Insider Trading Regulation in India

Insider Trading Regulation in India
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Insider Trading has been an important source of information for the investors which is treated as a less spoken topic in India. The article focus on the revolution of Insider Trading how Insider Trading came into effect what laws and rules govern the whole concept. Insider Trading has been a big issue in understanding the rules, regulations, and how the law evolves. My research paper focuses on the SEBI Act, the Companies Act 2013. I have included the latest amendment of the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 (Last amended on January 21, 2019). I have also tried to add the new law and polices. The article would be beneficial to investors, young law professionals.

Insider Trading Regulation in India

Introduction

When an individual is having corporate connections are a corporate position in a company, he goes ahead to leak the economic report of the shares before it is released to the public. It is called leaking unsolicited information is called insider trading. Insider trading is a whole process in which insider[1] which is a person who is called a connected person who has access to unpublished price sensitive information. To make the thing clearer connected person is a person who has 6 months or more than 6 months connection with a company who has been in any fiduciary of a director, owner or an employee is called as a connected person.

This is the whole process where information is leaked by a connected person called an insider which is unsolicited information. There are two kinds of insider trading depending upon what kind of shares are traded in the market.

Advantages of insider trading

Insider trading if taken in a positive approach it has three advantages –

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  • Investors can have benefit as they can ascertain the finical position of the company, knows the benefits of buying the shares, and then trading.
  • It helps to institutional buyers.

The disadvantage of insider trading

  • Illegal – Insider trading is considered to be illegal in India as it is not correct for any person or an insider to leak out any information which is unpublished and not known as public information. Insider trading is Illegal since it came into existence as it is not legal to disclose insider information about the company because –

Firstly, as it will encourage the rich investors to become richer not giving an opportunity to others to rise and find out where it is advantageous to them to invest.

Secondly, it is a kind of crime and whosever is doing this if found out guilty would be taken into account under the Companies Act and the SEBI Regulations.

Types of Insider Trading

  • Legal Insider Trading – Legal insider trading is the trading in which the insider wants to trade that is taken into consideration but it is for the benefit of the company in which it is done by keeping the legal things in mind that is when a person wants to trade he should report the trade to Securities and Exchange Commission (SEC).
  • Illegal Insider Trading – Illegal insider trading is the process when an insider leaks out the company’s information that is not legal and has Unpublished information is called illegal insider trading.

Need for Insider Trading Regulations in India

Insider trading impacts the economy and shakes the whole functioning of inflow and outflow of cash where the rich investors become rich and the poor investor is not able to get the correct information regarding the same. So, to curb this practices insider trading SEBI has promulgated the prohibition of Insider Trading Regulations, 1992[2] which was then regulated and in 2015 SEBI prohibition of insider trading regulations 2015 introduced PIT regulations with effect from 15th May 2015[3]

White-collar Crimes

Insider Trading Regulations in India

Insider trading first came into force in 1875. That was the year when the Bombay Stock Exchange was established. There were few acts that came into force which were governed by the Capital and Security Market, Companies Laws and SEBI guidelines. Looking back to history we see that stock exchange is very old which had made laws to curb insider trading under the provisions of Companies Act 195 which incorporated two sections 307 and section 308 which was made after the recommendations of the Company Law Committee.[4] The legislative history looks include the Thomas Committee 1948, Sachar Committee 1978, Patel Committee 1986, Abid Hussain Committee 1989, then involves governing regulations which regulated insider trading are –

