1. INTRODUCTION OF INSIDER TRADING .

MEANING :-

Insider trading is the trading of a public company's stock or other securities (such as bonds or stock options) by individuals with access to non-public information about the company. In various countries, insider trading based on inside information is illegal. This is because it is seen as unfair to other investors who do not have access to the information.

Trading by specific insiders, such as employees, is commonly permitted as long as it does not rely on material information not in the public domain. However most jurisdictions require such trading be reported so that these can be monitored. In the United States and several other jurisdictions, trading conducted by corporate officers, key employees, directors, or significant shareholders must be reported to the regulator or publicly disclosed, usually within a few business days of the trade.

The rules around insider trading are complex and vary significantly from country to country and enforcement is mixed. The definition of insider can be very wide and may not only cover insiders themselves but also any person related to them such as brokers, associates and even family members. Any person who becomes aware of non-public information and trades on that basis may be guilty.

Illegal insider trading :-

Rules against insider trading on material non-public information exist in most jurisdictions around the world (Bhattacharya and Daouk, 2002), but the details and the efforts to enforce them vary considerably. In the United States, Sections 16(b) and 10(b) of the Securities Exchange Act of 1934 directly and indirectly address insider trading. Congress enacted this act after the stock market crash of 1929. The United States is generally viewed as having the strictest laws against illegal insider trading, and makes the most serious efforts to enforce them.

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Definition of insider :-

In the United States and Germany, for mandatory reporting purposes, corporate insiders are defined as a company's officers, directors and any beneficial owners of more than 10% 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 fraudulent since the insiders are violating the fiduciary duty that they owe to the shareholders. The corporate insider, simply by accepting employment, has undertaken a legal obligation to the shareholders to put the shareholders' interests before their own, in matters related to the corporation. When the insider buys or sells based upon company owned information, he is violating his obligation to the shareholders.

For example, 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 then bought shares in Company A while knowing that the share price would likely rise.

Liability for insider trading :-

Liability for inside trading violations cannot be avoided by passing on the information in an "I scratch your back; you scratch mine" or quid pro quo arrangement as long as the person receiving the information knew or should have known that the information was material non-public information. When allegations of a potential inside deal occur, all parties that may have been involved are at risk of being found guilty.

For example, if Company A's CEO did not trade on the undisclosed takeover news, but instead passed the information on to his brother-in-law who traded on it, illegal insider trading would still have occurred (albeit by proxy by passing it on to a "non-insider" so Company A's CEO wouldn't get his hands dirty).

Misappropriation theory :-

A newer view of insider trading, the misappropriation theory, is now accepted in U.S. law. It states that anyone who misappropriates (steals) information from their employer and trades on that information in any stock (either the employer's stock or the company's competitor stocks) is guilty of insider trading.

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For example, if a journalist who worked for Company B learned about the takeover of Company A while performing his work duties and bought stock in Company A, illegal insider trading might still have occurred. Even though the journalist did not violate a fiduciary duty to Company A's shareholders, he might have violated a fiduciary duty to Company B's shareholders (assuming the newspaper had a policy of not allowing reporters to trade on stories they were covering).

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. Nevertheless, the Securities and Exchange Commission prosecutes over 50 cases each year, with many being settled administratively out of court. The SEC and several stock exchange sactively monitor trading, looking for suspicious activity.The SEC does not have criminal enforcement authority, but can refer serious matters to the U.S. Attorney's Office for further investigation and prosecution.

Tracking insider trades :-

Since insiders are required to report their trades, others often track these traders, and there is a school of investing which follows the lead of insiders. This is, of course, subject to the risk that an insider is making a buy specifically to increase investor confidence or making a sell for reasons unrelated to the health of the company (such as a desire to diversify or pay a personal expense)

Insider Trading in India :-

India was not late in recognizing the harm that insider trading can inflict upon the rights of the public shareholders, corporate governance in India and the financial markets. The first concrete attempt to regulate insider trading was the constitution of the Thomas Committee in the year 1948, which committee evaluated the global practices in restricting insider trading inter alia, the Securities Exchange Act, 1934. Pursuant to the recommendation of the Thomas Committee,5 sections 307 and 308 were introduced in the Companies Act 1956. This change paved way for certain mandatory disclosures by directors and managers, but was not very effective in

