CORPORATE GOVERNANCE AND INSIDER TRADING

1. INTRODUCTION
The term “governance” refers to the process of governing, whether by general laws,
norms, or control, whether by government, market, or network, whether over a family,
tribe, formal or informal organisation, or territory. It entails the engagement and
decision-making process. When applied to a business entity, the word “governance”
refers to a set of procedures developed and carried out by the Board of Directors,
which are reflected in the organization’s structure and how it is handled and directed
toward its objectives.
The term “Corporate Governance” gained much importance when accounting fraud of
high profile companies were observed in the business world and the reason was due to
lack of adequate governance mechanism.1
Trading in a company’s stock by a company’s insider is not illegal in and of itself.
Insider trading in their own company’s stock, which includes directors, officers, and
staff, is a good attribute that businesses promote because it aligns their interests with
the insiders’. Trading in a company’s stock by an insider on the basis of non-public
knowledge to the exclusion of others is forbidden. Insider trading, as defined, is one
of the most heinous crimes against the market’s trust in fairness.2
If insider trading is unrestricted in the financial markets, those with insider
information will have a consistent advantage in trades conducted with that
information, while those without will be consistent losers. The latter group, which
includes the overwhelming majority of investors, will gradually realise they are
playing a losing game and conclude that all transactions are thus biased against them.
Slowly, the average investor will abandon the stock market, leaving critical functions
such as capital raising in the dust.

2. MAIN BODY
HISTORY OF CORPORATE GOVERNANCE
The Confederation of Indian Industry (CII), India’s largest industry and business
organisation, was the first to take action in India. The Security Exchange Board of
India (SEBI) took the second big step as part of the listing agreement’s clause 49 3.
The Naresh Chandra Committee and the Narayana Murthy Committee took the third
initiative. These committees looked at corporate governance from the perspective of
stakeholders, particularly shareholders and investors. Shareholders, the Board of
Directors, and management are three central components of corporate governance
1
Importance of Corporate Governance and Companies Act, 2013, last accessed on April 10, 2021, accessible at
<https://www.caclubindia.com/articles/importance-of-corporate-governance-and-companies-act-2013-
24923.asp#:~:text=Section%20135(1)%20of%20Companies,or%20more%2C%20turnover%20of%20Rs.>.
2
Corporate Governance- Insider Trading, last accessed on April 10, 2021, accessible at
<https://www.mondaq.com/india/corporate-finance/19011/corporate-governance--insider-trading>.
3
Corporate Governance in Listing Companies, Clause 49 of the Listing Agreement, last accessed on April 10,
2021, accessible at < https://www.sebi.gov.in/legal/circulars/oct-2004/corporate-governance-in-listed-
companies-clause-49-of-the-listing-agreement_13153.html>.
 defined by the committees. Accountability, openness, and fair treatment of all
shareholders are three main issues defined by the committees. The recommendation,
which distinguishes the roles and obligations of the boards and management in
instituting good corporate governance structures, is at the core of the committee’s
report. The Ministry of Corporate Affairs (MCA) released a new set of ‘Corporate
Governance Voluntary Guidelines’4 in 2009 to enable companies to improve the way
they manage their boards and committees, appoint and rotate external auditors, and
develop whistle-blowing mechanisms. The guidelines adopted are advisory in nature
and can be divided into six sections: Board of Directors, Board Responsibilities, Audit
Committees, Auditors, Secretarial Audit, and Institution of Whistle Blowing
Mechanism. Although some Indian companies have been aggressively following high
governance standards, the majority of companies have failed to take the guidelines
seriously.

