Shreya
WHAT IS INSIDER TRADING?
It is an illegal practice of trading on the stock exchange to one’s advantage through having access to confidential information. It can also be defined as malpractice where a person(most probably the employee of a company) who has strategic, crucial, or confidential information shares this non-public information which can be crucial for making investment decisions for the company or, use it for trading the company’s stock or security.
It is an unethical practice where other stockholders are at a great disadvantage due to leakage of crucial and non-public information to a particular party or stockholder but if the information is made public in a way that all the concerned authority or stockholders have access to it then it does not constitute to the illegal practice.
RECENT CASES
FIRST CASE OF INSIDER TRADING IN THE WORLD
The USA is the first country to introduce the enactment of the securities act 1933, it is after the devastating crash of the stock market in 1929. After the securities act of 1933, a subsequent act was passed by the name securities act, 1934. It was the backbone for every law and regulation about insider trading or any securities fraud. Thereafter in the year 1961, the USA became the first country to enforcing a law for the prohibition of the practice of insider trading. In 1966, SEC vs. Texas Gulf Sulphur Company[1]it was decided for the first time, that anyone who possessed the inside information or non-public information then either he has to make it public or disclose it to all the interested parties or can decide not to trade. By doing this no one will be getting wrongly benefited. The case of the United States vs. Newman[2] made insider trading illegal for the first time.
INSIDER TRADING IN INDIA
In the 1940s for the first Indian government set up a committee named Thomas committee 1948 to look after insider trading laws of the USA and relations with companies act 1956 but due to inadequate provisions in the companies act 1956, three more committees were formed the Sachar Committee in 1979, the Patel Committee in 1986 and the Abid Hussain Committee in 1989. According to Patel committee “Insider trading generally means trading in shares of a company by the persons who are in the management of the company or are too close to them, based on undisclosed price sensitive information, regarding the working of the company which they possess but are not available to others”[3]. This is what insider trading means.
The rapidly advancing Indian security market needed more comprehensive regulations which resulted in the formation of the Securities and exchange board of India also known as SEBI. SEBI (insider trading) regulations were introduced in the year 1992 which was later amended due to discrepancies observed in the 1992 act. After which, one of the landmark cases of insider trading took place called Hindustan Lever Limited vs SEBI[4]. In this case, it was alleged that Hindustan Lever Limited’s (HLL) purchased shares of 8 lakhs of Brooke Bond Lipton India Limited (BBLIL) in March 1996, two weeks before the public announcement about the merger of the two companies. The notice to Hindustan Lever limited was the first notice which was issued by SEBI regarding insider trading. At that time insider trading laws were not well prepared in India, so both parties are expected to rely heavily on the insider trading laws of other jurisdictions while presenting their respective cases and there was a comparative study between Indian and UK, USA laws.
One of the most famous cases of insider trading which throws light on the vulnerability of SEBI’s 1992 regulation is Rakesh Aggarwal vs SEBI[5]. In this case, Rakesh Aggarwal the Managing Director of ABS Industries limited was involved in talks with Bayer AG regarding their plans to take over the ABS company. Because of which he had access to non-public and sensitive information. The statement was made by SEBI that there were allegations that Rakesh Aggarwal and his brother in law Mr. I P Kedia has purchased the shares of ABS Industries ltd before the announcement of Bayer. SEBI investigated the case and affirmed all the allegations. “SEBI held the Appellant guilty of violating the provisions of regulation 3(i) of the SEBI Regulations and passed the impugned order”. Rakesh Aggarwal justified it by saying that it was needed for the company’s benefit. SEBI directed “ Shri Rakesh Agrawal deposit Rs.34,00,000 with Investor Protection Funds of Stock Exchange, Mumbai and NSE (in equal proportion i.e. Rs.17,00,000 in each exchange) to compensate any investor which may make any claim subsequently. Any investor who is aggrieved with the sale of shares of ABS Industries to Mr. I.P. Kediafrom September 9, to October 1, 1996, can approach SEBI within 15 days of this order.” By the same order “ SEBI directed to (i) initiate prosecution under section 24 of the SEBI Act and (ii) adjudication proceedings under section 15I read with section 15 G of the SEBI Act against the Appellant”. Similarly in the case of Similarly,Samir.C.Arora vs. SEBI[6], SEBI prohibited Mr. Arora from buying, selling, or dealing in securities, in any manner, directly or indirectly, for five years.
These cases showed the inability of SEBI in proving its cases, to prove the allegations of insider trading. Most insider trading cases lack evidence due to which it is difficult for the prosecution to prove the criminal liability of the accused of insider trading.
