INSIDER TRADING AND

TRADE SECRETS
AMAN KUMAR PATHAK 20017

ANUSHKA GUPTA 20033

ANUSHKA RAJ SONI 20034

DARSHIKA 20052
Meaning of • Insider trading is defined as a malpractice wherein
trade of a company's securities is undertaken by
Insider people who by virtue of their work have access to
the otherwise non-public information which can be

Trading crucial for making investment decisions.

Who is an insider ?
SEBI Insider Trading Regulation Act, 1992 defines the insider as :

holds position involving a

a director or is deemed to be a professional or business
an official or member of a stock an officer or employee of the relationship with the company,
director as defined in the
Companies Act, exchange company, reasonably be expected to have
access to unpublished price
sensitive information,

a merchant banker, share

a dealer in securities or an
employee of such a dealer
member,
transfer agent, registrar,
debenture trustee, broker, a dealer in securities or an
portfolio manager, investment employee of such a dealer
advisor, sub-broker, investment member,
company or employee thereof
of a trustee of mutual fund
History of Insider Trading

1992
• Now SEBI has with effect from 20th February 2002 amended
these Regulations and rechristened them as SEBI 9 Prohibition
of Insider Trading Regulation , 1992 .

1970
• Insider trading was unhindered in its 130 year old stock
market till about 1970

1979
• In 1979 the SACHAR COMMITTEE recommended amendments to
Companies Act 1956 to restrict and prohibit the dealings of
employees. Penalties were also suggest to prevent insider trading

1989
• IN 1989 the ABID HUSSAIN COMMITTEE recommended that Insider
Trading activities may be penalized by civil and criminal proceedings
and also suggested that SEBI formulate the regulations and governing
codes to prevent unfair dealings
 TRADING

• Trade is a basic economic concept involving the buying and selling of goods and
services, with compensation paid by a buyer to a seller, or the exchange of
goods or services between parties.
What are the regulatory aspect that prohibit
Insider Trading ?

SEBI prohibition
of Insider Trading Section 11(2) E of
regulation 1995 Companies Act 1956
prohibits the insider
trading
Penalties involves
• India also prohibits trading on inside
information. There are strong laws and
penalties for breach. Anyone convicted
of insider trading can be asked to
transfer proceeds equivalent to the
cost price or market price of
securities, whichever is higher.

the SEBI Act provides for penalties as high

as Rs 25 crore or three times the amount
of profits made out of insider trading,
whichever is higher. The Act also
prescribes that insider trading is
punishable with a prison term of up to 10
years.
(PROHIBITION OF INSIDER
TRADING) REGULATIONS,
SECURITIES AND
EXCHANGE BOARD
OF INDIA
 • No insider shall communicate, provide, or allow
access to any unpublished price sensitive
information, relating to a company or
securities listed or to be listed, to any
COMMUNICATION person including other insiders except where
OR such communication is in furtherance of
legitimate purposes, performance of duties or
PROCUREMENT OF discharge of legal obligations.
UNPUBLISHED • No person shall procure from or cause the
PRICE SENSITIVE communication by any insider of unpublished
INFORMATION. price sensitive information, relating to a
company or securities listed or proposed to
be listed, except in furtherance of legitimate
purposes, performance of duties or discharge
of legal obligations.
COMMUNICATION OR PROCUREMENT OF UNPUBLISHED PRICE
SENSITIVE INFORMATION.

• The board of directors shall ensure that a structured digital database is

maintained containing the names of such persons or entities as the case
may be with whom information is shared under this regulation along
with the Permanent Account Number or any other identifier authorized by
law where Permanent Account Number is not available. Such databases
shall be maintained with adequate internal controls and checks such as time
stamping and audit trails to ensure non-tampering of the database.
 In the case of connected persons the onus of
establishing, that they were not in possession

TRADING WHEN of unpublished price sensitive information,

shall be on such connected personsand in
other cases, the onus would be on the Board.
IN POSSESSION
OF
UNPUBLISHED The Board may specify such standards and
requirements, from time to time, as it may
PRICE SENSITIVE deem necessary for the purpose ofthese
regulations.
INFORMATION.
 The board of directors of every company, whose
securities are listed on a stock exchange, shall
formulate and publish on its official website, a code of
practices and procedures for fair disclosure of
unpublished price sensitive information that it would
follow in order to adhere to each of the principles

CODES OF
set out in Schedule A to these regulations, without
diluting the provisions of these regulations in any manner.