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achieving the objective of preventing insider trading. Subsequently, the Sachar Committee and the Patel Committee were constituted in the years 1978 and 1986, respectively, to recommend measures for controlling insider trading in India. The Patel Committee had defined insider trading as “the trading in the shares of a company by the person 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 which is not available to others”. Along with other recommendations, both the Sachar Committee and the Patel Committee had recommended the enactment of a separate statute for curbing insider trading. The Abid Hussain Committee constituted in 1989 had recommended that a person guilty of insider trading should be penalized, both in the form of civil and criminal proceeding. A separate statute for prevention of insider trading was one of the recommendations of the Abid Hussain Committee too. On the basis of the recommendations made by these committees, a comprehensive legislation, ‘SEBI (Insider Trading) Regulations, 1992’ was promulgated and brought in to force. This regulation was substantially amended in the year 2002 to plug certain loopholes revealed in the cases of Hindustan Lever Ltd. v. SEBI6 and Rakesh Agarwal v. SEBI7 and was renamed as the SEBI (Prohibition of Insider Trading) Regulations, 1992. Ever since then, the Insider Trading Regulations have been amended 5 (five) times and the last amendment was in the year 2011.As on date, SEBI, the market watchdog regulates insider trading through the SEBI Act and the Insider Trading Regulation

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2. RULES AND REGULATIONS OF INSIDER TRADING.

Regulation 4 of the Insider Trading Regulations stipulates that any insider who deals in securities in contravention of the provisions of regulation 3 or 3A shall be guilty of insider trading. Therefore, in India, the test of whether a person is guilty of insider trading is determined on whether that person has breached Regulations 3 or 3A of the insider regulations act.

Insider Trading Regulations :-

Regulation 3A of the Insider Trading Regulations prohibits insider trading in the following manner:

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 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:

Regulation 3A of the Insider Trading Regulations

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.”

While Regulation 3 of the Insider Trading Regulations prohibits insider trading by all insiders in general, Regulation 3A is a specific prohibition on insider trading by companies.

The prohibition is two-fold :-

(i) Insiders cannot deal in the securities of a listed company when in possession of any UPSI.

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(ii) Insiders cannot pass on the UPSI, in any manner, to any other person, who deals in securities of a listed company when in possession of such

(iii) UPSI. However, communication of UPSI required in the ordinary course of business or profession or employment or under any law is exempt from the scope of Regulation 3.

Person is deemed to be a connected person :-

Person is deemed to be a connected person thereof, or is member of the Board of Trustees of a mutual fund or a member of the Board of Directors of the Asset Management Company of a mutual fund or is an employee thereof who have a juduciary relationship with the company;

Person is deemed to be a connected person is a Member of the Board of Directors or an employee of a public financial institution as defined in section 4A of the Companies Act, 1956; or

Person is deemed to be a connected person is an official or an employee of a Self-regulatory Organization recognized or authorised by the Board of a regulatory body; or

Person is deemed to be a connected person is a banker of the company.

Person is deemed to be a connected person relatives of the connected person; or

Person is deemed to be a connected person is a concern, firm, trust, Hindu undivided family, company or association of persons wherein any of the connected persons.

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Violation of SEBI (Prohibition of Insider Trading) Regulations, 1992 :-

Regulations, 1992, SEBI shall be informed by the Company.

Promoters and top executives intending to buy or sell shares of their companies might soon have to inform the market well in advance for such transactions. The Securities and Exchange Board of India (SEBI), as part of an overhaul of its insider-trading rules, is considering this, to clamp on misuse of share-price sensitive information.

The proposal has been made within a high-level 19-member committee set up by SEBI in April to review the country’s two-decade-old insider-trading regulations.

Penalty for contravention of code of conduct :-

Any employee/officer/director who trades in securities or communicates any information for trading in securities in contravention of the code of conduct may be penalised and appropriate action may be taken by the company.

Employees/officers/directors of the company who violate the code of conduct shall also be subject to disciplinary action by the company, which may include wage freeze, suspension,

[Ineligible] for future participation in employee stock option 68[plans], etc.

The action by the company shall not preclude SEBI from taking any action in case of violation of SEBI (Prohibition of Insider Trading) Regulations, 1992.

REGULATION 14 :-

Action under Section 11 of SEBI Act, 1992

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Directions under Section 11(4) (suspension of Trading & debarment)

Directions under section 11B of the SEBI Act

Cease and desist order in proceedings under section 11D of the Act;

Penalty for failure to furnish information, return etc. under section 15A of the SEBI Act, 1992

Monetary penalties under section 15G of SEBI Act, 1992 (upto 3X or Rs. 25 Cr. whichever is higher)

Criminal prosecution under section 24 of the SEBI Act (ten year imprisonment or fine upto Rs. 25 cr.)