PRINCIPLES OF CORPORATE GOVERNANCE

The corporate structure may differ from organization to organization, but the
following elements should be incorporated in the governance structure:
 All in the company should be handled equally and fairly. Making sure
shareholders are mindful of their rights and how to exercise them is a big part
of that.5
 Non-shareholder stakeholders have legal, contractual, and social
responsibilities that must be met. This involves sharing important information
to staff, customers, suppliers, and community members at all times.6
 Within corporate governance, the board of directors must uphold a
responsibility to ensure accountability, equity, diversity, and transparency.
Members of the board must also have the requisite skills to evaluate
management activities.7
 Organizations should have a code of ethics for board members and executives,
and new members should only be appointed if they follow the norm.8
 All corporate governance practises and processes should be open or made
available to interested parties.9

CONFLICT MANAGEMENT IN CORPORATE GOVERNANCE

One goal of corporate governance is to set up a system of checks and balances to
prevent conflicts of interest. Conflicts usually occur when two people involved have
different views about how the company should be run. Corporate governance is a non-
4
Corporate Social Responsibility Voluntary Guidelines 2009, last accessed on April 10, 2021, accessible at
<https://www.mca.gov.in/Ministry/pdf/CSR_Voluntary_Guidelines_24dec2009.pdf>.
5
Corporate Governance, last accessed on April 10, 2021, accessible at
<https://searchcompliance.techtarget.com/definition/corporate-governance#:~:text=Corporate%20governance
%20is%20the%20combination,suppliers%2C%20government%20regulators%20and%20management>.
6
Id.
7
Id.
8
Id.
9
Id.
biased way to handle dispute since a board of directors is usually made up of members who
are both internally and externally involved.
When executives and shareholders disagree, conflicts will arise. For example,
shareholders may usually want to follow only profit-generating interests, while the
CEO will want to invest in better employee engagement initiatives. If several
shareholders disagree with each other, another form of dispute can occur. Corporate
governance will be in charge of determining how these issues are resolved.

CORPORATE GOVERNANCE IN THE COMPANIES ACT, 2013

Corporate governance was introduced in the Companies Act, 2013.
 Independent Director- Every listed company as per Section 149(4)10 of the
Companies Act shall have 1/3rd of the total number of directors as independent
directors. The section further read with the Companies (Appointment and
Qualifications of Directors) Rules, 201411, gives an overview of the number of
independent directors to be appointed in special circumstances given below:
a. Public company having a turnover of more than Rs. 100 crores- At least 2
directors;
b. Public companies having paid up capital of more than Rs. 10 crores- At
least 2 directors.
 Woman Director- Under Section 149(1) of the Companies Act12, the
companies are listed which have to have at least one woman director:
a. All listed entities;
b. Non-listed public companies having a paid up share capital of more than
Rs. 100 crores or having a turnover of more than Rs. 300 crores.
 Audit Committees- The Companies Act of 2013 broadened the scope of
companies that can form audit committees. In comparison to clause 49 13, the
audit committee’s composition has changed, with a minimum of three
independent directors. The financial statement should be able to be read and
understood by the Chairperson. It would apply to all listed or unlisted public
entities with a paid-up share capital of Rs. 10 crores or more, a turnover of Rs.
100 crores or more, and an aggregate unpaid loan of Rs. 50 crores or more.
 Composition of committees for nomination and remuneration and stakeholder
relationship- The appointment of a Nomination and Remuneration Committee
is mandated by Section 178(1) of the Companies Act14. The Committee’s
function will be to evaluate people who are eligible to be directors and who
can be named to senior management positions, as well as to conduct director
evaluations. Section 178(5) of the Act15 mandated the formation of a
10
Companies Act, 2013, s 149(4).
11
Companies (Appointment and Qualifications of Directors) Rules, 2014, rule 4.
12
Companies Act, 2013, s 149(1).
13
Ibid at 3.
14
Companies Act, 2013, s 178(1).
15
Companies Act, 2013, s 178(5).
 stakeholder relationship committee to address the concerns of the company’s
stockholders.
 Internal Audit- Under Section 138 of the Companies Act of 2013 16, some
groups of companies are required to conduct internal audits. All listed
companies with a paid-up share capital of Rs. 50 crores or more, all non-listed
companies with a paid-up share capital of Rs.50 crores or more, turnover of
Rs.200 crores or more in the previous financial year, unpaid loans or
borrowings from banks or public financial institutions of Rs.100 crores or
more are included in this category.
 Serious Fraud Investigation Office- The Serious Fraud Investigation Office
will be established under Section 211(1) of the Companies Act, 2013 17 to
investigate fraud involving the business. On receipt of a report from the
Registrar or Auditor, or in the public interest, or upon request from any
Department of the Central Government or State Government, the SFIO may
investigate the company’s affairs.
 Corporate Social Responsibility- According to Section 135(1) of the
Companies Act of 201318, any corporation must form a Corporate Social
Responsibility Committee consisting of three or more directors, one of whom
must be an independent director. Companies with a net worth of Rs. 500
crores or more, a turnover of Rs. 1000 crores or more, or a net profit of Rs. 5
crores or more for any financial year are included in this category.
DEFINITIONS UNDER INSIDER TRADING REGULATIONS
Under Regulation 2(g) Securities and Exchange Board of India (Prohibition of Insider
Trading) Regulations, 201519, an ‘insider’ is defined as any person who is:

