.The Board shall, after consideration of the

investigation report communicate the findings
to the person suspected to be involved in
insider trading or violation of these regulations.

(2) The person to whom such findings has been

communicated shall reply to the same within 21
days.
3) On receipt of such a reply or
explanation, if any, from such person, the
Board may take such measures as it deems
fit to protect the interests of the investors
and in the interests of the securities market