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  • Dogma of Insider Trading A Comparative Study MOHIT SINGHVI VAISH ASSOCIATES ADVOCATES Email:

  • Dogma of Insider Trading: A Comparative Analysis

    2 Mohit Singhvi, Associate_ Vaish Associates Advocates


    With the advent of colossal frauds and scams in the Indian and capital markets across the globe, the regulators and governments of major economies have increasingly turned towards making stringent corporate governance standards and have appended penalties for violation of the same in order to curb the menace of misappropriation of the information, funds and other weapons used as tools to make huge illegal capital. The law and economics debate about the popularity of prohibiting insider trading by corporate insiders on material, non-public information is long-standing. The developing economies, coupled with growth of the capital market, necessitated the comprehensive legislation and a statutory body to promote orderly and healthy growth of the securities market, on a whole.

    The concept of insider trading is based on the availability of unpublished price sensitive information about a company listed in the stock market. Use of such information by the persons having access to it for trading in the stocks for purpose of making personal gains is called Insider trading. It is a clear cut instance of dealing in companys security with a view to make huge profits or avoiding a loss while in possession of information that, if generally known, would affect their portfolio. Insider trading is opposed to public policy, involves abuse of confidential information and is equivalent to betrayal of fiduciary position involving faith and confidence. Famous examples of it includes transacting on the advance knowledge of a companys discovery of a rich mineral ore,1 on a forthcoming cut in dividends by the board of directors,2 and on an unanticipated increase in corporate expenses.3

    Insider trading has been explained by the Patel Committee4 in its report as trading in shares of a company by the persons who are in the management of the company or are close to them on the basis of undisclosed price sensitive information regarding the working of the company which they possess but not available to others.

    The Apex Court in the case of Rakesh Agarwal v. SEBI5 stated that, Insider trading takes place when insiders or other persons, who by virtue of their position in office or otherwise, have access to unpublished price sensitive information relating to the affairs of a company, and deal in securities of such company or cause the trading of securities while in possession of such information or communicate such information to others who use it in connection with the purchase or sale of securities."

    Insider-trading is a term commonly used and also often heard by those who are regularly involved in trading in the stock market. Though the term has a surreptitious ring to it

    1 Securities and Exchange Commission v. Texas Gulf Sulphur Co., 401 F. 2d 833 2 In Re: Cady, Roberts & Co. 3 Diamond v. Oreamuno, 24 N.Y. 2d 494 4 High powered Committee on Stock Exchange Reforms, 1986 5 2004 49 SCL 351 SAT

  • Dogma of Insider Trading: A Comparative Analysis

    3 Mohit Singhvi, Associate_ Vaish Associates Advocates

    and stock market regulators around the globe spend considerable time framing laws to combat this menace, it is not always an evil. It need not be concluded that the persons connected to the company are barred from possessing, buying and selling its shares. They are permitted to deal in the securities of the company, provided they make adequate disclosure about the transaction to the regulator and the exchanges on which the shares are listed.6

    In India, law governing Insider trading is enumerated in the Securities and Exchange Board of India (Prohibition7 of Insider Trading) Regulations 1992, (Regulations) framed by the board in exercise of the powers conferred under section 30 of the Securities and Exchange Board of India Act, 1992, are intended to prevent and curb the nuisance of insider trading in the capital market. In the U.K. the law relating to Insider trading is dealt in accordance with the provisions enshrined under the Criminal Justices Act, 19938. The first country to take step to tackle the problem of insider trading effectively was the United States. In the USA, the Securities and Exchange Commission is empowered under the Insider Trading Sanctions Act, 1984 to inflict civil penalties besides initiating criminal proceedings. As far as the emergence of laws relating to Insider trading in the European Union is concerned, 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").

    6 Inside of Insider trading by Lokeswarri S. K., 2007042902001300.htm 7 Inserted by the SEBI (Insider Trading) (Amendment) Regulations, 2002, w.e.f. 20.02.2002. 8 This Act replaced the provisions first introduced in sections 68-73 of the Companies Act 1980 and consolidated into the Company Securities (Insider Dealing) Act, 1985.

  • Dogma of Insider Trading: A Comparative Analysis

    4 Mohit Singhvi, Associate_ Vaish Associates Advocates

    Who Is An Insider?

    Before getting into the technicalities of the concept, let us examine the pertinence of the terminology used in the whole process. As per section 2 (e) of the Regulations Insider means any person who,

    (i) 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, by virtue of such connection, to unpublished price-sensitive information in respect of securities of the company, or

    (ii) who has received or has had access to such unpublished price sensitive information.

    The persons who have access to such information may be those closely associated with the company either as:

    (1) top management as promoters or directors; (2) executives and employees; (3) persons associated with the company in their professional capacities as lawyers,

    auditors, financial consultants, etc; (4) persons working in banks and financial institutions dealing with the company; (5) persons manning the firms having business relationship with the company and (6) persons not falling in above categories but have come in possession of price sensitive


    Some other important terms are defined as follows: As per section 2 (h) (a) of the Regulations "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.

    As per section 2 (c) of the Regulations, connected person9 means any person who

    (i) is a director, as defined in clause (13) of section 2 of the Companies Act, 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.

    9 connected person shall mean any person who is a connected person six months prior to an act of insider trading.

  • Dogma of Insider Trading: A Comparative Analysis

    5 Mohit Singhvi, Associate_ Vaish Associates Advocates

    Prohibition on Insider Trading In India

    The entire scheme behind eliminating insider trading as stated earlier is to ensure that persons by virtue of their position in the company and based on the confidential information available to them by virtue of their position in the company do not gain an unfair advantage. Chapter II of the SEBI (Prohibition of Insider Trading) Regulations, 1992 deals with prohibition on dealing, communicating or counseling on matters relating to insider trading and contains Regulations 3, 3A, 3B and 4. Regulation 3 reads as follows:

    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 when in possession of any unpublished price-sensitive information; or

    (ii) communicate or counsel or produce directly or indirectly any unpublished price sensitive information to any person while in possession of such unpublished price sensitive information shall not deal in securities.

    Provided that nothing contained above shall be applicable to any communication required in the ordinary course of business or profession or employment or under any law. Also, Regulation 3A says that no company shall deal in securities of another company or associate of that other company while in possession of any unpublished price sensitive information.

    Regulation 3B sets out certain exceptions to which Regulation 3A will not apply. Regulation 4 states that any insider who deals in securities in contravention of the provisions of Regulation 3 or 3A shall be guilty of insider trading. Regulation 3 and Regulation 4 of the Regulations does not require anything else to be proved to proceed against the person except that the person is an insider and that he had dealt with the securities on the basis of the unpublished price sensitive information. The requi