Workshop : Financial Regulations 15th Nov

2022
By Dr Neetu Bhardwaz
Faculty in Finance & Research
SEBI Finance Resource Person
SEBI (PROHIBITION OF INSIDER TRADING)
REGULATIONS, 2015
 SEBI (PROHIBITION OF INSIDER TRADING) REGULATIONS, 2015
PIT Act 1992
• The rapidly advancing Indian Securities market needed a more comprehensive
legislation to regulate the practice of Insider Trading, thus resulting in the
formulation of the SEBI Regulations in the year 1992, which were amended in the
year 2002 after the discrepancies, observed in the 1992 regulations.
 
• The amendment in 2002 came to be known as the SEBI (Prohibition of Insider
Trading) Regulations, 1992. The regulations of 1992 seemed to be more disciplinary
in nature while the 2002 amendment regulations on the other hand are precautionary
in nature.
 
• SEBI issued and notified the SEBI (Prohibition of Insider Trading) Regulations,
2015 on 15th January, 2015 based on recommendations of Sodhi committee and
became effective from 15th May, 2015, by repealing the SEBI (Prohibition of
Insider Trading) Regulations 1992.
What is Insider Trading ???

• Insider Trading happens on a daily basis, legally, when corporate management

and Board of Directors buy or sell or deal with stocks of their own companies
within confines of the company policies and regulations governing the trading
 
• In other words, Insider trading refers to the practice of purchasing or selling a
publicly-traded company securities while in possession of material information
that is not yet public information. Material information refers to any and all
information that may result in a substantial impact on the decision of an
investor regarding whether to buy or sell the security.
Examples of Insider Trading:

I. 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.
II. Corporate officer, directors and employees who traded the companys securities
after learning of significant, confidentially corporate developments.
III. Employees of law, banking, brokerage, and printing firms who were given
such information to provide services to corporation whose securities they
traded.
IV. 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 fathers account.
Applicability of SEBI Insider Regulations:

• The regulations only apply in listed entities.

• In case, the company is unlisted, its listing is also pending

including listing application is pending, then also this company
will fall under this regulation.

• No applicability on private company or public unlisted company.

Meaning of Insider Trading and Insider Trading Defined?

• Securities and exchange board of India (prohibition of insider trading) regulations,

1992 does not give direct define the term Insider Trading but it defines the term:

• Insider or who is Insider?

• Who is connected person?
• What is price sensitive information?
Insider:

 Under regulation 2(e)[5] any person who is or was connected with the
company or deemed to have connected with the company and is expected to
have access to unpublished price sensitive information.

 Act defines as a company's officers, directors, or someone in control of at

least 10% of a company's equity securities. The nexus of criminalizing an
insider is for using non-public information that violates the fiduciary duty with
which the company has entrusted the person. The definition for determining an
insider provided by the Sanction Act is quantitative, whereas definition
provided by the decisions of the court is subjective in nature and holds all the
people who are in possession of price-sensitive information responsible under
Act.
Connected Person
• Regulation 2(c) of the Insider Trading Regulations defines �connected person as any
person who- Is a director[6] of a company, or is deemed to be a director of that company
by virtue of section 307(10) of the Companies Act, 1956? Occupies the position as an
officer or an employee of the company or holds a position involving a professional or
business relationship between himself and the company whether temporary or permanent
and who may reasonably be expected to have an access to UPSI in relation to that
company.
 
•  The Regulation 2(c) of the Insider Trading Regulations states that the words connected
person shall mean any person who is a connected person six months prior to an act of
insider trading.

• Face book friends are also considered as a connected persons

Price Sensitive Information
 Regulation 2(ha) of the Insider Trading Regulations defines price sensitive
information, Price Sensitive Information means any information, which relates
directly or indirectly to a company and which if published, is likely to
materially affect the price of securities of the company.
 Following are some examples of Price Sensitive Information:
 Financial results of the company.
 Intended declaration of Dividends.
 Issue of shares by way of public rights, bonus, etc.
 Any major expansion plans or execution of new projects.
 Amalgamation, mergers and takeovers.
 Disposal of the whole or substantial of the undertaking.
 Significant changes in policies, plans or operations of the company.
Case Laws:
 1. Reliance Industries:

The Securities and Exchange Board of India banned RIL from the derivatives sector for a year
and levied a fine on the company. The exchange regulator charged the company with the
intention of making profits by skirting regulations on its legally permissible trading limits and
lowering the price of its stock in the cash market.

 2. Amazon Insider Trading Case:

In September 2017, former Amazon.com Inc. (AMZN) financial analyst Brett Kennedy was
charged with insider trading. Authorities said Kennedy gave fellow University of Washington
alumni Maziar Rezakhani information on Amazon's 2015 first quarter earnings before the
release. Rezakhani paid Kennedy $10,000 for the information. In a related case, the SEC said
Rezakhani made $115,997 trading Amazon shares based on the tip from Kennedy.
 3. Rakesh Agrawal vs. SEBI: 
In this case Rakesh Agrawal, was MD of ABS industries ltd. was involved in
negotiations with Bayer A.G.(which is a company registered in Germany),
regarding their intentions to takeover ABS. the insider trading transaction here,
Rakesh Agrawal through his brother in law, Mr. I. P. Kedia had purchased shares of
ABS from the market and tendered the said shares in the open after made by Bayer
thereby making a substantial profit and thus was held for acting in violation of
regulation 3 and 4 of the insider trading regulation.
Hon'ble SAT held that: dealing in securities while possessing the unpublishes price
sensitive information is not sufficient to hold appellant guilty, the dealing should
result in an advantage to him, the law prohibits the gaining of the unfair advantage
by the insider, and the appellant has acted in the interest of the company and was
not held guilty.
Case
4. Dilip Pendse vs. SEBI:
Nishkalpa was a wholly owned subsidiary of Tata Finance Ltd (TFL), which was a listed company. Pendse was
the Managing Director of TFL.
 
