What is Insider Trading?

What is insider trading?

Insider trading means that an individual buys or sells a stock based on some information that is not available to the public. The mentioned individual can be any of the directors, employee or someone who managed to get the insider information.

When someone with certain inside and secret information about a company, is profiting in an immoral way depriving the other investors of fair competition, it is known as insider trading.

In India, insider trading is prohibited by the Securities and Exchange Board of India (SEBI) which encourages fair trading in the stock market.

Insider trading is the trading of the securities of the listed company by an employee, partner or any other person who has access to the sensitive and secret information of the company. Every company secure certain information which is not available to anyone other than a few trusted persons in the company.

What is the legal status of insider trading?

Insider trading is illegal in several countries including India, and the reason behind making it an immoral and illegal mode of trading are as follows:

• Unfair Practice: Insider trading is an unfair practice to the other investors in the market, as it gives an unfair advantage to those who have access to the secret information. If it is not made illegal, there will be unfair means adopted by the investors such as force, coercion, blackmailing etc. which can be criminal in nature.

• Unethical and Immoral: It is important to maintain a fair and clean process of business to secure people's confidence.

• Discourages New Investors: Insider trading discourages any new investor as the new investors would not be sure about the outcome, and only a few investors with connections will be trading in the securities market.. This in turn would lead to monopoly and the market shall be severely hurt

What are the Indian laws prohibiting insider trading?

The Securities and Exchange Board of India on 18th January 2019 introduced an amendment called "Prohibition of Insider Trading", by which it has decided to hold the promoters of any company liable for the violation of rules of insider trading if they are found possessing any non published price-sensitive information about the company without a valid legal purpose.

No promoters shall be exempted based on their shareholding status and anyone involved in insider trading would have to face the consequences.

The SEBI specified that the rule shall include sharing of non-published price sensitive information which may not be generally available with anyone - partner, lenders, collaborators, suppliers, customers, legal advisor, merchant banker, auditors, or anyone of advisor and consultant in any department.

Previously, the SEBI had imposed a penalty on the insider trader of INR 25 crore or three times the profit made through the inside trading, whichever is the higher. Imprisonment for a term of up to 10 years is also imposed.

Section 3 of SEBI regulations of Insider Trading Regulations 1992, specifies that no insider or a connected person has the right to publicly disclose or display any secret information which is relevant to the inside affairs of the company because if the information is made public, then it would affect the price of securities of the company.

One of the major issues includes the difficulty in proving insider trading. The activity is conducted with the utmost care that there is hardly any evidence left behind. Though SEBI has adopted tools for market surveillance to keep an eagle eye on the inside traders, the activity is still going on under a cover.

Some famous incidents of insider trading

India has always been a hub of stories, and here are two real incidents which made the Indian legislature understand the requirement of a strongly implemented law and a severe penalty to be imposed.

One of the Board of Directors of Goldman Sachs, Mr Rajat Gupta was all over the news for the insider trading and was convicted ion 2012. He was accused of leaking the information of the board room meetings of Goldman Sachs to Mr Raj Rajaratnam, the founder of the Galleon Group and an investor of a hedge fund.

The information included inside information about Warren Buffet's $5 billion bailouts at the height of the crisis that prompted Mr Raj Rajaratnam, to hedge himself against the fluctuations in stock price.

Even though there was not much evidence that Mr Rajat Gupta had any real financial gain, as argued by his attorneys, and that the two friends were discussing the deal in their position as investors themselves, however, the timing of it and the fact that the reveal took place before the public announcement was enough reason for his conviction as guilty of Insider trading.

Another recent case of insider trading about Indiabulls, where the executive director of Indiabulls was accused of making Rs. 87 lakhs unlawfully by trading in Indiabulls when they had access to unpublished secret information about the sale of land and property privately which happens to be the subsidiary of Indiabulls venture limited. As per the markets regulator, the executive director of the Indiabulls venture limited was a member of the management committee of the Indiabulls, which makes her an insider and her husband too was an insider. These unlawful gains were proved to be made in two years from 2017 to 2019.

The SEBI ordered that strict criminal action be taken and both the executive director of the company and her husband were penalised with Rs. 87.4 lakhs both jointly and separately. It was further directed that no debts shall be made without the prior permission of SEBI.

It has been observed by the experts that insider trading has dropped really in a considerable manner in the last few years.

The credit goes to SEBI for the strict implementation of the law and severe punishment to the guilty, which made the Indian market a cleaner one than it was before.