 a connected person; or
 in possession of or having access to unpublished price sensitive information.

Regulation 2(n)20 of the regulations define unpublished price sensitive information as

any information, relating to a company or its securities, directly or indirectly, that is
not generally available which upon becoming generally available, is likely to
materially affect the price of securities and shall, ordinarily including but not restricted
to, information relating to:

 financial results;
 dividends;
 change in capital structure;
 mergers, de-mergers, acquisitions, de-listings, disposals and expansion of
business and such other transactions;
 changes in key managerial personnel.
16
Companies Act, 2013, s 138.
17
Companies Act, 2013, s 211(1).
18
Companies Act, 2013, s 135(1).
19
Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015, r 2(g).
20
Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015, r 2(n).
INGREDIENTS OF VIOLATION
The regulations impose multiple conditions for the infringement. The first is the
importance of becoming an insider (which now specifically includes a company).
Second, the ownership of content that is not publicly available and contains price
sensitive inside information. Finally, the reality of trading in securities (there is
another prohibition against revealing such information).
Any person who is likely to have (or has had) access to unpublished price sensitive
information due to an obligation owed to the company is considered an insider. Thus,
a taxi driver with no links to the organisation who overhears two directors discussing
unreleased price sensitive details will not be subject to the Act’s prohibitions. Under
the rules, anybody who comes into contact with inside details is not responsible.
Possessing material inside information begs the question of what constitutes material
inside information and what constitutes an inside undisclosed price sensitive fact.
What is material is a question of fact and will be depend on a balancing of both the
indicated probability that the event will occur and the anticipated magnitude of the
event in light of the totality of the company activity.21
Insider trading that is out of the ordinary may be a strong measure of materiality.
Inside unpublished price sensitive fact is confidential information that only a few
people are aware of due to their proximity to the firm and has not been widely
disseminated. When does a piece of knowledge become public? Not for at least a few
hours after the public is informed (via the stock exchange or the company’s website).
In the case of United States v. Falcone 22, the court of appeals agreed with the
Commission’s amicus brief that a stockbroker who received advance notice of the
contents of Business Week’s “Inside Wall Street” column through an employee of the
magazine’s wholesaler and traded on the information owed a duty of trust to Business
Week because he was not too “remote” in the magazine’s distribution chain. Since
Business Week conveyed the need for secrecy to its seller, who then communicated it
to the wholesaler, who acknowledged and implemented the trust, and the stockbroker
received the information with understanding that he was receiving it in violation of
the confidentiality requirement, the court of appeals held that the stockbroker had a
duty not to trade on that information.
ARE THE INDIAN INSIDER TRADING LAWS EFFECTIVE?
Insider trading is rightfully regarded as one of the most aggressive offences on a well-
functioning stock market. It erodes investor trust in the market and stifles capital flow.
India, on the other hand, falls short of defining successful civil consequences of
insider trading.
Insider trading is prohibited by Section 195 of the Companies Act 23 for directors and
key management staff of a corporation. Insider trading, according to the Act, is
defined as any act of subscribing, purchasing, selling, dealing, or agreeing to buy, sell,
or trade in any securities by any director, key managerial staff, or other officer of a
company, whether as principal or agent, if he is reasonably expected to have access to
any non-public price sensitive information in respect of the company's securities.

