Role of SEBI in Preventing Insider Trading

SUBMITTED BY:
Vyom Kumar Tiwari, B.A. LL.B. (Hons.), Roll no.- 2378
Semester-5th

SUBMITTED TO:
Mrs.Nandita S. Jha,
Assistant Professor of Law

This Final Draft is submitted in partial fulfilment of the (B.A.

LL.B.) course in Company Law- I

Chanakya National Law UniversityNyaya Nagar,

Mithapur, Patna-800001
 Table of Content

1. Introduction……………………………………………………………….……………03

 Aims & Objective…………………………………………………………...……………04

 Research Methodology………………………………………………………..………….04

2. Meaning of the term ‘Insider’……………………………………………………….04

3. Insider Trading and the Securities Exchange Board of India……...…………..04

4. Penalties for insider trading……………………………………………...…………..05

5. Case Laws………………………………………………………………………..……..06

6. Role of SEBI in curbing Insider Trading……………………….…………………08

7. Data Analysis…………………………………………………………………………..10

8. Conclusion……………………………………………………………………….……..11

Bibliography………………………………………………………………………………..12

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 INTRODUCTION
Insider trading is that the buying or selling of a security by someone who has access to material
non-public information about the protection. Trading are often illegal or legal betting on when
the insider makes the trade. it's illegal when the material information remains non-public.

Meaning of the term ‘Insider’

The term ‘insider’ has been defined under Regulation 2(e) of SEBI (Prohibition of Insider
Trading) Regulations, 19921. Basically, the term ‘insider’ will be classified into three broad
categories, which are:

 Persons who are connected to the company,

 Persons who were connected with the company,

 Persons who are deemed to be connected to the company.

In order to become an insider a person needs to fulfill three elements, viz

 The person should be a natural person or legal entity;

 The person should be connected person or deemed to be connected;

 Acquisition of the unpublished price sensitive information by virtue of such connection.

Unpublished Price Sensitive Information

Unpublished price sensitive information means any information which refers to the internal
matters of the company and ordinarily it is not disclosed by the company in the regular course of
the business.

1
Roy, Ayan, Project Report on Insider Trading in India (June 4, 2010). Available at SSRN:
https://ssrn.com/abstract=1620386 or http://dx.doi.org/10.2139/ssrn.1620386

3
 1. AIMS & OBJECTIVE

 To study the concept of Insider Trading.

 To analyse the role of SEBI in preventing Insider Trading.
 To analyse some related case laws & data.

2. RESEARCH METHDOLOGY
This is a purely exploratory research. The analysis is done on the basis of Primary and secondary
data. The researcher adhere himself only to the Doctrinal method of research. In the dictomy of
qualitative and quantitative research it is primarily qualitative. This method is sufficient to
address the findings and to arrive at concrete conclusions.

3. SOURCES OF DATA COLLECTION

The researcher will collect data from primary as well as secondary sources.

• The primary sources are

1. Legislations
2. Bare Acts
3. Case laws.

• The Secondary sources are

1. Journals
2. Blogs

3. Books

Mode of Citation- Bluebook

Insider Trading and the Securities Exchange Board of India

Insider trading in India is basically determined by SEBI laws which govern the whole trading in
national stock exchange or Bombay stock exchange. The main aim of this law is that to ensure

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traders that no one is gained by trading on ‘insider’ or ‘unpublished’ information- information
that is not made public. Another aim of this law is to make the information available to all the
participants. The enforcement of insider trading laws increases the market liquidity and decreases
the cost of equity. Insider trading laws are found in developed countries where strong trading
regulations are adopted. The main aim of government in the enactment of insider trading laws is
that all the participants in the market have the same information. When the Indian economy was
liberalized and security market was open to foreign institutional investors, common investors aim
to get quick returns in short period of time.

