All about Insider Trading

Introduction

In The Year 2004 , the listed company where I was working in Abu Dhabi,UAE had a public issue of 3.00 Million Shares @ AED 10 per share with a premium of AED 100 Per Share totaling about AED 330 Million Dirhams, During those days there was no share registry companies in the UAE at that point of time and we 3 CA’s along with our Assistants made the allotment of shares by using the MS Excel sheet and there were no issues whatsoever with respect to allotment of shares, but after the IPO was over we were made to sign a Confidential document which expressly barred the 3 CA’s in charge of the 1holding and 2 Subsidiary company’s from dealing in our own company shares and this document was signed by all the 3 of us and any violation of the document was an immediate arrest& Heavy Financial Penalties, you know the laws of UAE are quite strict and that was the first time in my lifeWe came to know about insider trading and quarterly reporting to the stock exchanges which in our case was Present Abu Dhabi stock Exchange (ADX)but it was known earlier as (ADSM)

So what is insider trading?

Let us take the explanation given by the US Securities and exchange commission on the same issue because the US is a matured market as far as Stock Markets Are concerned and it becomes more important to safeguard the interests of the stakeholders& Share Holders, the public Confidence is built upon That, even our PM Modijiemphasizes us to be very clear & Focussed while presenting an audited balance sheet because as per his words there are many interested parties sitting across India who have faith the Balance Sheet of a company and so the financials should represent a true and fair view. Any deficiency in reporting may lead to a monetary loss to the stakeholders.

Insider Trading

Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, on the basis of material, non-public information about the security. Insider trading violations may also include "tipping" such information, securities trading by the person "tipped," and securities trading by those who misappropriate such information.

Examples of insider trading cases that have been brought by the SEC are cases against:

• Corporate officers, directors, and employees who traded the corporation's securities after learning of significant, confidential corporate developments (This has happened in many top companies in India in the recent past
• Friends, business associates, family members, and other "tippees" of such officers, directors, and employees, who traded the securities after receiving such information which is also known as UPSI or Unpublished Price Sensitive Information / Heard In the Street
• Employees of law, banking, brokerage, and printing firms who traded based on information they obtained in connection with providing services to the corporation whose securities they traded as part of the normal business dealings and periodical business compliance.
• Government employees who traded based on confidential information they learned because of their employment with the government since some of the filings have to be done on a regular basis.
• Political intelligence consultants who may tip or trade based on material, non-public information they obtain from government employees and
• Other persons who misappropriated, and took advantage of, confidential information from their employers, family, friends, and others.

Because insider trading undermines investor confidence in the fairness and integrity of the securities markets, the Securities and Exchange Commission (SEC) has treated the detection and prosecution of insider trading violations as one of its enforcement priorities.

So what does our Companies Act of 2013 say about insider trading, it says as per Section 195 of the Companies Act 2013.

Prohibition on insider trading of securities

• No person including any director or key managerial personnel of a company shall enter into insider trading: Provided that nothing contained in this sub-section shall apply to any communication required in the ordinary course of business or profession or employment or under any law.

Explanation For the purposes of this section,

(a) Insider trading means

1. i) An act of subscribing, buying, selling, dealing, or agreeing to subscribe, buy, sell or deal in any securities by any director or key managerial personnel or any other officer of a company either as principal or agent if such director or key managerial personnel or any other officer of the company is reasonably expected to have access to any non-public price-sensitive information in respect of securities of the company; or
2. ii) An act of counseling about procuring or communicating directly or indirectly any non-public price-sensitive information to any person;

(b) 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.

(2) If any person contravenes the provisions of this section, he shall be punishable with imprisonment for a term which may extend to five years or with a fine which shall not be less than five lakh rupees which may extend to twenty-five crore rupees or three times the amount of profits made out of insider trading, whichever is higher, or with both.

Let me take one practical case of insider trading which took place in a famous watch company in India where SEBI Fined 6 Employees on charges of Insider Trading being employees of the company

In six separate orders, SEBI said these individuals were employees or designated persons of the company at the time of the violation and had transacted in the scrip on two separate occasions in the financial year 2018-19.

The total traded value of the shares by each of them was in excess of Rs 10 lakh, which they failed to disclose to the company within two working days in accordance with the prevalent insider trading norms.

The notices argued that they were unaware of the SEBI Act, PIT regulations, and the company’s code of conduct for the prevention of insider trading, but SEBI rejected their claims. SEBI had received a letter from the company, intimating the regulator about contravention of insider trading norms, which led to a subsequent investigation by the market regulator.

Similar cases were reported from one of the IT majors where an Accounting Department employee who had clear news about the bagging of a prestigious project and he passed it on to his colleague in the same firm and who took a position and made a profit of almost 2.6 Cr in the stock market before SEBI took action based on the person’s transaction history.

CONCLUSION

Insider trading cannot be erased completely because as Gautham Buddha said “Desire is the root cause for misery “and this Desire will be an influential part on the human being to commit a sin for self-gratification, though the penalties are stiff before we enforce it strictly such practice will continue unabated.