21
Ibid at 2.
22
311 U.S. 205 (1940).
23
Companies Act, 2013, s 195.
The Securities and Exchange Board of India (SEBI) is responsible for policing insider
trading in companies. It forbids insider trading and the disclosure of any business
secret information that could impact the company’s stock price or shares. Insider
trading is dealt with and communicated under SEBI Regulation 3. SEBI has the
authority to protect the interests of its investors and shareholders at its discretion. Any
person found guilty of insider trading will be subject to a fine of not more than Rs. 5
lakhs. If someone violates SEBI’s laws, guidelines, or actions, SEBI has the authority
and right to conduct an investigation. SEBI has the authority to nominate any officer
to audit any of a company’s documents, accounts, or books.
According to SEBI, new amendments adopted recently would help to limit and
discourage insider trading to some degree. Unlisted firms are now included in the
SEBI’s new amendment. This now requires the right to conduct a search and seizure
in the most efficient and practical manner possible. Following the implementation of
new laws, businesses and real estate firms that were considering expanding their
operations must now reconsider due to the tight domestic regulations. SEBI has now
implemented a reward of up to one crore for anyone who can inform the SEBI about
minor wrongdoing and insider trading that has occurred in any business.
SEBI has included a different ‘Informant Mechanism’ to its Prohibition of Insider
Trading laws in the most recent amendment. Both practitioners, auditors, and
employers will be able to take advantage of the SEBI’s new benefits. Insider trading
has become a major problem, and the SEBI has responded by enacting stringent rules,
guidelines, and a code of conduct to combat it. The SEBI bears sole responsibility for
safeguarding the interests of its investors and shareholders.
SEBI has the obligation and duty to detect ongoing insider trading in a business and to
take swift legal action to protect the rights and interests of shareholders. However,
obtaining clear proof or evidence of insider trading and linking ties is a monumental
challenge, and launching legal proceedings by the SEBI takes months.
As a result, an informant must apply a Voluntary Information Disclosure Form
(VIDF) about any unpublished information or insider trading that has occurred in a
business under the current SEBI Prohibition of Insider Trading regulations. The
informant should be required to reveal all original details and to sign a statement
stating that he is not directly or indirectly affiliated with SEBI or any of its employers.
The informant can apply the information without disclosing his identity, but he would
need the assistance of a practising attorney to serve as his legal representative. Except
under such circumstances, such as if the informant does not follow the SEBI’s
guidelines and regulations, the informant should remain anonymous.
The SEBI has also founded the Office of Informant Protection (OIP), which is an
informant protection office that processes all original data and pays the informant a
reward. It offers hotlines from which informants can be contacted. Without disclosing
the identity of the informant, SEBI may share the original information given by the
informant with other international markets and associations. As a result, SEBI plays a
critical role in limiting insider trading and enforcing stringent rules, regulations, and
guidelines.
 The Securities and Exchange Board of India (SEBI) agreed on January 18, 2019, to
keep promoters of a stock, regardless of their shareholding status, liable for insider
trading if they have non-published price-sensitive information (UPSI) about the
company for no valid reason.
“The term legitimate purpose would include sharing of non-published price-sensitive
information (UPSI) in the ordinary course of business by an insider with partners,
collaborators, lenders, customers, suppliers, merchant bankers, legal advisors,
auditors, insolvency professionals, or other advisors or consultants,” SEBI said in the
press release.
This change is made under the heading "Prohibition of Insider Trading."
INDIABULLS INSIDER TRADING CASE
This case24 is one of the most recent in the field of insider trading. In this case, the
executive director of Indiabulls was accused of illegally earning Rs. 87 lakhs by
dealing in Indiabulls while having access to unpublished classified details about the
selling of land and property secretly by Indiabulls venture limited’s subsidiary.
According to the regulator, the executive director of Indiabulls Venture Limited was a
member of the Indiabulls management committee, making her an insider, as was her
husband. These illegitimate gains were made between 2017 and 2019.
The SEBI ordered that the IVF face strict criminal charges, and that the company’s
executive director and her husband be fined Rs. 87.4 lakhs jointly and severally. It
was also mandated that no debts be incurred without SEBI’s prior approval.
COMPARISON OF INDIAN LAW WITH THE LAW IN UK
In the United Kingdom, the Financial Services and Markets Act of 2000 25 (“FSMA”)
and the Criminal Justice Act of 199326 (“CJA”) provide the legal basis for insider
trading. Neither Act, however, defines the phrase "insider trading."
The FSMA establishes a framework for combating market manipulation and
empowers the UK Financial Services Authority (“FSA”) to penalise those who do so.
Market abuse is described by Section 118(2) of the FSMA as behaviour in which an
insider trades, or attempts to trade, in a qualifying investment or related investment on
the basis of insider knowledge about the investment in question. It also refers to those
who cause or allow others to participate in behaviour that may be considered market
abuse. Since market manipulation is considered a civil offence, it does not necessitate
that an individual behave intentionally or recklessly.
Dealing in price-affected securities on the basis of insider information, encouraging
another individual to trade in price-affected securities on the basis of insider
information, and knowing disclosure of inside information to another are all
prohibited under the CJA.

