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INSIDER TRADING AND ITS RELATED LAWS

ABSTRACT

Insider Trading is a serious offence prevailing currently in the country it is based on the execution of securities transactions on the basis of material non-public information. The above blog talks about its regulations and punishments.

KEYWORDS: Investopedia, Companies Act,2013, SEBI Act and Regulation, SEBI (Prohibition of Insider Trading) Regulation, 2015.

INTRODUCTION

Insider trading generally refers to trading shares of the company through having access to unpublished price-sensitive information. For example, in a company, the directors and the other key personnel managers have access to unpublished price-sensitive information before the annual report is published to the general public in the annual general meeting. Or the persons who invest in shares by illegally gaining the price sensitive information or the directors or key managerial personnel themselves selling or providing access to price sensitive or other disclosed information to the public. SEBI (Prohibition of Insider Trading) Regulation, 2015 says that no person shall communicate unpublished price-sensitive information, provide or allow access to any unpublished price-sensitive information or a person shall not procure or arrange any communication of unpublished price-sensitive information from an insider.


HISTORY OF SEBI (PROHIBITION OF INSIDER TRADING) REGULATION, 2015

In the year 1940, the government formed Thomas Committee to evaluate restrictions that can be imposed on short-swing profits. The provisions relating to Insider Trading were included in Sections 307 and 308 of the Companies Act, 1956. In the year 1979, Sachar Committee was formed to study insider trading. In the year 1986 - Patel Committee was formed and in 1989 Abid Hussain Committee was formed and all recommended a separate law on insider trading. And in the year 1992 SEBI formed the SEBI (Prohibition of Insider Trading) Regulation, 1992.[1] Later when amended on recommendations of the Committee under the Chairmanship of Justice N.K Sodhi formed SEBI (Prohibition of Insider Trading) Regulation, 2015.


Definitions

  • Insider - It includes any connected person to the company or deemed to be connected or any person in possession of unpublished price-sensitive information.

  • Trading - It includes buying, selling, dealing, agreeing to buy or agreeing to subscribe or agreeing to buy sell or deal in securities of any listed company.

  • Unpublished Price Sensitive Information -

  • It is not generally available information, when this information will be made public, it will have an impact on the price of shares and securities.

  • Compliance Officer - It means a person who is a senior level officer of the company and designated as a compliance officer and who reports to the board of directors of the company.

Prohibition of Insider Trading

No person shall trade in securities when he is in possession of Unpublished Public Sensitive Information. And if such a person trades in the securities then it shall be assumed that such person’s trade has been motivated by knowledge and awareness of such information. And he is prohibited to do so. However,[2] his prohibition does not apply to insiders if he can prove their innocence on the following basis -

  1. When there is an off-market transaction between the insiders.

  2. Transaction carried out through block deal window mechanism between persons having possession of the unpublished price sensitive information without being in breach of regulation 3 and both parties had made a conscious & informed trading decision.

  3. Transaction in question was carried out pursuant to a statutory or regulatory obligation to carry out a bonafide transaction.

  4. Transaction in pursuant to the exercise of stock options in respect of which exercise price was pre-decided.

  5. Trade pursuant to the trading plan.

  6. Regulation - 6: Disclosure of trading by the insider.

  7. Regulation - 7: Disclosure by certain persons.

There are two types of disclosures which are initial disclosures and continual disclosures.


Code of fair disclosure

The BOD of the listed company should formulate and publish on the official website of the company a code of practice and procedure for fair disclosure of UPSI. Code of fair disclosure as per Schedule A -

  1. UPSI should be disclosed at the earliest and not later than the information goes to the public.

  2. Should be disclosed on a uniform and universal basis.

  3. Should designate a Chief Investor Relation Officer for the purpose of handling the UPSI.

  4. It shall not share UPSI with research and stock brokers and shall issue a prompt response to rumours and news reports.

  5. It shall disclose UPSI on a need-to-know basis.

Punishment

  • If a violation is made in the code of conduct by any employee and shall be reported by the compliance officer to SEBI.

  • If any person violates SEBI (Prohibition of Insider Trading) Regulation, 2015 Imprisonment for 1 month to 10 years or a fine of Rs.25 Cr, subject to a minimum of Rs.500000 to Rs.1000000 or both.

  • As per SEBI Act, 1992 Rs. 25 Cr or 3 times of profit whichever is higher.

  • If any person is dissatisfied with the decision given by SEBI regarding punishment such person may within 45 days file an appeal to SAT.

CONCLUSION AND RECENT JUDGMENTS AND DEVELOPMENTS

In the year 2018, it came to the knowledge of SEBI that several unpublished price sensitive information (UPSI) is being circulated in social media networking platforms or groups ahead of official announcements of stock exchanges. This calls for immediate change in ongoing PIT Regulations with newer requirements for a leak of unpublished price-sensitive information (UPSI) maintaining a structural database of persons with whom the information is shared. In the matter of Insider Trading in the scrip of Deep Industries Ltd., the SEBI during the investigation go beyond the prescribed definition of connected persons under the regulation and establishes relationships and nexus of persons. leak of information on the basis of social media networks and KYC documents with intermediaries of suspected persons and entities involved in insider trading.


REFERENCES [1] Companies Act,2013 SEBI(Prohibition of insider trading) Regulation, 2015 [2] Companies Act, 2013 SEBI(Prohibition of insider trading) Regulation, 2015

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