BOARD’S RIGHT TO INVESTIGATE REGULATION 5 :-

Where the Board, is of prima facie opinion that it is necessary to investigate and inspect books of account, documents of an insider or any person on the basis of compliant received form investors, intermediaries or any other person, or suo-motu upon its own knowledge, to protect the interest of investors, it may appoint an investigating authority.

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3. INSIDER TRADING IN SHARES AND HOW IT IS DONE.

Insider trading is an unfair practice, wherein the other stock holders are at a great disadvantage due to lack of important insider non-public information. However, in certain cases if the information has been made public, in a way that all concerned investors have access to it, that will not be a case of illegal insider trading. When insiders, e.g :- key employees or executives who have access to the strategic information about the company, use the same for trading in the company's stocks or securities, it is called insider trading and is highly discouraged by the Securities and Exchange Board of India to promote fair trading in the market for the benefit of the common investor. 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. Any person having UPPI from the any subsidiary or group company is also stated to be the connected person.

Case study :-

Rajat Kumar Gupta born 2 December 1948) was an Indian-American businessman and philanthropist who is currently serving a two-year term in US federal prison for insider trading. He was the first foreign-born Managing Director (chief executive) of management consultancy firm McKinsey & Company from 1994 to 2003. He was also a board member of corporations including Goldman Sachs, Procter and Gamble and American Airlines, as well as an advisor to non-profits such as the Bill & Melinda Gates Foundation and The Global Fund to Fight AIDS, Tuberculosis and Malaria. Additionally, he is the co-founder of the Indian School of Business, American India Foundation, New Silk Route and Scandent Solutions.

On March 1, 2011, the SEC filed an administrative civil complaint against Gupta for insider trading with billionaire and Galleon Group hedge fund founder Rajaratnam. Coverage of the event noted that Anil Kumar — who, like Gupta, had

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graduated from IIT, was a highly regarded senior partner at McKinsey, and had also co-founded the Indian School of Business - had already pleaded guilty to charges in the same case Gupta, Kumar, and Rajaratnam were all close friends and business partners. Gupta countersued and both sides eventually dropped charges..

On October 26, 2010 the United States Attorney's Office filed criminal charges against Gupta. He was arrested in New York City by the FBI and pleaded not guilty. He was released on $10 million bail on the same day. Gupta's lawyer wrote, “Any allegation that Rajat Gupta engaged in any unlawful conduct is totally baseless .... He did not trade in any securities, did not tip Mr. Rajaratnam so he could trade, and did not share in any profits as part of any quid pro quo.” The SEC alleged, "The tips generated 'illicit profits and loss avoidance' of more than $23 million." Manhattan U.S. Attorney Preet Bharara said, "Rajat Gupta was entrusted by some of the premier institutions of American business to sit inside their boardrooms, among their executives and directors, and receive their confidential information so that he could give advice and counsel."

Details of wiretap recordings and trading activity related to the charges were analyzed at length in the media, assessing the strengths and weaknesses of the prosecution's and defense's cases.

The current case is focusing on the relationship between Raj Rajaratnam, Anil Kumar and Gupta. Gupta, Rajaratnam, and Kumar were all involved to varying degrees as founding partners of private-equity firms Taj Capital and New Silk Route, though Rajaratnam and Kumar left before they began operation. Gupta remained as chairman of New Silk Route, and Rajaratnam eventually invested $50 million in the fund.

Rajat Gupta's trial began on May 22, 2012. On June 15, 2012, Gupta was found guilty on three counts of securities fraud and one count of conspiracy. He was found not guilty on two other securities fraud charges. At the time, his lawyer told reporters, "We will be moving to set aside the verdict and will, if necessary, appeal the conviction." The maximum sentence for securities fraud is 20 years and the maximum sentence for conspiracy is five years. In arguments in mid-October, prosecutors favored prison time of up to 10 years while defense attorneys favored probation and community service. As one service option, the latter suggested Gupta "work on health care and agriculture in rural Rwanda". Prosecutors based their recommendation in part on $11.2 million profits, or losses avoided, by

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Rajaratnam based on the tips. The defense argued Gupta "never profited on the alleged trading" per one news account.

On October 24, 2012, Gupta was sentenced to two years in prison by Judge Jed Rakoff of the United States District Court in Manhattan for leaking boardroom secrets to former hedge fund manager Raj Rajaratnam. His conviction was upheld by a Federal Appeals Court on March 25, 2014. His prison sentence will begin June 17. On June 11, 2014 US Supreme Court rejected Gupta's bail plea, a week before his prison term begins.

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4. INSIDER TRADING IN MUTUAL FUND AND HOW IT IS DONE.