24
Indiabulls Insider Trading Case, last accessed on April 10, 2021, accessible at <
https://economictimes.indiatimes.com/markets/stocks/news/indiabulls-insider-trading-case-sebi-impounds-rs-
87-21-lakh-from-former-director-spouse/articleshow/69487936.cms?from=mdr#:~:text=Indiabulls%20insider
%20trading%20case%3A%20Sebi%20impounds%20Rs,lakh%20from%20former%20director%2C
%20spouse&text=Markets%20regulator%20Sebi%20Friday%20ordered,in%20an%20insider%2Dtrading
%20case.>.
25
Financial Services and Markets Act, 2000.
26
Criminal Justice Act, 1993.
 Insider trading and market manipulation will result in prison terms of up to seven
years and unlimited fines.
The terms "price sensitive information" and "insider" are described similarly in Indian
and British laws (as far as civil liability is concerned). Both criminal and civil liability
are dealt with under one common law in India, while both liabilities are dealt with
under separate laws in the United Kingdom. Insider trading is punishable in India
under the SEBI Act and the Companies Act with a fine of INR 250,000,000 or three
times the profit gained from insider trading, whichever is higher. He may also face a
sentence of up to ten years in jail, as well as a fine or both.
HINDRANCES FACED BY SEBI IN IMPLEMENTING THE INSIDER TRADING LAWS
The regulation of insider trading has proven to be the most complex of the major
issues that SEBI must address. The unflattering moniker of “the unwinnable battle”
has been applied to such regulation, prompting a rethinking of the problem. Insider
trading accounted for 14 percent (34 cases) of SEBI’s investigations in 2016-2017,
compared to 12 cases the previous year, according to the SEBI Annual Report for the
year 2016-201727. Insider trading is rampant, and it’s getting worse every year. In
addition, only 15 of the 34 cases that were investigated were completed. As a result, it
is a cause for serious concern.
Insider trading claims are difficult to identify and prove because they are often based
on circumstantial facts. And when it is discovered, the rate of successful prosecution
is extremely poor. Despite the existence of a strong regulatory framework, SEBI lacks
the technical capabilities necessary to conduct successful investigations. There has
been a severe scarcity of capital and personnel. As a result, the success rate of
prosecution is extremely poor.
Furthermore, there is no provision in Indian law for imposing a penalty or even
initiating an investigation into a foreign national who has engaged in insider trading.
There is no discussion of the regulations’ extraterritorial application. This is a
significant disadvantage in today’s globalised securities market.

