Categories: ArticlesImportant Laws

SEBI- The Watchdog for Malpractices in the stock market

 

Amit Anand[1]

In simple terms, insider trading is an act of buying or selling a security, in breach of any duty or obligation. Insider Trading has been an important source of information for the investors which is treated as a less spoken topic in India. Therefore, preventing such transactions is an important obligation for any capital market regulatory body. The United States of America was the first country which has firstly enacted the legislation to regulate Insider Trading. This regulation is different from other rules and regulations regarding the stock market.

Introduction to SEBI

The practice of Insider Trading came into existence ever since the very concept of trading of securities of the company become prevalent among the investors worldwide. There are basically 3 main essential elements of insider trading:-

  • There is the trading of company securities
  • The dealing is by an insider
  • The dealing is related on the basis of Unpublished Price Sensitive information{UPSI}
  • 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– Illegal insider trading is the process when an insider leaks out the company’s information which is not legal and has Unpublished information.

To curb insider trading SEBI formulated SEBI {Prohibition of Insider Trading} Regulations 2015 which also prescribes code of fair disclosure and conduct to be followed by listed companies and entities. These regulations not only seek to curb dealing in securities, but they also seek to curb communicating or counseling about securities by insiders.

Aims of SEBI

The primary aim of this act is to curb and regulate the insider trading of securities and for that the SEBI introduced the SEBI regulations and guidelines. The SEBI nowadays trying to make the regulations stricter by bringing the amendments to the regulations. Its objective is also to assure that nobody should gain by doing insider trading and for that various provisions have been introduced by the SEBI to curb & prohibit insider trading in India. The ultimate goal of this regulation is to create a level playing field by making a fair market in the field of the stock market.

The genesis of Insider Trading Regulations in India

It is really important that there should be certain rules and regulations to curb these malpractices under the stock market. Such rules and regulations are generally enforced to ensure liquidity and efficiency in the market. Insider trading impacts the economy to a greater extent 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 these practices the Securities and Exchange Board of India created a set of rules and regulations with respect to the stock market and the securities markets as a whole. The main motive was to suppress the practices that violated the market.

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.  Later on, it was decided that there should be one separate body to ensure efficiency and curb these practices. Then the SEBI introduced the following regulations:-

  • Securities & Exchange Board of India, 1992 – The SEBI created rules and regulations in relation to the securities market as a whole. The main aim of the board was to curb the practice of insider trading and that’s why the board enacted different regulations with regards to the prohibition of Insider trading. The Board also issued different directions regarding the code of conduct, disclosure & transparency. If the person does not comply with the provisions of the regulations the heavy penalties would be imposed by SEBI.
  • SEBI (Prohibition of Insider Trading) Regulation, 2015– This regulation introduced a different set of rules and regulations. This regulation is considered to be one of the great and historic developments in the prohibition of insider trading. These regulations introduced different provisions related to insider trading like:-
  • No communication of Unpublished price Sensitive Info{UPSI} except official Communication
  • No procurement of UPSI from Insider
  • Execution of confidentiality & nondisclosure agreement
  • Disclosure of Trading Plan
  • Specific form for Disclosures

This regulation was introduced with five chapters and two schedules. As per this regulation, an insider shall have to formulate a trading plan and present it to the compliance officer for approval, and then the officer would review the plan and give the approval. Upon approval, the officer would notify the plan to the stock exchange. The CEO, MD or such other person of a listed company shall put a strict internal control to ensure all the compliances and rules governing the SEBI regulations in the company. Violation of these regulations attracts huge penalties any also leads to criminal prosecution. However, if a person is not satisfied by the order he may appeal to Securities Appellate Tribunal within 45 days of order.

The exception to the above provision

A UPSI may be communicated, provided, allowed in the following cases:-

  • For Open offer, UPSI may be communicated when the board of directors is of informed opinion that the proposed transaction is in the best interests of company.
  • UPSI may be communicated if it does not involve an obligation to make an open offer and the information that constitutes UPSI should be available at least 2 trading days prior to the proposed transaction.

The insiders should disclose all the trading in the specified form and the disclosures should also include those trading relating to persons’ immediate relatives etc. Disclosure should also include trading in derivatives of securities and the traded value. Trading shall commence only after the expiry of 6 months from public disclosure of trading plan & trading shall close 20 days before the closure of the financial period. The trading plan once approved by the compliance officer shall be irrevocable and insiders have to compulsory implement the plan.

Conclusion

At last, I would end by saying that the SEBI {Prohibition of Insider Trading} Regulations is really a great achievement & enactment in the field of Stock market and it SEBI is an essential component of the regulation. Really, SEBI regulations have brought up a tremendous improvement in the prohibition of Insider trading. It also helped to put all the earlier regulations under one roof. In its starting periods, it really faced a lot of challenges but gradually it’s becoming strict due to which the insider trading cases are decreasing. Nowadays the insider trading regulations not only seeks to curb dealing in securities, but they also seek to curb communicating or counseling about securities by the insiders.

Bibliography

Sites referred:

[1] Amit Anand, 3rd Year BBA LLB {Hons.} student at School of Law, University of Mumbai Thane Campus

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