In India, SEBI (Insider Trading) Regulation, 1992 framed under the Section 11 of the SEBI Act,
1992 intends to curb and prevent the menace of insider trading in securities. An insider is a
person who is an accepted member of a group or organization who has special knowledge
regarding his firm1.

Evolution

Bombay stock exchange was established in 1875 and since then Indian securities markets started
functioning. Before the enactment of SEBI Act 1992, there were two acts namely Capital Issues
Control Act,1947 and Securities Contract Regulation Act,1956. After independence, there was no
such as act which governed the insider trading practices in India.

Penalties for committing insider trading

The penalties and punishments for committing insider trading have been defined under Chapter
IV-A of the SEBI Act. The penalties have been discussed below according to the SEBI
(Amendment) Act, 2002.

1
Manchikatla, A.K. and Acharya, R.H. (2017), "Insider trading in India – regulatory enforcement", Journal of
Financial Crime, Vol. 24 No. 1, pp. 48-55. https://doi.org/10.1108/JFC-12-2015-0075

5
Section 15(G)(i)– if an insider either on its own or on behalf of any person has dealt on behalf of
his company any unpublished information then he may be fined with RS. 25 crores or 3 times the
profit made, whichever is higher.

Section 15G(ii)– if an insider has given any price sensitive information then he may be fined up
to RS. 25 crores or 3 times the profit made.

Section 15G(iii)– if an insider has procured any other person to deal in securities of anybody
corporate on basis of published information then he may be fined up to RS. 25 crores or 3 times
the profit made which is higher.1

Case Laws
Hindustan Lever Limited v. SEBI (1996)

This case mainly concerns the purchase of 8 lakh shares by HLL of BBLIL from the Unit Trust of
India on March 25, 1996. This purchase was made barely two weeks prior to a public
announcement for a proposed merger of HLL and BBLIL. Upon investigation, SEBI found that
HLL was an insider at the time of purchase.

SEBI upon investigation found that at the time of purchase of shares of BBLIL from UTI, HLL
was an insider under Section 2(e) of the 1992 Regulations. HLL filed an appeal before the
appellate authority asking on what grounds they can be termed as an insider. But after hearing on
the evidence of HLL, the authority appreciated the evidence but it was not enough to prove it.
Consequently, the appellate authority2 found the SEBI investigations right. The matter is
currently pending before the Supreme Court.

TISCO case (1992)

1
https://www.unionbankofindia.co.in/pdf/code%20of%20conduct%20for%20pit%202022-23.pdf
2
https://www.proquest.com/openview/8af4a92bc8bda6a243e17035eb674c6e/1?pq-origsite=gscholar&cbl=54439

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In this case, the profit of TISCO for the first half of the financial year 1992-93 felt to Rs. 50.22
crore in comparison to the profit of Rs. 278.16 crore for the financial year 1991-92. Before the
announcement of the half-yearly results, there was intense activity in the trading of share between
October 22, 1992, and October 29, 1992. However, the SENSEX saw a decline of 8.3% during
the same period. The insiders who had the knowledge of the same had manipulated the market to
make short sales. Small investors were hit badly. Due to the absence of insider trading regulations
in India, it was not possible to investigate the case.

DSQ Holdings Ltd. v. SEBI (1994)

DSQ biotech ltd. (DSQB) was originally promoted by KND engineering and technologies ltd.,
jointly with Tamil Nadu industrial development corp. DSQ Holdings Ltd. Is a same promoter
group company of DSQB. The board of directors held a meeting on 30 July 1994 considered
rights issue and same was communicated to the stock market. The purpose of sending
information to the public was to properly disseminate it.