1.On 31st March 2001 Nishkalpa had incurred a huge loss of Rs. 79.37 crores and this was bound to affect the
profits of Tata Finance Limited. This was basically an Unpublished Price Sensitive Information (UPSI) which
Pendse was aware. This information was disclosed to the public only on 30th April 2001. Thus, any transaction
by an Insider within the period of 31/03/2001 and 30/04/2001 was bound to fall within the scope of Insider
Trading. Dilip Pendse passed on this information to his wife who sold 2,90,000 shares of TFL held in her own
name as well as in the name of the companies controlled by her and her father-in-law. SEBI levelled charges
against Dilip Pendse for Insider Trading.

2.Thiscase testifies the fact that SEBI lacks a thorough investigative mechanism and a vigilant approach due to
which culprits are able to escape from the clutches of law. In most of the cases, SEBI failed to adduce evidence
and corroborate its stance before the Court.
An Overview- SEBI Insider Trading
Regulation:
• SEBI has notified and issued SEBI(Prohibition of Insider Trading) Regulations, 2015
on January 15, 2015. These regulations are notified to replace the earlier framework of
SEBI (Prohibition of Insider Trading) Regulations, 1992 which are in place for the past
two-decades.
• In addition to broadening the definitions of unpublished price-sensitive information,
insider and connected persons in SEBI Regulations, 2015 the legal perspective also
imposes graver consequences for company officials involved in selective exchange of
price-sensitive information.[11]
• Under the new regulations, simple correspondence of UPSI would be culpable, anyway
in prior, SEBI Regulations, 1992 simple correspondence of UPSI (without any trade)
would not be continued against. Corporates are presently needed to raise their eye
temples on uncovering the UPSI specifically.
Exceptions to Insider Trading:
• The distinction between legally permitted trading and illegal insider trading must
be carefully understood.
• It is but natural for an Insider to know some inside information of a company
which is expected of their job.
• It would be violation of human rights and would resist the rationale openly
tradable securities if Insiders are not allowed to trade for themselves. That would
be irrational. It is unreasonable to prevent advertisers of a company from
managing in their securities.
• Thus, the restriction on the corporate insider is directly or indirectly using the price
sensitive information that they hold to the exclusion of the other shareholders in
arriving at trading decisions.
• There is absolutely no restriction on insiders in trading in securities of the company
if they do not hold any price sensitive information that the public is not already
aware of. During the short while promoters and insiders can use the information
to their advantage by guessing market reaction to the news or information.
Significant Penalties

1. SEBI may impose a penalty of not more than Rs. 25 Crores or three times the amount
of profit made out of Insider Trading; whichever is higher.
2. SEBI may initiate criminal prosecution,
3. SEBI may issue order declaring transactions in Securities based on unpublished price
sensitive information,
4. SEBI may issue orders prohibiting an insider or refraining an insider from dealing in
the securities of the company.
Conclusion

 The SEBI has strengthened the laws on Insider Trading by introducing

amendments in the year 2002. Insider Trading is the misuse of Privileged
position and breach of trust which affects the whole structure of Securities
market. The Companies that are affected by Insider Trading becomes
inefficient.

The leak of price sensitive information can be beneficial to some investors

but harmful to others. The investors with the price sensitive information
takes abnormal gains at the cost of other investors and this affects the
transparency of the market. Insider Trading is the practice that is prevalent
from the start and it is not possible to end it completely, but efforts can be
made to curb this evil practice to reach at a greater extent.
References
The Companies Act, 1956.
1. Insider Trading in India�, http://www.riskpro.in/download/insider_wp.pdf, last accessed on 31st August,2020
2. Insider Trading�, https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/what-is-
insider-trading/, last accessed on 31st August, 2020.
3. Rakhda Rizwan�, �Insider Trading�, https://www.slideshare.net/rakhda_1987/insider-trading-11217548, last
accessed on 31st August,2020.
4. SEBI (prohibition of insider trading), regulation 2015.
5. As defined under section 2(13), of Companies Act, 1956.
6. Insider Trading Regulation- A Primer�, Insider_Trading_Regulations_-_A_Primer.pdf (nishithdesai.com) last
accessed on 1st September, 2020.
7. U.S. Securities and Exchange Commission�, litigation no: 23931, filed on 7th September,2017.
8. MANU/SB/0208/2003.
9. 80/2009, Date of Decision: 19/11/2009.
10. CS D Hem Senthil Raj�, �Analysis of SEBI (prohibition of insider trading) Regulations, 2015�, 18th April,2015,
https://taxguru.in/sebi/analysis-sebi-prohibition-insider-trading-regulations-2015.html, last accessed on 1st
September,2020.
11. SEBI (prohibition of insider trading) Regulation, 2015�, https://www.icsi.edu/media/portals/70/mss165.pdf,
last accessed on 1st September,2020.