Recently SEBI has restrained NDTV promoters Prannoy Roy and Radhika Roy from accessing the securities market for two years, for making an unethical gain of Rs. 16.97 crore by insider trading in April 2008. It also exempted them from buying, selling, or any other activities related to dealing with securities directly or indirectly or howsoever for two years. The market regulator asked them to jointly or severally pay the wrongful gain of Rs. 16,97,38,335/ with the interest of 6% per annum from 2008 to till date within 45 days. The order passed by a whole-time member of SEBI Mr. S K Mohanty stated that
“The insider information is available to the insiders on account of their important corporate hierarchical position. Any fiduciary holds a position in trust for others. If the persons like the Notices, who are obligated to observe fiduciary duties while exercising their powers fail to do so and instead use their position to their advantage pecuniary or otherwise, it constitutes a fraud perpetrated on the common shareholders whose trust reposed in them has been blatantly breached. It is, therefore, of paramount importance that trading by the insiders is monitored and regulated, especially when they are in possession of UPSI(Unpublished Price Sensitive Information). Wherever such trading results in the accrual of unlawful gain, such insiders are required to forgo such gain”
The investigation was conducted between 2006 and 2008 and it revealed that Sanjay Dutt and his associated entities had indulged in insider trading in the scrip of NDTV and at the same time it also revealed that Pranay Roy and Radhika Roy had carried out insider trading in the script of NDTV. Board held that promoters OF NDTV made wrongful gain by dealing in the company’s share while in possession of UPSI. It was held that the “Promoters had contravened Regulation 3(i) and 4 of the Prohibition of Insider Trading (PIT) Regulations, 1992 r/w Regulation 12 of the SEBI (Prohibition of Insider Trading) Regulations, 2015 and Section 12A(d) and (e) of the SEBI Act, 1992”. This case is very recent and SEBI also exempted seven more individuals from accessing the security market for one to two years.
CONCLUSION
SEBI is the sole authority that deals with insider trading have strengthened the anti- insider trading laws by the 2002 amendment. It made tracking and curbing insider trading in more than one way easy and simple. The disclosures which are required to be made by the directors, officers, and substantial shareholders of a company and the appointment of an employee or an officer in every listed company have shown good effects in managing the accounts. Despite this amendment, SEBI still struggles in proving cases due to lack of evidence as mentioned before. SEBI needs a more efficient and strong investigating mechanism to overcome this problem and to solve cases more efficiently and quickly. Also, SEBI should welcome any kind of information relating to insider trading in progress by people and encourage them to do so. Similarly, the SEBI should also introduce the concept of giving rewards to lead to a decline in this practice by inducing fear in the minds of insiders of being exposed.
SOURCES
- HimanshuChahar and SumeerSodhi, Insider trading in India, (Dec 27, 2020, and 8:30 PM), http://www.legalserviceindia.com/article/l199-Insider-Trading.html
- AkshitaSaxena, NDTV Promoters Prannoy Roy & Radhika Roy Guilty Of Insider Trading, Holds SEBI; Asks Them To Pay Rs 16.97 Crores Plus Interest,(Dec 28, 2020, and 8:30 PM)
https://www.livelaw.in/top-stories/ndtv-promoters-prannoy-roy-radhika-roy-guilty-of-insider-trading-holds-sebi-asks-them-to-pay-rs-1697-crores-plus-interest-166539?infinitescroll=1 - Nishith M. Desai & Krishna A. Allavaru,INSIDER TRADING: A COMPARATIVE STUDY, [11], [2],https://nishithdesai.com/fileadmin/user_upload/pdfs/Associates_Insider_Trading_-_A_Comparative_Study.pdf
- Arjun Singh, Insider Trading – Analysing the Indian Perspective, (Dec 28, 2020, and 9:30 PM), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2368299
- AkhileshGanthi, Insider trading, (Dec 29, 2020, and 10:30 PM), https://www.investopedia.com/terms/i/insidertrading.asp
- Percival Billimoria and Ankoosh Mehta, India: Insider Trading: Hindustan Lever Limited v. SEBI, (Dec 29, 2020, and 11:30 PM),https://www.mondaq.com/india/securities/642056/insider-trading-hindustan-lever-limited-v-sebi
[1]SEC v. Texas Gulf Sulphur Co. 1967
[2]United States vs. Newman 1983
[3] The High Powered Committee on Stock Exchange Reforms, 1986 (Ch. 7.25).
[4] Hindustan Lever Limited vs SEBI 1996
[5] Rakesh Aggarwal vs SEBI (2004) 1 CompLJ 193 SAT, 2004 49 SCL 351 SAT
[6]Sebi vs Sameer C. Arora on 31 March, 2004
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