insider trading
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This article is written by Seep Gupta, from the Institute of Law, Jiwaji University. This is an exhaustive article which deals with the changes in the insider trading laws in India under the SEBI Prohibition of Insider trading regulations Act 1992.

Introduction

Insider trading is quite rampant not in today’s times but for many years. This malpractice has been increasing year by year. Insider trading in India is regulated by SEBI which is the Securities Exchange Board of India Act, 1992. According to SEBI it scrutinized and investigated  70 companies in the year 2019 accused of insider trading. This statistics has been increased with a great margin from the previous year. Can you believe it? SEBI has also revealed the use of the word ‘Insider trading’ has been frequent from the last three years’ reports. This is quite shocking.

What is insider trading

As this term suggests, the literal definition of ‘Insider trading’ is the illegal trading of a company’s bonds, stocks and securities to other places and countries and the information which is secret and hidden from the general public. It is defined in Section 2(e) of the SEBI Prohibition of Insider Trading Regulations Act, 1992 There is no section in Company law Act that defines illegal trading. Through insider trading, the investors who have access to secret information can make millions of money and this eventually can affect the company’s reputation and other regular investors who do not have access to secret information. Insider trading means illegal trading which is happening under the garb of the corporate veil of a company. A person who illegally trades any closed or secret information is guilty of insider trading. It holds a broad perspective and its definition varies from country to country. In this article, we will deal with insider trading regulations in India.

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Insider trading regulations in India

Insider trading in India is generally regulated by the SEBI Regulations on Prohibition of Insider Trading, 1992. Insider trading is defined in Section 2(e) of the act. However, the term insider trading is not defined anywhere in the Company’s Act, 1956. But, Section 195 of the Company’s Act of 2013 prohibits insider trading by the director or the key managerial person. Section 458 of the Company’s Act, 2013 delegates or confers the power to SEBI to prosecute both the listed and companies which are deemed to be listed of insider trading which is going on illegally inside any of these companies.

According to SEBI Prohibition of Insider Trading regulation 1992 which consists of IV chapters. There are the following provisions that are given under it:

Section 2(c) of the Act defines ‘connected person’.

  1. Who is the director of a company which is defined in Section 2(13) of the company’s activities or deemed to be a company?
  2. Either the employee or the officer of a company or any person or insider who has access to secret, unpublished information regarding the company’s securities or bonds.

So basically, a connected person can be any person who is directly or indirectly related to the affairs of the company. 

Section 2(h) defines the deemed to be a connected person. According to it, a ‘person deemed to be a connected’ can be any person who is directly or indirectly related to either an insider or a connected person.

Section 2(e) of this act defined the ‘insider’.An Insider can be any person who is connected to the company or has access to secret information that has not been publicly disclosed yet or any information related to the affairs of the company. Here, ‘price sensitive information’ is any kind of secret information that should be kept secret in order to protect the reputation of the company and by disclosing such information be likely to affect the price or securities of the company.

According to Section 3 of SEBI regulations of Insider trading 1992, it is given that no insider or a connected person has the right to publicly disclose or display any secret information related to the affairs of the company if the made public can affect the price or securities of the company.

According to the Section 12 of the Act, all the listed companies with the SEBI, intermediaries, self-regulatory organizations, recognized stock exchanges, public finance institutions, corporate or professional firms should form the internal procedure code and moral ethics on the lines of rules given in the Schedule 1 of the act and should strictly adhere to them to prevent illegal insider trading in their companies.

One crucial thing to be noticed that according to this act, price-sensitive information must be disclosed to only those persons who need it in order to discharge their duties on the ‘need to know’ basis.

It’s the responsibility of the director or employee of the company to maintain the confidentiality of the price-sensitive information. Any person who is related to the company trades or discloses any secret information will be held liable in a criminal manner and strict action would be taken against them. Any person or employee/director/worker of the company who violates any rules or guidelines of code of conduct will be held liable for planetary action such as wage freeze, suspension of future participation in the company’s affairs, etc. These actions and guidelines and penalties are the same whether for listed companies or for corporate or professional firms.

Rules and penalties are strict and mandatory to prevent illegal insider trading that has been going on in companies. 

