INSIDER TRADING
REGULATIONS & PRACTICES
June 7, 2013
STRUCTURE OF PRESENTATION
Introduction
 Why to curb insider trading
 Regulatory aspects of insider trading
 Case Studies
 Challenges
 Way forward

EVOLUTION OF INSIDER TRADING REGULATIONS IN INDIA
1948
• Thomas Committee recommendations incorporated in the Companies Act, 1956 under
Sections 307 and 308, which required shareholding disclosures by the directors and
managers of a company
1979
• Sachar Committee recommendations• Amendments to the Companies Act, 1956 to restrict or prohibit the dealings of
employees / insiders
• Penalties to prevent the insider trading
1986
1989

• Patel Committee recommendations• Amendments in Securities Contracts (Regulations) Act, 1956 to make exchanges curb
insider trading and unfair stock deals
• Heavy fines including imprisonment, apart from refunding the profit made or the losses
averted to the stock exchanges
• Abid Hussain Committee recommendations• Insider trading activities may be penalized by civil and criminal proceedings
• SEBI should formulate the regulations and governing codes to prevent unfair dealings
Subsequently, India came out with Securities and Exchange Board of India (Insider
Trading) Regulations, 1992, which were drastically amended in 2002 and
renamed as SEBI (Prohibition of Insider Trading) Regulations, 1992
INTRODUCTION

Insider trading essentially denotes an act of an
insider dealing in a company’s securities while
in possession of unpublished price sensitive
information about the company.
WHO ARE INSIDERS?
WHY TO CURB INSIDER TRADING?
Prohibition of Insider Trading is required to make Securities
Market:
•
Fair & Transparent
•
To have a level playing field for all the participants in the
market
•
For free flow of information & avoid information asymmetry
•
To prevent insiders from making a huge profit or save
tremendous loss when the public cannot react to this
information
WHO CAN BE A CONNECTED PERSON ?



It could be director of company, or is deemed to be a
director of the company by virtue of sub-clause(10) of
Section 307 of the Companies Act 1956
He or she could be officer or professional of the
company or holding a business relationship with the
company and who may be reasonably expected to
have access to UPSI
Connected person means any person who is a
connected person six months prior to an act of insider
trading
DEEMED TO BE CONNECTED PERSONS

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
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

COMPANY UNDER SAME MANAGEMENT
INTERMEDIARY/STOCK EXCHANGE/ CLEARING HOUSE OR
EMPLOYEE/DIRECTOR THEREOF
MEMBER OF BOARD OF DIRECTORS OF PUBLIC FINANCIAL
INSTITUTION
EMPLOYEE OR OFFICIAL OF SRO
MEMBER OF BOARD OF TRUSTEES OF MUTUAL FUND
BANKER OF COMPANY
RELATIVES OF THE ABOVE
CONCERN.FIRM,TRUST,HUF,COMPANY OR AOP WHEREIN
ANY OF THE CONNECTED PERSONS HAS MORE THAN 10%
OF THE HOLDING OR INTEREST
WHAT IS PRICE SENSITIVE INFORMATION???
The price sensitive information is defined in
Regulation 2(h)(a) of the prohibition of Insider
Trading
“It means any information which relates directly or
indirectly with the company & which if published is likely to
materially affect the price of the security’s of the
company”
Unpublished information means
 Means information which is not published by the company
or its agents
 Speculative reports in print or electronic media shall not
be considered as published information
INFORMATION DEEMED TO BE PRICE SENSITIVE
Periodical financial results
 Intended declaration of the dividend(both interim
& final)
 Issue of securities or buy-back of securities
 Any major expansion plans or execution of new
projects
 Amalgamation & mergers or takeovers
 Disposal of the whole or substantial part of the
undertaking
 Any significant changes in policies, plans or
operations of the company

REGULATION 3 AND 3(B) OF PROHIBITION OF
INSIDER TRADING

Regulation 3
No insider should deal in security, while
possession of UPSI
He/she should not communicate o procure
the UPSI to others

Regulation 3B
This regulation enables a company to defend itself in
a proceeding involving insider trading if it can prove
that there is “Chinese Wall” within the company
DISCLOSURES FOR PROHIBITION OF INSIDER
TRADING
Initial Disclosure
 Buying the stake greater than the 5% of the paid up
capital of the company ,the acquirer should inform the
Stock Exchange within two working days of acquiring
the stake.