A mutual-fund is a type of professionally managed collective investment scheme that pools money from many investors to purchase securities. While there is no legal definition of the term mutual fund, it is most commonly applied only to those collective investment vehicles that are regulated and sold to the general public. They are sometimes referred to as "investment companies" or "registered investment companies". Most mutual funds are open-ended, meaning stockholders can buy or sell shares of the fund at any time by redeeming them from the fund itself, rather than on an exchange .Hedge funds are not considered a type of mutual fund, primarily because they are not sold publicly.

Case Study :-

The Securities and Exchange Board of India, took a decisive step forward in checking malfeasant acts in the stock exchanges. It banned Samir Arora, till recently the Chief Investment Officer of Alliance Capital Mutual Fund (ACM), from participating either directly or indirectly in the domestic capital market. The allegations have been of two kinds. The first charge is insider trading, a category of unethical practices that is as widely prevalent as it is difficult to prove. It is alleged that Mr. Arora traded on privileged information, basically price-sensitive corporate news, before it became public. Of the several cases that the SEBI will rely upon to substantiate its charge, the one concerning Digital Globalsoft stands out. It is alleged that Mr. Arora and his team dumped a large quantity of the company shares after coming to know of a potentially damaging valuation report before it became public. The second charge is that he tried to profit personally when the American principal, Alliance Capital, tried to exit from India. It is alleged that he favoured one prospective buyer, discouraging several others, ostensibly to earn a hefty commission in the event of the deal going

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through. Those acts damaged the interests of the unit holders, which Mr. Arora was supposed to uphold. Besides, insider trading, being totally opaque, discriminates against the general body of investors.Few doubt that the regulator's action marks a defining moment for capital market regulation in India. It sends out several salutary messages simultaneously. It can set a valuable and badly needed precedent, an important gain to the nascent market regulation in India. Compared with banking and insurance, the capital market has been, for most of its existence, largely unregulated. The SEBI, which was constituted in 1989, more than a century after the Bombay Stock Exchange, remained a toothless body during its first three years. Even after acquiring legislative teeth in January 1992, the SEBI has had at best a mixed record, faring reasonably well in areas such as investor education but poorly in other areas where upholding the integrity of markets has been the issue. Since the 1990s, with trading volumes growing exponentially, the market regulator was seen to be one step behind those who committed questionable acts. There have been a few well-publicised instances of alleged insider trading where the regulator, despite having apparently clinching evidence, either failed to act in time or had its rulings overturned on appeal. Even in the developed financial markets, where there is more transparency and regulators have greater powers, countering insider trading has been a challenging task.

Given the multiplicity of cases in India, the regulator's strategy should be to focus energies on the most high profile of the cases and follow it through until exemplary punishment is awarded. There is little doubt that the present case is the perfect one to focus on. The accused has been a highly visible fund manager representing an internationally known mutual fund, having access to substantial dollar and rupee resources. Regulators and investors alike will keenly watch the outcome of his appeal against the ban. An even larger message concerns financial intermediation in its entirety. For almost a decade, mutual funds have been touted — even by policy makers - as a preferred investment route for investors in the share market. Although they failed to deliver in terms of returns, mutual funds were widely believed to be safer places to park savings. Now that one of the better-performing funds is in the dock, it is time to revise those facile assumptions.

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5. CONCLUSION.

Insider trading must not be practiced in any of the organizations because it make the profit for some professional individuals the Government Of India , SEBI and RBI had also made the strict rules and regulations to stop the insider trading but some times some loopholes in the law helps to take the undue advantage for some professional individuals. There should also be the new law which should be amended to stop the insider trading in India and the top officials of the organizations must be loyal to their organization.

The insiders possess the knowledge and the vision. They are the ones who make corporate decisions and business plans, and therefore are the ones you must pay close attention to any benefit we derive from the understanding of insider trading comes predominantly from buying. However, because of the difference between buying and selling motivation, there are always more insider sales than buys Your would still need your normal due diligence.

siders possess the knowledge and the vision. They are the ones who make corporate decisions and bu1.1siness plans, and therefore are the ones you must pay close attention to Any benefit we derive from the understanding of insider trading comes prednndndndominantly from buying. However, because of the difference between buying and selling motivation, there are always more insider sales than buys 

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Your w

6. BIBLIOGRAPHY

(i) www.wikipedia.com (ii) www.investopedia.com (iii) www.forbes.com (iv) www.bloomberg.com (v) www.rbi.org.in (vi) www.sebi.com (vii) www.moneycontrol.com (viii)www.cnnibn.com (ix) www.kplinger.com (x) www.investorwords.com (xi) www.financialexpress.com (xii) www.outlookmoney.com (xiii)www.economictimes.com o

ld still need your normal due diligence

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