Insider Trading:

Overview &
Objective
What is Insider Trading?

Insider Trading refers to a situation when person

having unpublished price sensitive information
such as financial results, expansion plans, take
over bids etc. by virtue of his or her association
with a company, trades its shares to make undue
profits.
It is a breach of a fiduciary duty or other
relationship of trust and confidence.
Insider Trading: Genesis

• Insider Trading is one of the most prevailing form of Securities Market

Offence worldwide. The genesis Insider Trading is human GREED!
• It is really difficult for persons with privileged information which could help
him to gain substantial profit or allow avoidance of loss to control the
temptation of using these privileged information
• But possession of privileged information put the person in a fiduciary
position and misusing this position is a Breach of Trust and Fraudulent act
• When a company get listed - its promoters, directors and other key
employees as well as other persons who have more information than
general investors become the trustee of Investors’ interest and are in
fiduciary duty to not to use them for their personal benefit. Thus, Insider
Trading is a Crime
Insider Trading: Privileged Information

Privileged Information is defined as:

“Information of a precise nature which has not been made public,
relating, directly or indirectly, to one or more issuers of financial
instruments or to one or more financial instruments and which, if
it were made public, would be likely to have a significant effect
on the prices of those financial instruments or on the price of
related derivative financial instruments”.
Same concept applies to every type of financial instrument.
A clearer definition of privileged information helps companies to
know what has to be publicly disclosed and therefore prevents
risk of insider trading.
Insider trading evolution and theories
International Perspective
Insider Trading: International Perspective

• Initially, Insider Trading was considered fraud under Common Law in all
major jurisdictions and there was no specific law. Later with the
development of Capital Market specific laws were formulated:
• UK Common law prohibits Insider Trading. The relevant laws are
• The Criminal Justice Act 1993, Part V, Schedule 1, and
• The Financial Services and Markets Act 2000, which defines an offence of Market Abuse
• The USA Laws against Insider Trading:
• Securities and Exchange Act of 1934 (indirect)
• Insider Trading Sanction Act, 1984
• Insider Trading & Securities Fraud Enforcement Act, 1988
• United States Securities Exchange Commission Rule 10b5-1
• European Union Laws:
• European Community Directive Coordinating Regulations on Insider Trading, 1989
• Insider Dealing and Market Abuse Act of 1994
• Financial Markets Abuse Act in 2002
• EU Market Abuse Directive 2003
 Insider Trading & Corporate Governance

Insider trading has many governance implications, affecting:

• The organization of companies;
• The duties of directors of managing boards and supervisory
boards and other corporate insiders;
• The permitted flow of information within companies;
• The disclosure duties imposed to companies.
The main problem in insider trading is conflict of interests
and the misuse of power.

Therefore, there is a strong connection between corporate

governance and insider trading.
Insider Trading: Timely & Sufficient Disclosure

 Greater concern with disclosure duties regarding privileged information.

 Companies must inform the public as soon as possible of inside information
which directly concern them.
 There should not Selective Disclosure;
 Public access to information concerning such transactions as soon as
possible
 Internet facilitates quick and cost-effective communication of price-
sensitive information to the public.
 Imposes duty to disclose such information on the company’s website.
Insider Trading: Indian Perspective
Evolution of Law

Securities & Exchange Board of India Act, 1992 04.04.1992

SEBI (Insider Trading) Regulations, 1992 19.11.1992
SEBI (PIT) (Amendment) Regulations, 2002 20.02.2002

SEBI (PIT) (Amendment) Regulations, 2003 11.07.2003

SEBI (PIT) (Amendment) Regulations, 2008
19.11.2008
SEBI (PIT) (Amendment) Regulations, 2011 16.08.2011
Evolution of Law …cont

A few Initial Judgements

Rajiv B. Gandhi, Sandhya R. Gandhi & Amishi B. Gandhi Vs. SEBI
[2008] 84 SCL 192(SAT)

• Rajiv B. Gandhi (Gandhi) appellant No. 1 is the Company Secretary and

Chief Financial Officer of Wockhardt Limited (for short the company).
Sandhya Gandhi appellant No. 2 is his wife and Amishi Gandhi (appellant No.
3) is his sister.
• Insider trading transaction:- The appellants had sold 3600 shares on
21.1.1999 (before the board meeting held on April 22, 1999 at 11.30 a.m
called for demerger) and 22.1.1999 (in the first half hour before the market
could react to the news) on the basis of unpublished price sensitive
information.

The Hon’ble SAT held that

- The words “on the basis of” are significant and mean that the trades
executed should be motivated by the information in possession of the
insider
- Facts necessary to establish the contrary being especially within the
knowledge of the insider, the burden of proving those facts is upon him
To sum up …..

INSIDER TRADING is the misuse of privileged position & breach of trust and
hence can disturb whole structure of Securities Market. It can also be a big
menace for small investors as they can loose their hard earned money in the
hands of corporate insiders, hence its effective prevention is very significant.
 The importance of policing insider trading has assumed international
significance as regulators attempt to boost the confidence of investors
 Prevention of Insider trading is necessary to create a Level Playing Field for
Investors in Capital Market
 Effective measures to prevent Insider Trading would create trust &
confidence among the Investor Communities and help to develop securities
market
Thanking you ….