Amendments in the insider trading laws

Many amendments have been done in SEBI Prohibition of Insider Trading regulation Act which originally came under effect in 1992. This Act came into effect from the 100th day from the date of its publication in the official gazette. 

The SEBI Prohibition of Insider Trading Act 1992 has been amended thrice till now. The latest amendment came into effect on 17th September 2019. The recent amendment made many unexpected changes in the previous one. These are mentioned below.

Between Chapter III and Chapter IV, a new chapter IIIA is inserted according to the recent amendment. This chapter contains the Sections 7A-7M. These sections include many new definitions

  1. Inclusion of the new term ‘Informant’ which is given under Section 7A (b) of the amended act 2019. According to this section, an informant can be any person who informs the SEBI regarding disclosure of any secret information of the company or has a belief that such insider trading is about to occur.
  2. It should be necessary that the informant voluntarily submits this information without any pressure, coercion, or any relation to central or public authority.
  3. There is a new word that is included under the new amended act which is ‘Original Information’ given in Section 7A (h) of the amended act. Original information means any independent knowledge or information which is not known to the board which is not frivolous or irrelevant or which is related to the violation of the insider trading laws. 
  4. The person who gives original information to SEBI regarding insider trading in a company need not be disclosed and his identity is protected or should be kept confidential by the SEBI under the Right to Information Act, 2005 except in some exceptional cases. No one can compel that person to reveal his identity.
  5. One important thing is to be noticed that information provided by any informant should not be irrelevant, frivolous, or vexatious. The informant must adhere to all the guidelines and litmus tests laid down by SEBI. if any mischievous activity found by SEBI then the informant would be held liable and has to pay the penalty.
  6. In the recent amendments, the informant has legal remedies in case the employer of the company threatens or coerces the informant for revealing original information to the SEBI. If such victimization, blackmailing be found by the SEBI then the employer will be held liable or will be suspended, penalized, or also will be criminally liable. Any act or agreement which prohibits any informant or restricts him to give original information in the SEBI regarding insider trading is void and also that act is prohibited by the SEBI.
  7. The informant is entitled to get a reward not exceeding Rs. 10 lakhs rupees for telling and giving the original information to SEBI. It is given in Section 7D of the Act. It is up to the discretion power of the SEBI to decide the amount of the reward on the recovery of such information by the informant.

The perspective of the regulations targeted by the SEBI

SEBI plays a very important role in controlling insider trading going on in a company. It prohibits any type of insider trading and disclosure of any secret information of the company that can further affect its price and securities. Regulation 3 of SEBI deals with the dealing and communication of insider trading. SEBI has discretionary power to protect the rights of its investors and shareholders. Any person who will be guilty of insider trading shall be liable of fine and it should not exceed Rs. 5 lakhs. SEBI has the power and the right to conduct a probe and inquiry if any violates its rules, guidelines, and conduct. SEBI has the power to appoint any officer to inspect any of the records, accounts, and books of a company.

The 2002 Amendment in the SEBI prohibits the insider to deal with any secret information and securities of a company and prohibits any communication regarding that. And, any agreement or dealing with that securities be considered null and void and equal remuneration should be provided to the investors.SEBI has the power to initiate criminal proceedings if any person is involved in any insider trading.

Changes to curb Insider Training

According to SEBI, new amendments that have been recently introduced last year will help in curbing and preventing insider trading to some extent. The latest amendment in the SEBI now includes unlisted companies as well. This now includes the right to search and seizure in the most effective and convenient way. After the introduction of new rules, now business companies, real estate firms who were earlier thinking to introduce their business now have to think twice because of the strict domestic rules. SEBI has now introduced the reward of up to 1 crore for any person who will enlighten the SEBI regarding the minor wrong-doing and insider trading that has been going on in any company. 

In the latest amendment, SEBI has now introduced a separate, ’Informant Mechanism’ in its Prohibition of insider trading regulations. These benefits which have been introduced by the SEBI will be available for all professionals, auditors and employers. The SEBI has now introduced strict regulations, guidelines and code of conduct to curb the practice of insider trading which has become a menace now. It is the full responsibility of the SEBI to protect the rights of its investors and shareholders. 

