This article has been written by Chhatrapal Singh Shaktawat, pursuing Diploma in US Contract Drafting and Paralegal Studies. It has been edited by Oishika Banerji (Team Lawsikho).
It has been published by Rachit Garg.
Table of Contents
Introduction
Insider trading refers to the trading of a security by someone who has knowledge of material non-public information relating to that particular security or the company. It is very much necessary to have certain rules and regulations for the smooth governance of the security market. According to Section 11 of the Securities Exchange Board of India Act (SEBI), 2011, the SEBI (Prohibition of Insider Trading) Regulations, 1992 were enacted to end the illegal insider trading prevalent in India. The object of enacting such legislation is to provide fair information to all the players in a market rather than providing benefits to certain sections of participants in the field. This article explores the concept of insider trading in India thereby pointing out the existing regulations governing the same.
What is insider trading
Insider trading is a process in which an individual (insider) gathers internal information of the company which is not yet published in the public domain thereby misusing the same for his own personal gain and advantage, illegally in the share market. An insider can be any individual having a minimum of six months experience in the operating company and who is also a fiduciary of a director, employee or the owner of the concerned company, according to SEBI (Insider Trading) Regulations, 1992. There are two types of insider trading in accordance with the variety of shares which are affecting the share market, namely, legal insider trading and illegal insider trading.
Advantages of insider trading
Insider trading has three positive approaches, namely:
- Share market players can have profits as they have internal information of the company. So, once the investors have the information then they know the financial position of the company and hence they have the idea of buying shares and then trading.
- The previous point mainly helps institutional buyers in the field.
Disadvantages of insider trading
Insider trading is considered illegal in India because:
- The said practice is only advantageous to rich investors as it makes them richer and the process turns prejudicial for other investors as they miss fair opportunities.
- It is an offence and if any individual is found doing that then he would be charged under both the Companies Act, 2013 and the SEBI Regulations, 1992.
Regulation of insider trading market in India
The Ministry of Corporate Affairs and SEBI Regulations for Prohibition of Insider Trading (RPIT), are the two government bodies which are responsible for governing insider trading in India.
Legal position and statutes regarding insider trading India
The existing statutes that are responsible for governing insider trading in India have been discussed hereunder.
Section 195 of the Companies Act, 2013
According to this section, the term ‘insider trading’ signifies an offence which involves any person who have access to the information of the company (which is confidential or not made public by the administration of company) as he is holding any officer post in that particular company and he either buys, sells, subscribes, deals or make agreements to do such act with the information. The provision states that violation of its terms will render an imprisonment of over five years. Alongside the same, the provision prescribes a fine of not less than five lakhs rupees, which can be extended to 25 crores as well.
Securities Exchange Board of India (Prohibition of Insider Trading Regulations), 1992
This statute of 1992 is very much clear about any person who is an insider and therefore mandates that such an individual under no circumstances deals with the securities of a company which is listed in a stock exchange for trading if he has a piece of unpublished information (the information which is not in the public domain). The provision further directs that the insider in possession of such information cannot even communicate or counsel or even publish such information either directly or indirectly to any person who is having interest or benefit in that particular piece of price-sensitive information. A punishment of about ten years of imprisonment is awarded for the offence of insider trading under the statute of 1992.
Landmark cases relating to the insider trading market in India
The case of Tata Iron and Steel Co. Ltd. etc. vs. Union of India and others (1992), commonly known as the TISCO case, is considered to be one of the landmark judgments concerning insider trading in India. In this case, the court of law had wisely observed the respondents’ argument which went on to argue based on the financial profit made by the company in different financial years as published by the company itself. The court observed that the profit earned by the company in the first half of the financial year of 1992-93 was fifty crores and twenty-two lakhs rupees. This profit was far less than the profit earned in the financial years of 1991-92 and 1990-91, which were ₹278.16 crores and ₹238.13 crores respectively. The huge difference in the profit of the company in three consecutive years was a clear indication that there has been the commission of insider trading by the company. This was the first case which addressed the need of having governing legislation so as to curb the ris eof insider trading among companies.
In the case of Reliance Industries Ltd.(RIL) vs. SEBI (2001), the petitioner was a company with net worth of $27 billion (US dollar), who also owned shares in many other companies. Among all, the company owned 5.32% shares in Larsen & Toubro (L&T). Further, the petitioner started purchasing shares of L&T which made Reliance own 10.25% of the total share of the company. Now, these shares were further sold by Reliance to another company named Grasim Industries Ltd. But, the shares were sold at a higher price in comparison to what was prevalent in the market. The shares were sold at ₹306.60 per share whereas the market rate was ₹208.50 per share. The court of law made Reliance Industries Ltd. withdraw from dealing and even further went on to prohibit Reliance to deal with L&T in future. Reliance was even directed to make many more disclosures in relation to the stock exchange and L&T.
In the case of Rakesh Agarwal v. SEBI (2003), the adjudicating authority (which is SAT) was of the opinion that insider trading is a criminal offence. Further Bombay High Court in the case of Cabot International v. SEBI (2004), had opined that the violets of SEBI Act must be tried under civil law as the act is of civil nature. The Supreme Court of India had upheld the Bombay High Court’s decision in the case of SEBI v. Shriram Mutual Fund and Another (2006), where the Court observed that the element of mens rea is not essential while deciding the case relating to SEBI Act, thereby categorising it as a civil offence.
Improvements required in insider trading regulation in India
It’s a general saying that ‘criminals are one steps forward than the administration’, I believe the same is with the case of insider trading regulation in India and this is because the authorities have not been using the modern technologies as an impotent medium to the investigation or tracking of incident to find out the wrong happening in the system. The major problem of the nation is the lack of contemporary and modern technologies which are advanced up to a mark that the proper surveillance could be done in order to detect the wrong and catch the offender. In simple words, it is nearly impossible to catch the offender with such a light system which is not equipped with modern mechanisms of surveillance. The lack of technical expertise makes the body handicap and hampers the inquiry or investigation in a significant manner.
A country like the USA could be followed in this regard where the body responsible for stock exchange has a highly efficient mechanism for surveillance to catch the act of insider trading and further pursue its investigation. It is true that both the bodies SEC and SEBI have their own fully automated oversight system for their market capital separately but, despite USA in comparison to India enjoys the best surveillance system and oversight which further helps in detecting the cases of insider trading.
It is highly challenging to prove a case against insider trading as most of them are generally based upon circumstantial evidence. The recordings of telephone and transcript are the only evidence in most of the cases of insider trading and that’s the only way where the nexus is proved that people are involved in illegal insider trading. But, apparently in India, SEBI doesn’t have the right to tap the phone to detect the wrong going on even after it being one of the is one of the crucial powers of investigation. Soon after the case of Securities and Exchange Commission v. Rajat K. Gupta and Raj Rajaratnam (commonly known as Raj Rajaratnam-Rajat Gupta insider trading case) case was brought under public domain, SEBI had approached the Indian government for the right of telephone taping for detecting the fraud and other illegal activity going under stock exchange especially insider trading. The same has been denied on grounds of privacy breach and scope of misusing.
Conclusion
Since the stock market is changing rapidly so the governing law also needs to be changed. With the introduction of new laws and amendments from time to time, the scope for curbing insider trading regulation can be said to improve for the better.
References
- https://idr.nitk.ac.in/jspui/bitstream/123456789/14150/1/138002HM13F05.pdf.
- https://legalstudymaterial.com/insider-trading/.
- http://www.raijmr.com/ijrhs/wp-content/uploads/2017/11/IJRHS_2014_vol02_issue_04_02.pdf
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