The new director should disclose all its trade position
in Equity or derivatives with in two working days of his
appointment.
CONTINUED…….
Continuous Disclosure
 If the shareholder holds more than 5% and change his
holding by 2% or more.
 Any change of promoter/director/officer beyond Rs. 5
Lacs or 25000 shares or 1% of total shareholding or
voting rights whichever is lower.
Additional Disclosures
 All holdings in securities of that company
 Periodic statements of all transactions
 Annual statement of all holdings
 Any other disclosure of company to stock exchange
MODEL CODE OF CONDUCT FOR PREVENTION OF
INSIDER TRADING
A compliance officer is required to be appointed by the company.
 There should be pre-clearance of trade by the officer of designated
employees. Designated employees include :

i.
ii.
Employees from top three tiers of management.
Employee designated by the company from time to time to whom
the trading restriction shall be a applicable.
Trading window ,is closed at the time of UPSI activities like Results,
Issue of securities etc.
 Trading window is opened 24 hours after the information is made
public


There are several forms in accordance with disclosures & code of
conduct.
CONTINUED…….

All directors/officers/designated employees who buy or sell any
number of shares of the company shall not enter into opposite
transaction during the next six months following the prior
transaction

All directors/officers/designated employees shall not take
positions in derivative transactions in shares of company at any
time

In case of subscription in IPOs, the above entities shall hold
their investments for a minimum period of 30 days. The holding
period starts when securities are actually alloted
Disclosure
Setting forth
policies and
procedures
Pre-clearance
Compliance
Officer
HOW SEBI’s
CODE OF
CONDUCT SEEKS
TO PREVENT
INSIDER
TRADING
Trading
Window
Corporate
Announcements
Chinese Walls
Minimum
holding period
CODE OF CORPORATE DISCLOSURE PRACTICES



PROMPT DISCLOSURE TO STOCK EXCHANGE
TIMELY REPORTING OF SHAREHOLDINGS /OWNERSHIP AND
CHANGES IN OWNERSHIP
NORMS FOR ANALYSTS AND INSTITUTIONAL INVESTORS
 ONLY PUBLIC INFORMATION TO BE PROVIDED
 PREFERABLY RECORD THE DISCUSSION
 BE CAREFUL WHILE HANDLING UNANTICIPATED
QUESTIONS
 SIMULTANEOUS RELEASE OF INFORMATION
INVESTIGATION OF INSIDER TRADING
•
Regulation 4A deals with the power to make inquiries and
inspection
•
SEBI can also appoint the outsider auditor for the enquiry &
auditor would have the same power as the SEBI possess.
•
Before undertaking any investigation SEBI shall give a
reasonable notice to insider for that purpose.
•
Where SEBI is satisfied that in the interest of investors or in
public interest no such notice should be given, it may by an
order in writing direct that the investigation be taken up
without such notice.
SEBI’S POWER TO MAKE INQUIRIES AND
INSPECTION
Regulation 4A
•
If the SEBI suspects that any person has violated any provision of
these regulations, it may make inquiries with such persons.
•
The SEBI may appoint officers to inspect the books and records of
insider(s) for the purpose of inspection.
•
The SEBI can investigate and inspect the books of account, either
records and documents of an insider on prima facie.
•
SEBI can investigate into the complaints received from investors,
intermediaries or any other person on any matter having a bearing on
the allegations of insider trading.
PENAL PROVISIONS FOR INSIDER
TRADING
Civil Proceedings
•Directing the insider not to deal in
securities acquired in violation of
the regulations
•Prohibiting from disposing of any
such securities acquired
•Restraining
the
insider
to
communicate or counsel any
person to deal in securities
•Declaring the transactions(s) in
securities as null and void
•Directing the person to deliver the
securities back to the seller
•Directing the person to transfer an
amount to the Investor Protection
Fund
Monetary
Penalties
Criminal
Proceedings
• Upto Rs. 25
crore or three
times
the
amount
of
profits made
whichever is
higher
• Imprisonment
upto 10 years
• Fine upto Rs.
25 crore
CASE STUDIES
THEORIES OF INSIDER TRADING
Classical theory
Misappropriation theory
UNITED STATES
Section 16
a) Covers officer, directors, and 10%
equity holders
b) §16(a) -> Disclosure Provision >Every corporate insider should
report holdings and transactions.
Facilitates §16(b)
c) §16(b) -> Recovery of Short-swing
Profits ->These insiders must
disgorge profits from selling stock
held less than six months
SE Act,
1934
Rule 10b-5
a) Covers
i) material corporate misstatements
or non diclosures,
ii) insider trading, and
iii) corporate mismanagement cases
regarding transactions in shares or
other securities
b) Today a major weapon to curb
insider trading, as a catch-all antifraud provision
Penalty: Civil penalties such as payment of fine upto 3 times the profit
earned or loss avoided and Criminal Prosecution
CASE STUDIES - USA

In Re Cady, Roberts and Co.