3. CONCLUSION AND SUGGESTIONS

From the above references, it is clear that both corporate governance as well as insider
trading both are emerging topics in the field of corporate law in our country. The
inter-connectedness of these emerging topics cannot be ignored. Insider trading can be
said to be an evil which good corporate governance aims at eliminating.
One of the most important goals of corporate governance is to establish a system of
laws, policies, and procedures for an organisation, or to hold people accountable.
Each major component of the “government” – the shareholders, board of directors,
executive management team, and company employees – is accountable to the others.
The fact that the board of directors provides financial statements to shareholders on a
regular basis, which represents the corporate governance concept of disclosure, is part
of this accountability. When a company's good corporate governance is ignored, it
runs the risk of collapsing, and shareholders stand to lose a lot of money.
27
SEBI Annual Report 2016-17, last accessed on April 10, 2021, accessible at
<https://www.sebi.gov.in/reports/annual-reports/aug-2017/annual-report-2016-17_35618.html>.
 Insider trading has been drastically decreased in recent years, according to estimates.
Insider trading by directors, executives, partners, and other individuals is now
prohibited by listed corporations and other entities' internal policies and guidelines.
Insider trading law has been criticised in the past for being ineffective, difficult to
implement, and having no influence on the financial markets. This ineffectiveness has
been shown by low compliance rates and a lack of prosecutions against insiders.
Regardless of whether the SEBI was given broad powers or not, it has proven to be a
dismal failure when it comes to enforcing the law.
The importance of controlling insider trading has taken on international significance
as foreign regulators try to bolster domestic investor interest and attract international
investment. As a result, SEBI's position should now be limited to that of a regulator.
Special courts may be established to expedite and effectively resolve cases.
We need to increase capital market transparency, and the SEBI must crack down on
all forms of insider trading. Real, investors who want to buy and sell large amounts of
stock can use block deals, according to SEBI rules from 2005, which were revised in
2017. The transactions are supposed to take place in a different trading window,
within a fixed time slot, and the securities are supposed to be priced within 1% of
market rates. Surely, it is now time to revise block deal rules even further, bringing
them in line with those in place in mature capital markets. Block deals on the bourses,
after all, have major benefits, allowing for the straightforward transfer of large blocks
of shares without causing market distortions or instability. Block deals, on the other
hand, can be abused, and we need to tighten the rules to prevent unscrupulous
activities that could deter big-bulge FPIs from putting their trust in India's growth
storey in the future. Furthermore, forward-thinking regulation is important.

4. BIBLIOGRAPHY
CASE LAWS
 Indiabulls Insider Trading Case, <
https://economictimes.indiatimes.com/markets/stocks/news/indiabulls-insider-
trading-case-sebi-impounds-rs-87-21-lakh-from-former-director-spouse/
articleshow/69487936.cms?from=mdr#:~:text=Indiabulls%20insider
%20trading%20case%3A%20Sebi%20impounds%20Rs,lakh%20from
%20former%20director%2C%20spouse&text=Markets%20regulator%20Sebi
%20Friday%20ordered,in%20an%20insider%2Dtrading%20case.>.
 United States v. Falcone, 311 U.S. 205 (1940).
STATUTES
 Companies (Appointment and Qualifications of Directors) Rules, 2014.
 Companies Act, 2013.
 Criminal Justice Act, 1993.
 Financial Services and Markets Act, 2000.
 Securities and Exchange Board of India (Prohibition of Insider Trading)
Regulations, 2015.
ONLINE ARTICLES
 Corporate Governance in Listing Companies, Clause 49 of the Listing
Agreement, < https://www.sebi.gov.in/legal/circulars/oct-2004/corporate-
governance-in-listed-companies-clause-49-of-the-listing-
agreement_13153.html>.
 Corporate Governance- Insider Trading,
<https://www.mondaq.com/india/corporate-finance/19011/corporate-
governance--insider-trading>.
 Corporate Governance,
<https://searchcompliance.techtarget.com/definition/corporate-
governance#:~:text=Corporate%20governance%20is%20the
%20combination,suppliers%2C%20government%20regulators%20and
%20management>.
 Corporate Social Responsibility Voluntary Guidelines 2009,
<https://www.mca.gov.in/Ministry/pdf/CSR_Voluntary_Guidelines_24dec200
9.pdf
 Importance of Corporate Governance and Companies Act, 2013,
<https://www.caclubindia.com/articles/importance-of-corporate-governance-
and-companies-act-2013-24923.asp#:~:text=Section%20135(1)%20of
%20Companies,or%20more%2C%20turnover%20of%20Rs.>.
 SEBI Annual Report 2016-17, <https://www.sebi.gov.in/reports/annual-
reports/aug-2017/annual-report-2016-17_35618.html>.