FAIR
DISCLOSURE Every such code of practices and procedures for

AND CONDUCT fair disclosure of unpublished price sensitive

information and every amendment thereto shall be
promptly intimated to the stock exchanges where
the securities are listed.
CODES OF FAIR DISCLOSURE AND
CONDUCT

• Every listed company, intermediary and other persons formulating a

code of conduct shall identify and designate a compliance officer
to administer the code of conduct and other requirements under
these regulations. NOTE: This provision is intended to designate a
senior officer as the compliance officer with the responsibility to
administer the code of conduct and monitor compliance with these
regulations.
TYPES OF INSIDER
TRADING
LEGAL
• Legal insider trading: Legal insider trading is when an
insider purchases shares of a company. But these
transactions are to be properly reported with an advance
notice to SECURITY AND EXCHANGE BOARD.
• Legal insider trading happens often, such as when a
CEO buys back shares of their company, or when
other employees purchase stock in the company in
which they work. Often, a CEO purchasing shares can
influence the price movement of the stock they own
• Example: Warren Buffett purchases or sells shares in
the companies under the Berkshire Hathaway
umbrella.
 ILLEGAL

• Illegal Insider Trading: Illegal insider trading is when someone uses non-public
material information for their own profit.
• The CEO of a company divulges important information about the acquisition
of his company to a friend who owns a substantial shareholding in the
company. The friend acts upon the information and sells all his shares before
the information is made public.
• A government employee acts upon his knowledge about a new regulation to
be passed which will benefit a sugar-exporting firm and buys its shares
before the regulation becomes public knowledge
• A high-level employee overhears some conversation about a merger and
understands its market impact and consequently buys the shares of the
company in his father’s account
Cases of Insider Trading

• Although several laws are passed to protect investments from the effects of
insider trading, incidents of insider trading are often difficult to detect because
the investigations involve a lot of conjecture.
• Cases of insider trading also tend to capture lots of media attention, especially if
the accused person is a public figure whose reputation may be at stake
• Over the years many cases of insider trading has been disclosed, yet some of them
are written in the minds of investors forever. Here are some cases that will always
be remembered:
RELIANCE vs SEBI

• Reliance Industries Limited is an Indian multinational

conglomerate company headquartered in Mumbai, Maharashtra,
India. Reliance owns businesses across India engaged in energy,
petrochemicals, textiles, natural resources, retail, and
telecommunications.
• The case pertains to sale and purchase of Reliance Petroleum
(RPL) shares in the cash and the futures segments in November
2007. This followed RIL's decision in March 2007 to sell 4.1%
stake in RPL, a listed subsidiary that was later merged with RIL
in 2009
• The Sebi, in a statement, observed that RIL had entered into a
well-planned operation with its Agents to corner the open
interest in the RPL Futures and to earn undue profits from the
sale of RPL shares in both cash & futures segments and to dump
large number of RPL shares in the cash segment during the last
ten minutes of trading on the settlement day resulting in a fall
in the settlement price.
RELIANCE vs SEBI

• Mukesh Ambani, being the chairman &

managing director of RIL, was
responsible for its day-to-day affairs and
thereby, liable for the manipulative
trading done by RIL.
• Sebi imposed a penalty of Rs 25 crore on
RIL, Rs 15 crore on Mukesh Ambani, Rs
20 crore on Navi Mumbai SEZ and Rs 10
crore on Mumbai SEZ.
R. Foster Winans VS SEC Winans
arranged a
deal where
he leaked
the contents
After the
of his
He would brokers
R. Foster column–
profile a were able to
Winans was specifically
certain make their
a columnist the stock
stock, and own profits,
at the Wall that he was
the stocks they
Street going to
featured in allegedly
Journal who detail–to a
the column gave some
wrote a group of
often went of their
column stockbrokers.
up or down gains to
called The
according to Winans in
"Heard on stockbrokers
Winans' return for
the Street”. would then
opinion. his
purchase intelligence
positions in
the stock
before the
column was
published
 R. Foster Winans vs SEC