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  • Securities & Exchange Board of India, 1992 – It is been that Section 12A explains insider trading in which no person or individual can use the name of the company directly and indirectly for the purpose of their own use for trading shares and stocks in the market. If anyone found will be treated as fraud in the with the listed shares in the stock exchange. It is also been noted that no one can acquire the shares and control in the equity shares more than the percentage of equity share capital.
  • SEBI (Insider Trading) Regulations, 1992 – Then there is seen one more amendment in the SEBI which was about Insider Trading that includes that there were some additions added in the SEBI to reduce the insider trading in India. In which chapter 3 was introduced with the investigating authority can investigate any person who has violated the rights in Section 11 of this act.
  • SEBI (Prohibition of Insider Trading) (Amendment) Regulations, 2002 – There is another amendment in the same year in which there was an amendment in section 2(k) where “unpublished” means information which is not published by a company which is not specific in nature. This includes speculative reports in print media will not be considered as published information this is seen by the case Hindustan Liver vs SEBI[5]
  • SEBI (Prohibition of Insider Trading) (Amendment) Regulation, 2003 – In this part 2, Section 3 includes section 30 where Form A, Form B, Form C, and Form D was introduced.
  • SEBI (Prohibition of Insider Trading) (Amendment) Regulation, 2008 – In this part 3, Section 4 was amended where the case of subscription in the primary market shall hold investments only for 30 days in which holding period of the securities was allotted.
  • SEBI (Prohibition of Insider Trading) (Amendment) Regulation, 2011 – The regulation amended the disclosure of interest in listed companies by certain persons as initial disclosure. There were changes in Section 13 (2), 13 (2A) and 13 (6) where there are amendments in Form B and Form D. Inform D it is to be mentioned details of shareholding or voting rights held by the director who is the part of the promoter group of a listed Company.
  • SEBI (Prohibition of Insider Trading) Regulation, 2015[6]– In this, it is been seen that the insider trading regulations in India in which it is spoken about the regulations in the PIT Regulations are issued on August 24 under regulation 11 where it provides guidance to the market to remove the difficulties and the interpretation of application. It is been seen that these rules and guidelines have great importance in today’s time and it helps to report submitted by the Committee on Fair Market Conduct. It is also seen that the Insider Trading has been taken into major consideration and may loophole in the company’s share trading has been reduced by this change which has a full proof method by which each company’s board member has to give all the information which will be saved in the digital portal. There are few regulations that are added to curb the major insights into the illegal trading method. If an insider is found guilty of the provisions it would be taken and treated as a crime which will be considered in the insider trading penalties which are been charged as written in the SEBI Guidelines.
  • SEBI (Prohibition of Insider Trading) (Amendment) Regulations, 2020 – This amendment came into force 3 weeks before in which Regulation 3, sub-regulation 5 in which it is stated that any person who is handling unpublished price sensitive information should ensure that there is a digital database maintained in which Permanent Account Number should be available and the internal control and checking can be trapped so that it cannot be hampered or misused.

There is one more sub-regulation 5, in which the database is meant to be saved and preserved for a period of not less than 8 years even after completion of the transaction.[7]

Case Law

Insider Trading cases have been increasing at a faster rate. Few of the cases which lay importance are –

Conclusion

It is been seen that insider trading regulations were seen and opening doors to the economic liberty and growth of the people at large. It is been seen that if insider trading will be stopped it will help fresh talent to grow in the financial markets. When we saw the cases wherein it is seen that the insider is treated liable to penalties as the penalties which provides jail up to 5 years or monetary penalty as stated in the SEBI regulations Act. The research paper brings out complete and clear information on how and when insider trading came into existence. It gives you a simplified view wherein there is a brief description of the legal insider trading and illegal insider trading.

 

[1] Securities and Exchange Board of India (Prohibition of insider trading) regulation,2015 (last amended on January 21, 2019), page number 5 (g)

[2]https://www.sebi.gov.in/acts/ir1992.pdf

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[3] https://www.sebi.gov.in/legal/regulations/jan-2019/securities-and-exchange-board-of-india-prohibition-of-insider-trading-regulations-2015-last-amended-on-january-21-2019-_41717.html – Part 3,Section 4

[4] Report of the Company Law Committee, 1952 –http://reports.mca.gov.in/Reports/22-Bhabha%20committee%20report%20on%20Company%20law%20committee,%201952.pdf

[5] 1 (1998) 18 SCL 311 MOF

[6] https://www.sebi.gov.in/legal/regulations/jan-2019/securities-and-exchange-board-of-india-prohibition-of-insider-trading-regulations-2015-last-amended-on-january-21-2019-_41717.html

[7] https://www.sebi.gov.in/legal/regulations/jul-2020/securities-and-exchange-board-of-india-prohibition-of-insider-trading-amendment-regulations-2020_47104.html

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[8]SEBI and Corporate Laws, April 4- April 10, 2005, page number – 96- 144

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