The erstwhile management of DSQB entered into an agreement in April 1994 with DSQH Ltd.
promoted by Shri Dinesh Dalmia (DD) group1. Through the agreement, the DSQ Holdings Ltd.
(DSQH) purchased 44, 98,995 shares of DSQB at the rate of Rs. 15.94 per share from the
erstwhile promoters. Thereafter DSQ group made an offer as per clauses 40A and 40B of the
Listing Agreement to acquire a further 17,66,400 shares (20% of the paid-up capital of the
company) during the last quarter of 1994. The scrip of DSQB prior to the takeover of the
company by the DSQ group in April 1994 was not actively traded on the exchanges with the
price hovering in the region between Rs.12 and Rs.18 during most part of 1993 and also during
the first half of 1994. The scrip witnessed considerable movement both in terms of price and
volume immediately after the DSQ group took over the company.2

1
https://www.sebi.gov.in/acts/act08amend1.html
2
https://www.sciencedirect.com/science/article/abs/pii/S1042444X15300128

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A detailed investigation was carried out by SEBI. It was found that there was a steep jump in
shares of DSQB from RS. 20 to RS. 92. From the investigation of SEBI, the DSQB failed to give
the actual proof of dispatch of AGM notice. Regulation 2(k)(iii) of the SEBI (Prohibition of
Insider Trading) Regulations, 1992 considers the information regarding the issue of shares by
way of public, rights, bonus etc. as unpublished price sensitive information. In this case, it was
clear that DSQB made an advantage over other investors. So DSQH was a ‘connected person’
under regulation 2(c) of SEBI Insider trading regulations.

Role and Power of SEBI in curbing Insider Trading

SEBI is established as a statutory body which works under the framework of Securities and
Exchange Board of India, 1992. The various roles and power of SEBI have been discussed under
Section 11 of the SEBI Act,1992.

 The main duty of SEBI is to protect the safeguard of investors and ensure proper trading.

 The main power of SEBI is that if any person has violated the provisions of this Act then
SEBI set up an enquiry committee.

 In order to investigate SEBI may appoint officers who look after the books and records of
insider and other connected persons.

 It is the duty of SEBI to give a reasonable notice to the insider before starting the
investigation.

 The board can also appoint an auditor who may inspect the books of accounts and affairs
of an insider.

 It is the duty of insider to provide necessary documents to the investigating authority.

However, it has neither any power to examine on oath, nor does it have the same power as
are vested in a civil court under the Code of Civil Procedure,1908 while trying a suit.

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  After all the investigations, the officer has to submit the report within 1 month as per
SEBI 1992 regulations. It also depends on the investigating officer to take longer time if
he funds that the work could not be completed within the stipulated time.

 After the final report submission, SEBI has to communicate the findings to the insider and
issue a show cause to the insider or other person within 21 days of the receipt of the
communication.

 The person to whom the finding has been communicated has to give the reply to the
notice within 21 days of receiving the notice. The Expert Group (headed by Justice M.H.
Kania) constituted by the SEBI in August, 2004, recommended in its Report that, Section
ll(2)(i) of SEBI Act be amended to empower SEBI to call for information from
professionals, subject to the professional’s rights (for not parting with the privileged
information in their possession).

 Any person who feels aggrieved by the directions of the SEBI can appeal to the Securities
Appellate Tribunal (Regulation 15).

 An appeal can be filed within 45 days of the receipt of the copy of the order from the date
on which appeal had been filed. SEBI (insider trading) regulations, 1992 consists of three
chapters and twelve regulations.

An insider is a connected person who is connected to the company directly or indirectly with the
company. The term ‘connected person’ is an important concept for defining the charge of insider
trading. It represents a person who is a director of a listed company or is an officer or an
employee of a listed company. Connected persons1 have access to the unpublished price sensitive
information of the company. It also includes a person who has been connected to the company
prior to 6 months to the implementation of insider trading regulations.

There are various regulations under SEBI Regulations, 1992 that defines the term ‘connected
persons’. They are as follows:

1
https://www.icsi.edu/media/portals/72/year%202018/presentation/ROLE%20PLAYED%20BY%20SEBI%20IN%
20RESTRICTING%20INSIDER%20TRADING.pdf

9
  Regulation 2(h)(i)- an officer or employee of the same company under subsection(1b) of
Section 370(1b) or subsection (11) of Section 372 of the Companies Act, 1956 or
subsection (g) of Section 2 of the MRTP Act,1969.