Robert Gintel was a broker and partner of Cady, Roberts
and Co. Cowdin was a Director of Curtiss-Wright Corp
(CWP) and an associate at Cady, Roberts. Gintel
received inside information about CWP from Cowdin and
used that information to sell shares of CWP.
Held, violation.
Reasoning - Individuals who are outside the company
could also be considered as ‘Insiders” and found guilty
of insider trading if they have a “special relationship”
with the company
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
DAVID CARPENTER, KENNETH P. FELIS AND R.
FOSTER WINANS VS. UNITED STATES



Winans was a reporter for the Wall Street Journal and one of
the writers of a daily column which discussed selected
stocks and gave information about those stocks. The
contents of the column were the Journal's confidential
information. Winans passed on the contents of the column
to a few people before its publication. Those people traded
in the stocks and made profits, which was shared with
Winans.
Held, Violation.
Reasoning - (1) Winans had knowingly breached a duty of
confidentiality
by
misappropriating
pre-publication
information. (2) The deliberate breach of Winans' duty of
confidentiality and concealment of the scheme was a fraud
and deceit on the Journal. (3) The contention that the
newspaper is the only alleged victim of fraud and has no
interest in the securities traded was rejected.
UNITED STATES VS. O'HAGAN
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Grand Metropolitan PLC (Grand Met) retained the law
firm of Dorsey & Whitney to represent it regarding a
potential tender offer for the Pillsbury Company's
common stock. Respondent O'Hagan, a Dorsey &
Whitney partner, who did no work on the representation,
dealt in the shares of Grand Met.
Held, violation.
Reasoning - (1) A person who trades in securities for
personal profit, using confidential information
misappropriated in breach of a fiduciary duty to the
source of the information can be held liable. (2) A
company's confidential information qualifies as property
to which the company has a right of exclusive use; the
undisclosed appropriation of such information
constitutes fraud akin to embezzlement.
UNITED STATES VS. RAJ RAJARATNAM
In the Galleon cases, the SEC had charged
number of
defendants for widespread and
repeated insider trading in the securities of around
15 companies generating illicit profits totaling
nearly $90 million
 Raj Rajaratnam was arrested for insidertrading
and conspiracy ; was found guilty and sentenced
to jail
 Number of other defendants also found guilty
 Investigation
relied inter-alia on telephonic
evidence

CASE STUDIES – INDIA
o
o
HLL-BBLIL MERGER
RAKESH AGARWAL vs. SEBI
o
RAJIV GANDHI VS SEBI
o
Reliance Industries Ltd vs SEBI
HLL-BBLIL MERGER CASE
HLL–BROOKBOND LIPTON INDIA LTD

Focus on legal controversy involving BBLIL’s merger with HLL.

SEBI, suspecting insider trading, conducted enquiries.

In August 1997, SEBI charged HLL of insider trading by using
Unpublished Price-Sensitive Information.

HLL bought 8 lakh shares of BBLIL from UTI at Rs 350.35 per
share (At a premium of 9.5% of the ruling market price of Rs
320) just two weeks before the formal announcement knowing
that the HLL and BBLIL were going to merge.

SEBI held that HLL was using unpublished, price-sensitive
information to trade, and was therefore guilty of insider trading.
HLL–BROOKBOND LIPTON INDIA LTD

In March 1998, SEBI passes an executive order in this regard

SEBI directed HLL to pay UTI Rs 3.4 Crore in compensation, and also
initiated criminal proceedings against the five directors of HLL and
BBLIL.

HLL appealed against the SEBI verdict to the Union Ministry of
Finance.

HLL contended that before the transaction, the merger was the
subject of wide speculation by the market and the media.

After the formal announcement, press articles mentioned that the
merger was no surprise to anyone.
HLL–BROOKBOND LIPTON INDIA LTD

HLL pointed out that the share price of BBLIL moved up from Rs 242
to Rs 320 between January and March, before the transaction,
indicating that the merger was “generally known information”.