It is the responsibility and duty of SEBI to detect the ongoing insider trading which has been carried on in a company and to initiate strict legal action as soon as possible to protect the rights and interests of the shareholders. But, getting direct proof or evidence of insider trading and connecting links is a mammoth task and thus it requires months to initiate legal proceedings by the SEBI. 

That’s why according to new SEBI’s Prohibition of insider trading regulations, an informant needs to submit Voluntary Information Disclosure Form (VIDF) regarding any unpublished information or any insider trading that has been going on in a company. It should be compulsory for the informant to disclose all the original information and needs to take the undertaking that he is not associated with either SEBI or any employer of SEBI directly or indirectly. The informant can submit the information without revealing his identity but for this, he needs to have a practising advocate who can act as his legal representative. The informant can be anonymous except in certain cases such as if he does not comply with the guidelines and regulations laid down by the SEBI.

The SEBI has also established the Office of Informant Protection (OIP) which is an office for informant protection that processes all the original information and provides a reward for the informant. It provides hotlines for communicating with the informants.SEBI can also share the original information provided by the informant to other foreign markets and associations too without revealing the identity of the informant. Thus, SEBI plays an important role in curbing insider trading and keeping it to limit strict norms, regulations, and guidelines.

Landmark judgements related to insider trading

There are many landmark cases that are related to insider trading. Some of these are mentioned below:

Rakesh Agrawal Vs. Securities Exchange Board of India 3rd November 2003 

In this case, it was given that Rakesh Agrawal was the managing director of ABS company Pvt. Ltd. The ABS company was in negotiation with Bayer A.G. which was based in Germany. Rakesh Agrawal thus had access to unpublished information of the Bayer’s company. It was alleged by the SEBI that the brother-in-law of Rakesh Agrawal had purchased some shares from ABS and tendered the shares to Bayer in the open offer. This resulted in substantial gains by the ABS company. After Bayer company overtook the ABS company. The 51% of shares that were acquired by the Bayer company were not public, thus ABS was an insider. Therefore the appellant acted in insider trading and acted in violation of regulation 3 and 4 of the SEBI act 

The SEBI directed  Rakesh Agrawal to give compensation of Rs. 34 lakhs and it is the appellant’s responsibility to give compensation to any of the investors making claims of violation of their interests. The SEBI directed the criminal proceedings against Rakesh Agrawal under Section 24 of the SEBI Act.

However, in an appeal to (SAT) which is Securities to Appellate Tribunal. The tribunal took the order back of compensation and withheld by giving the verdict that the appellate Rakesh Agrawal did this to secure the interests of his company.

SEBI vs. Sameer C. Arora 31st March 2004

In this case, Mr Arora was held liable for insider trading. He was asked by the SEBI not to deal with any securities and shares and not to buy it for a period of five years. Also, if the respondent wanted to deal with or sell securities he required prior permission from SEBI. But, the Securities Appellate Tribunal set aside this order by saying that SEBI does not have any sufficient evidence that accuses the respondent of Insider trading. Hence, there will not be any restriction on the respondent.

Indiabulls Insider Trading Case

This case is one of the latest case law which is related to insider trading. In this case, the executive director of Indiabulls was accused of making Rs. 87 lakhs unlawfully by trading in Indiabulls when they had access to unpublished secret information of sale of land and property privately which is the subsidiary of Indiabulls venture limited. According to the regulator, the executive director of the Indiabulls venture limited was in the management committee of the Indiabulls, therefore she was an insider and her husband too was an insider. These unlawful gains were made in the year from 2017-19. 

The SEBI ordered that strict criminal action be taken against the IVF and both the executive director of the company and her husband have to impound  Rs. 87.4 lakhs both jointly and severally. It was further directed that no debts shall be made without the prior permission of SEBI.

Conclusion

According to statistics, it is noticed that insider trading has been significantly reduced in the past few years. It is due to the strict and haste action by the SEBI and strict norms and guidelines laid down by the SEBI. It is now we have to look forward to the future that the recent changes and amendment in the SEBI prohibition of insider trading regulation has been successfully implemented or able to curb the insider trading or not.

References


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