WHAT IS INSIDER TRADING???
Insider trading is dealing in securities of a listed company by any person who has knowledge of material “inside” information which is not known to the general public.
WHO IS INSIDER???
Insider is the person who is “connected” with the company , who could have the unpublished price sensitive information or receive the information from somebody in the company.
CONNECTED PERSON WITH DETAILED CLARIFICATION
Any person who is or has been associated with company, in any manner, during the six months prior to the concerned act:
An immediate relative to the connected person.
A banker of the company.
An official of stock Exchange or of clearing corporation.
A holding/associate/subsidiary company.
WHAT INCLUDES TRADING ?
WHO ARE INSIDER TRADERS?
Corporate officers, directors ,and employees who traded the corporations securities after learning of significant, confidential corporate developments.
Friends, business associates, family members and employees of law, banking and brokerage firms who were given such information to provide services to the corporation whose securities they traded.
GOVERNING REGULATIONS
Securities & Exchange Board Of India Act,1992
SEBI (Insider Trading) Regulations,1992
SEBI (PIT) (Amendment) Regulations,2002
SEBI (PIT) (Amendment) Regulations,2003
SEBI (PIT) (Amendment) Regulations,2008
SEBI (PIT) (Amendment) Regulations,2011
HISTORY BEHIND INSIDER TRADING IN INDIA
Insider trading in India was unhindered in its 130 year old stock market till about 1970.
In 1979,the Sachar Committee recommended amendments to the companies Act,1956 to restrict prohibit the dealings of employees. Penalties were also suggested to prevent the insider trading.
In 1989 the Abid Hussain Committee recommended that the insider trading activities may be penalized by civil and criminal proceedings and also suggested the SEBI formulate the regulations and governing codes to prevent unfair dealings.
UNPUBLISHED PRICE SENSITIVE INFORMATION
REGULATORY ASPECTS OF PROHIBITION OF INSIDER TRADING
SEBI prohibition of Insider Trading regulation 1995.
Section 11(2) E of companies act 1956 prohibits the insider trading.
WHY THERE IS NEED FOR PROHIBITION OF INSIDER TRADING???
As per SEBI the Prohibition of Insider Trading is required to make securities market:
Fair and Transparent.
To have a Level Playing Field for all the participants in the market.
For free flow of information and avoid information asymmetry.
CASE STUDY
HLL – BBLIL MERGER CASE
HLL-BROOKBOND LIPTON INDIA LTD
The case primarily involves 4 pa
2. WHAT IS INSIDER TRADING???
Insider trading is dealing in securities of a
listed company by any person who has
knowledge of material “inside” information
which is not known to the general public.
3. WHO IS INSIDER???
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.
4. CONNECTED PERSON
WITH DETAILED CLARIFICATION
Any person who is or has been associated with company, in
any manner, during the six months prior to the concerned
act:
An immediate relative to the connected person.
A banker of the company.
An official of stock Exchange or of clearing corporation.
A holding/associate/subsidiary company.
6. WHO ARE INSIDER TRADERS?
Corporate officers, directors ,and employees
who traded the corporations securities after
learning of significant, confidential corporate
developments.
Friends, business associates, family members
and employees of law, banking and brokerage
firms who were given such information to
provide services to the corporation whose
securities they traded.
7. GOVERNING REGULATIONS
Securities & Exchange Board Of India Act,1992
SEBI (Insider Trading) Regulations,1992
SEBI (PIT) (Amendment) Regulations,2002
SEBI (PIT) (Amendment) Regulations,2003
SEBI (PIT) (Amendment) Regulations,2008
SEBI (PIT) (Amendment) Regulations,2011
8. HISTORY BEHIND INSIDER TRADING
IN INDIA
Insider trading in India was unhindered in its 130 year old
stock market till about 1970.
In 1979,the Sachar Committee recommended
amendments to the companies Act,1956 to restrict
prohibit the dealings of employees. Penalties were also
suggested to prevent the insider trading.
In 1989 the Abid Hussain Committee recommended that
the insider trading activities may be penalized by civil and
criminal proceedings and also suggested the SEBI
formulate the regulations and governing codes to prevent
unfair dealings.
10. REGULATORY ASPECTS OF PROHIBITION
OF INSIDER TRADING
SEBI prohibition of Insider Trading
regulation 1995.
Section 11(2) E of companies act 1956
prohibits the insider trading.
11. WHY THERE IS NEED FOR PROHIBITION
OF INSIDER TRADING???
As per SEBI the Prohibition of Insider Trading is
required to make securities market:
Fair and Transparent.
To have a Level Playing Field for all the
participants in the market.
For free flow of information and avoid
information asymmetry.
13. HLL-BROOKBOND LIPTON INDIA LTD
The case primarily involves 4 parties namely Unit Trust of
India(UTI),Hindustan Lever Limited(HLL),Brooke Bond
Lipton India Limited (BBLIL)and Securities &Exchange
Board of India (SEBI).
SEBI , suspecting insider trading, conducted enquiries.
In August 1997 , SEBI charged HLL of insider trading by
using Unpublished Price-Sensitive Information.
14. HLL bought 8 lakh shares of BBLIL from UTI at Rs.350.35 per
share (At a premium of 9.5% of 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.
In March 1998 , SEBI passes an executive order, which sent
shock waves through the country’s corporate order.
SEBI penalized HLL with Rs. 34 million in compensation, and
also initiated criminal proceedings against the five directors of
HLL and BBLIL.
15. 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 pointed out the shares of BBLIL moved up from Rs.242 to
320 between January and March, before the transaction,
indicating that the merger was “generally known information”.
16. HLL claimed that the purpose of the purchase of shares
was to enable Unilever to acquire 51% shares of BBLIL.
In July 1998, the Appellate Authority of the Finance
Ministry dismissed the SEBI order.
However, SEBI order was correctly based on a simple
proposition of Law : what can not be done “directly” can
not be done “indirectly”.
26. PENALTIES
Monetary Penalty: Section 15G of the act imposes
penalty of at least Rs.10lacs,which may extend to Rs.25
Crore or three times of profits made out of insider trading
whichever is higher.
Imprisonment: Section 24 of SEBI Act even goes to the
extent of imprisonment upto 10 years or fine upto 25
Crore, or both, for any offences pertaining to
contravention of the provisions of the Act.
27. CONCLUSION
INSIDER TRADING is the misuse of privileged position and
breach of trust and hence can disturb whole structure of
Securities Market.