HLL contended that to be considered as an insider, it should have
received information “by virtue of such connection” to the other
company.

According to HLL, it was an initiator and the transferee, and it was the
“primary party” to the merger and no primary party to the merger can
be considered an insider from the point of view of insider-trading.

HLL argued that only the information about the swap ratio could be
deemed to be price-sensitive and that this ratio was not known to
HLL or its directors before the purchase of shares from UTI.
HLL–BROOKBOND LIPTON INDIA LTD

HLL also argued that the news of merger was not
price sensitive as it had already been announced
by the media before the official announcement.

HLL claimed that the purpose of the purchase of
shares was to enable Uniliver to acquire 51%
shares of BBLIL.

In July 1998, the Appellate Authority of the
Finance Ministry dismissed the SEBI order.
RAKESH AGARWAL VS. SEBI
RAKESH AGARWAL VS. SEBI

One of the most famous case highlighting the vulnerability of the
SEBI’s 1992 regulations.

Rakesh Agarwal, MD of ABS Industries Ltd was involved in
negotiations with Bayer A.G, regarding their intention to takeover
ABS.

As per SEBI, Rakesh Agarwal had access to the Unpublished pricesensitive information.

SEBI alleged that prior to the announcement of acquisition, Rakesh
Agarwal, through his brother-in-law, had purchased shares of ABS
and tendered the said shares in the open offer made by Bayer.
RAKESH AGARWAL VS. SEBI

Rakesh Agarwal contended that he did this in the interest of the company.

Pursuant to Bayer’s condition to acquire at least 51% shares of ABS, he,
through his brother-in law bought the shares and later sold them to Bayer.

The SEBI directed Rakesh Agarwal to “deposit Rs 34,00,000 with Investor
Education & Protection Funds of Stock Exchange, Mumbai and NSE.

SAT held that the SEBI order directing Agarwal to pay Rs 34 lakh couldn’t be
sustained, on the grounds that Rakesh Agarwal did that in the interests of
the company.

The matter was later settled on consent basis and Mr. Rakesh Agarwal paid
Rs 48 lakhs
RAJIV B. GANDHI VS. SEBI
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
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Rajiv Gandhi (RG) was the CFO and Company Secretary of Wockhardt
Limited. Sandhay Gandhi (SG) and Amishi Gandhi (AG) were the
spouse and sister of RG. SG & AG traded in the shares of Wockhardt
Limited. Having regard to date and time of trades, their close
relationship with one another, it was alleged that they were insiders
and that their trades were executed on the basis of the UPSI.
Held, Violation
Reasoning – Appellants failed to rebut the presumption on which the
allegation was made and not even attempted to offer an explanation
as to the basis which prompted them to trade
Adjudicating order imposed a penalty of Rs, 5 lac each on the
Company Secretary Mr. Rajiv B. Gandhi and two relatives, For
separate proceedings under Sec. 11B of SEBI Act 1992 initiated
against them, they have consented to pay Rs. 5 lac and undergo a
voluntary debarment for 18 months and agreed to refrain from acting
as the compliance officer of a listed co. for 18 months.
RELIANCE INDUSTRIES LTD VS SEBI
Reliance Petroinvestments Ltd. was alleged to
be in possession of unpublished price sensitive
information (hereinafter referred to as "UPSI")
while trading in the scrip of IPCL prior to
announcement of declaration of interim
dividend and amalgamation of IPCL with
Reliance Industries Ltd.
 Imposed penalty of Rs. 11 crores.

CHALLENGES
INSIDER TRADING– EMERGING ISSUES
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Non availability of telephone/e-mail records
Multiple layers of Bank Transactions
Delay in submission of information by
banks/Clients
Inadequate information in bank statements
Inadequate data to prove connections
Requirement for information from Other/ Foreign
Regulators
INSIDER TRADING – EMERGING ISSUES
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Easy availability of “front entities”
Easy to float a company without much finance
and infrastructure i.e. Fly-by-night companies.
Principle of Natural Justice” i.e. inspection of
documents, cross examination, etc.
Use of Benami SIM cards
Dependence on suspect for information
Issue of regulatory jurisdiction/ overlap –
because of cross-market and cross-time zone
and cross-region dependencies (such as
derivatives with an underlying assets trading
elsewhere)
WAY FORWARD

Committee set up by SEBI to review insider
trading regulations

New Regulation for Insider Trading soon

Stricter disclosure requirements on connected
persons to company