INSIDER TRADING

Prepared by CA
Membership No. 116288
Meaning of Insider trading

 Insider trading is the trading of a public company's stock or

other securities (such as bonds or stock options) by individuals with access
to nonpublic information about the company.
 Insider trading refers to a situation where in a person by virtue of his position
to access unpublished price sensitive information of the company, gains
such access and subsequently uses the information obtained for his or her
personal benefits.
As per clause 2(e)of SEBI regualtions
“Insider”means any person
• Who is or was connected to the company or
• Is deemed to have been connected with the company, and
• Who is reasonably expected to have access, by virtue of such connection,
to unpublished price sensitive information, in respect of securities of the
company or
• Who has received or
• Has had access to such unpublished price sensitive information
clause 2(k)of SEBI regualtions “unpublished
price sensitive information means,

• Information which is of concern, directly or indirectly to a company, and

• Is not generally known or published by such company for general
information,
• But which if published or known
• Is likely to materially affect the price of securities of that company in the
market
Insider trading is illegal & unethical

 Insider trading is an unethical practice for two reasons:

 (1) It is unfair. Insiders have access to information that is not given to the
public. Unequal possession of information is an advantage that cannot be
competed away because this advantage depends on a lawful privilege to
which an outsider cannot acquire access.
 (2) On a utilitarian basis. The greatest good for society is not achieved in
the long term. It is true that insider trading may increase market efficiency
in the short-term. Yet, insider trading may in fact, decrease efficiency in the
long term.
Negative consequences for investors
and markets
 Out weigh short term market efficiency
 Decreases overall trust in the markets
 Loose of confidence of investors
Popular Insider trading Scams

 Harshad Mehta in 1992

 Ketan Parikh in 2008
 Raj Rajaratnam in 2009
 TV tycoon Martha Stewart
 Enron the energy company
 Samir Arora in 2008
Legal or Illegal Insider Trading

 Insider trading can mean that a person buys or sells stock based on
information that is not available to the public. The person may be a
corporate officer, director employee or someone who has received the
non-public information. Insider trading can be legal if the trading occurs on
the basis of information which is available to the public.
 Illegal insider trading is very different than legal insider trading. A person
who engages in illegal insider trading may work for the company that he
buys the stock for, but does not necessarily have to. The key is that the
person who buys or sells the stock acts on insider information (not public
information) in violation of the law.
 These are some of the many examples of insider trading that occur. Insider
trading is a white collar crime and a person who has been found guilty of
insider trading can be sent to prison.
Examples of Insider Trading

 Legal Insider Trading Examples

1. A CEO of a corporation buys shares of stock and reported to the Securities and Exchange
Commission.
2. An employee of a corporation exercises his stock options and buys shares of stock in the
company that he works for.
3. A board member of a corporation buys shares of stock in the corporation. The trade is
reported to the Securities and Exchange Commission.
 Illegal Insider Trading Examples
1. A board member of a company knows that a merger is going to be announced within the
next day or so and that the company stock is likely to go way up.
2. A lawyer representing the CEO of a company learns in a confidential meeting that the
CEO is going to be indicted for accounting fraud the next day. The lawyer shorts 1,000
shares of the company because he knows that the stock price is going to go way down
on news of the indictment
SEBI (Prohibition of Insider Trading)
Regulations,2015
Significance
 Insider trading invokes severe civil and criminal penalties not only on the insider but
also on Company in certain circumstances under the Securities and Exchange Board
of India (SEBI) Act, 1992.
 Onus of proof that they don’t possess UPSI on Insiders in case of connected persons
 SEBI can impose fines, severe penalties
 Maximum penalty of Rs. 25 Crores or 3 times of profits made (Sec 15G)
 Punishable with imprisonment up to 10 years ( Sec 24 of SEBI Act)
 Reputation risk to Insider and Company
 Board is responsible to report on effective systems and on Compliance of all laws (
Sec 134 of Companies Act, 1956)
 Insider who are employees who are not in compliance may face disciplinary actions
from Company
 Compliance officer shall report to Board about violation of rules
Role of Compliance Officer

 “compliance officer” means any senior officer, designated so and reporting

to the board of directors or head of the organization in case board is not
there,
 who is financially literate and is capable of appreciating requirements for
legal and regulatory compliance under these regulations and
 who shall be responsible for compliance of policies, procedures,
maintenance of records, monitoring adherence to the rules for the
preservation of unpublished price sensitive information, monitoring of trades
and
 • the implementation of the codes specified in these regulations under the
overall supervision of the board of directors of the listed company or the
head of an organization, as the case may be;
Disclosures of trading by insiders

 General provisions.
 (1) Every public disclosure under this Chapter shall be made in such form as may be
specified.
 (2) The disclosures to be made by any person under this Chapter shall include those
relating to trading by such person’s immediate relatives, and by any other person for
whom such person takes trading decisions.
 (3) The disclosures of trading in securities shall also include trading in derivatives of
securities and the traded value of the derivatives shall be taken into account for
purposes of this Chapter: Provided that trading in derivatives of securities is permitted
by any law for the time being in force.
 4) The disclosures made under this Chapter shall be maintained by the company, for
a minimum period of five years, in such form as may be specified.
Initial Disclosures

What to disclose Applicable to

 Holding of securities of Company  Designated Persons
before June 15, 2015

 Holding of securities of Company

 Promoter, Key Managerial Person,
on appointment as key
Director
managerial personnel or Director
or upon becoming promoter
within 7 days of such appointment
Continual Disclosures

What to disclose Applicable to

 Number of Securities acquired,  Promoter, Director, Employee
disposed within 2 trading days of
transaction if
•Transaction or series of
transactions in calendar quarter in
excess of Rs.10 Lakhs
 Notify to stock exchange the  Company
particulars of trade within 2
trading days of receipt of
disclosure
CODES OF FAIR DISCLOSURE AND
CONDUCT

Code of Fair Disclosure.

 (1) 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 set out in Schedule A to these regulations, without diluting the
provisions of these regulations in any manner.
 (2) Every such code of practices and procedures for 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
 Code of Conduct.
 (1) The board of directors of every listed company and market intermediary shall formulate
a code of conduct to regulate, monitor and report trading by its employees and other
connected persons towards achieving compliance with these regulations, adopting the
minimum standards set out in Schedule B to these regulations, without diluting the
provisions of these regulations in any manner.
 (2) Every other person who is required to handle unpublished price sensitive information in
the course of business operations shall formulate a code of conduct to regulate, monitor
and report trading by employees and other connected persons towards achieving
compliance with these regulations, adopting the minimum standards set out in Schedule B
to these regulations, without diluting the provisions of these regulations in any manner
 (3) Every listed company, market 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.
 THANK YOU
CA xyz