 Regulation 2(h)(ii)

 Regulation 2(h)(iii)

 Regulation 2(h)(iv)- a member of the board of directors

 Regulation 2(h)(v)- an official or an employee of a self-regulatory organisation

 Regulation 2(h)(vi)- any relative of any of the aforementioned persons

 Regulation 2(h)(viii)- a relative of the connected person1

 Regulation 2(h)(ix)- a concern, firm, trust, Hindu undivided family

Data Analysis
Over the last two decades, Indian markets have been criticized because of the failure to
investigate and prosecute the convicted person. Even if the person2 is caught the punishment and
penalty is so low that the regulations have lost its effects. Below is the data 3 which shows the
number of insider trading investigations and completed between 2010-15:

Year Investigations taken up Investigations completed

2010-11 28 15

2011-12 24 21

2012-13 11 14

1
https://www.proquest.com/openview/8af4a92bc8bda6a243e17035eb674c6e/1?pq-origsite=gscholar&cbl=54439

10
2013-14 13 13

2014-15 10 15

The reason behind the low rate of successful investigation and convictions could be due to these
factors which are discussed below:

 SEBI was only recently granted the power to call for phone records of suspects under
investigation: As we know insider trading is not easy to determine and also SEBI has not
been empowered with the basic investigation tools.

 SEBI does not have the power to wiretap phone calls: As in the US where the authority
can obtain the phone call records but in India, it cannot be done so.

 SEBI has failed to utilize its power and penal provisions: SEBI in many ways failed to
utilize its power and has also asked the government to give additional powers to the body.

 SEBI does not have the appropriate human resource to conduct a proper investigation:
SEBI has nearly 800 old employees and does not have proper human resource department.

In developed countries like USA or UK, there is severe punishment for insider trading. In
European union, there is 4 years term jail for insider trading.

Conclusion
As I have discussed above that insider trading offences are defined under Section 11 of SEBI
Act,1992. It has the power to investigate on matters and look upon the books of the firm. Despite
the regulations, SEBI has failed in many investigations because of lack of various factors SEBI
has the power to initiate criminal prosecution under Section 24 of SEBI Act 1992. There was no
such provision before the enactment of SEBI Act but after the various committees had submitted
their report to the SEBI (Insider Trading Regulation) Act, 1992 was enacted.

In other developed countries, there is strong legislation regarding the insider trading but in India,
though there is legislation under SEBI Act, 1992 but the rate of investigations is very low

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because of many factors and the government has to look upon the matter and pass more strong
legislation to curb the insider trading practices.

BIBLIOGRAPHY
• https://www.icsi.edu/media/portals/72/year%202018/presentation/ROLE%20PLAYED%20
BY%20SEBI%20IN%20RESTRICTING%20INSIDER%20TRADING.pdf

• https://www.sebi.gov.in/acts/act08amend1.html
• https://www.unionbankofindia.co.in/pdf/code%20of%20conduct%20for%20pit%202022-
23.pdf

• https://www.proquest.com/openview/8af4a92bc8bda6a243e17035eb674c6e/1?pq-
origsite=gscholar&cbl=54439

• https://www.sciencedirect.com/science/article/abs/pii/S1042444X15300128

• Manchikatla, A.K. and Acharya, R.H. (2017), "Insider trading in India – regulatory
enforcement", Journal of Financial Crime, Vol. 24 No. 1, pp. 48-55.
https://doi.org/10.1108/JFC-12-2015-0075

• Roy, Ayan, Project Report on Insider Trading in India (June 4, 2010). Available at SSRN:
https://ssrn.com/abstract=1620386 or http://dx.doi.org/10.2139/ssrn.1620386

12