• He was eventually caught by the SEC after

being involved in 24 influenced trades over
3-4 months.
• his case was tricky because the column was
the personal opinion of Winans, rather than
material insider information
• He was still convicted as the information
shared with the stockbrokers was not public
until his column was published. Winans
received a sentence of 18 months in prison
which was later reduced and $5000 fine.
Trade Secrets
What is a Trade Secret?

• Trade secrets are intellectual property (IP) rights on confidential information which allows a
business to have a competitive edge over their competition. This could be anything from sales
methods, distribution methods, consumer profiles, advertising strategies, lists of suppliers and
clients, etc.

• The unauthorized use of such information by persons other than the owner is regarded as an
unfair practice and a violation of the trade secret. Loss of trade secrets can cost companies millions
of dollars.
Which information can qualify as a trade secret ?

Commercially valuable information which is to be kept a secret

It should be known to a limited group of persons

It should be subject to reasonable steps taken by the rightful

holder of the information to keep it secret, including the use of
confidentiality agreements for business partners and employees.
Famous trade secrets
 • KFC
There’s quite possibly no fast-food item that’s
quite as mythical as Colonel Harland
Sanders’ Original Recipe fried chicken. This
blend of 11 herbs and spices is one of the
most tightly guarded trade secrets in the
restaurant industry. The recipe is locked
inside a vault at KFC’s headquarters in
Louisville. Even KFC’s Head Chef Bob Das
revealed that he doesn’t know the recipe.

• Coca-Cola

Perhaps the most famous trade

secret is the Coca-Cola formula.
According to a company
representative, the original formula is
written on a piece of paper stored in
a bank vault in the city of Atlanta.
Only “a small handful” of people
know the formula at any time.
 • Google

Google’s algorithm for its search engine is a

very valuable trade secret. Google uses an
algorithm that ranks websites based on many
factors including inbound links, page rank,
relevant text, anchor tags, etc. However, no
one except perhaps Larry Page and Sergey
Brin, the founders of Google, know the exact
algorithm for the Google search engine – which
has made Page and Brin billionaires.

• WD-40
WD-40 is an American brand and the
trademark name of a water-displacing spray
manufactured by the WD-40 Company
based in San Diego, California. The formula
for WD-40 Multi-Use Product is a trade
secret so protected the company never even
filed for a patent. In fact, only a single
person knows every exact ingredient that
goes into the famous formula.
 Negative Trade Secrets

• Negative information about your company can also be a trade secret,

including:
• Abandoned solutions
• Research dead ends
• Unsuccessful sales efforts
• Failed experiments
• This information could help your competitors by letting them know
what not to do, hence giving them a head start.
 • Unlike copyrights, patents, and trademarks, trade
secrets are not registered with a government

Trade
agency.
• There is no specific legislation in India to

Secret
protect trade secrets and confidential
information. Nevertheless, Indian courts have
upheld trade secret protection on basis of

Laws
principles of equity, and at times, upon a
common law action of breach of confidence,
which in effect amounts a breach of contractual
obligation.
 Discovering Trade Secrets
Proper/ Legal Methods Improper/ Illegal Methods

Misappropriation by improper means in

Trade secrets can be legally discovered by
punishable:
the following proper means:
• This includes theft, bribery,
misinterpretation, or espionage.
• Independent Invention
• Reverse engineering, a process that
Safeguards against trade secret theft
examines an existing product to
can include:
determine detailed information and
• Nondisclosure agreements
specifications in order to learn how it
• Non-compete agreements
was made and how it works.
• Work for hire agreements
• Obtaining the trade secret from
• Confidentiality agreements
published literature.
• Non-solicitation agreements
THANK YOU!!