“An analysis of insider trading regulations in India”

AUTHOR – PRAGATI KESHRI, LLM, ICFAI LAW SCHOOL, THE ICFAI UNIVESITY, DEHRADUN

ABSTRACT

Insider trading has increased dramatically in many nations. It is nothing more than an insider trading in a firm’s securities based on specific, non-publicly available, and confidential knowledge about the company. An insider is someone who has access to or has obtained such confidential, non-public information about prices. Insider trading entails the Insider’s breach of fiduciary obligation. Insider trading is considered a financial crime. If handled improperly, it will harm India’s securities market, slow down foreign investment and capital inflow, and have an adverse effect on the state’s economic growth. It is also very harmful to the development of a robust securities market.

This study attempts to provide recommendations to reduce illicit insider trading in India by reviewing insider trading and its effects on the Indian securities market.

Keywords: UPSI; PIT;

INTRODUCTION

It would be incorrect to state that India has very old insider trading laws. India’s economy is still in its infancy, thus new rules and provisions are constantly being developed for meeting demands in the modern financial-sectors. India currently prohibits in accordance with insider trading the 2015 SEBI Regulations. Apart from these guidelines, the Companies Act of 2013 has specific clauses that forbid insider trading. Indian businesses are free to create their own insider trading policies, provided they follow the 2015 SEBI (Regulations).

Insider trading is the practice of trading stocks of publicly traded firms or other assets using proprietary knowledge that has not yet been released into the public domain in order to earn personally and prevent losses over the short term and long-term period. Insider trading may be lawful or unlawful; only lawful if the insider or a related party complies with SEBI regulations. Insider trading is prohibited if it occurs without adhering to the rules and procedures of the Companies Act of 2013. Insider trading is commonly viewed as unethical, but not all cases are morally questionable. Some studies suggest that a significant number of them also provide advantages to the wider investment community. India is moving towards centralized regulation, especially concerning financial institutions and foreign investments. Compliance requirements vary depending on the industry sector and geographic factors. In India, measures to prevent insider trading primarily concentrate on central supervision, specifically directed at financial institutions and foreign investments. This is demonstrated by the emphasis on centralized regulation and the diverse compliance standards tied to industry sectors and geographical locations. Furthermore, the enforcement of insider trading regulations in India aims to protect the integrity of companies, their management, and staff. While India is transitioning towards centralized regulation, particularly for financial institutions and foreign investments, compliance standards for insider trading differ based on industry sectors and regional factors. Along with centralized regulation, India’s insider trading compliance rules also consider industry segments and geographic factors. This approach ensures that the regulations are tailored to address specific requirements and risks in each sector and location. Insider trading regulations in India are predominantly influenced by centralized supervision, with a focus on financial institutions and foreign investments.

Unpublished Price Sensitive Information or UPSI

UPSI is a key component of India’s insider trading rules, which specifically aim to protect Unpublished Price Sensitive Information. The focus is on safeguarding this type of data through India’s regulations on insider trading. These regulations primarily emphasize central regulation, with a particular focus on financial institutions and foreign funds to ensure adherence to the rules. Insider trading regulations in India aims to protect the integrity of organizations, their management, and employees, by focusing on central regulation, particularly for financial organizations and foreign funds. Insider trading regulations in India aims to protect the integrity of organizations, their management, and employees, by focusing on central regulation, particularly for financial organizations and foreign funds.

What is the restriction relating to UPSI

Restrictions on Insider

• Insiders are prohibited from providing or disclosing any confidential information about a company that is listed or that is proposed to be listed, or about its securities, as per Regulation 3 of the PIT Regulations, ¹ “Communication must serve a legitimate purpose while fulfilling their responsibilities or meeting legal requirements.”

• Insiders are absolutely forbidden from not trading in securities while they possess UPSI, according to Regulation 4 of the PIT Regulations. ²If the insider with UPSI makes any purchases of securities within that time, it will be assumed that he did so based on his awareness of that information.

Until an outsider is needed to provide facts to the UPSI to perform their legal or official responsibilities, nobody should try pressuring them into doing so. Keeping integrity and silence can be safeguarded in this manner.

Regulation 8 asserts that the Directorate is answerable for establishing the rule that characterizes valid intentions as an element of the “Ethical Codes of Revelation and Behavior.” Once this guideline is executed, insiders will possess a more comprehensive perception of when it is apt to reveal the UPSI to associates, accomplices, loaners, customers, vendors, trader bankers, inspectors, bankruptcy experts, or other advisors in the standard routine of operations.

Who is an insider

According to PIT Regulation 2(1)(g), an insider is any anyone who is:

A related individual (including close family members); or “having ownership of or being able to reach confidential information.”

The PIT Regulation informs us that anyone who possesses UPSI for a valid reason will be regarded as an “insider.” Additionally, it is their responsibility to keep the UPSI a secret until it really becomes known.

“As per the definition, an insider is someone with access to UPSI, irrespective of how it was acquired. If an individual claims to have traded while in possession of UPSI, the burden of proof lies with the person making such a statement.” The accused party will have an opportunity to demonstrate that they did not possess the knowledge, did not trade, and could not access it, or that specific circumstances warranted their selling.

When a person with access to undisclosed price-sensitive information (UPSI) is in possession of such information, they are prohibited from engaging in the buying or selling of the company’s securities, except under specific circumstances:

• The block deal window mechanism facilitated the execution of the transaction.
• If the transaction is required by law or regulations and is genuine.
• If the transaction involves the use of predetermined stock options in with the relevant rules.
• In cases involving non-individual insiders, those making trade decisions and those with access to Unpublished Price Sensitive Information (UPSI) are separate entities. At the time of making trade decisions, individuals did not possess such UPSI, and sufficient precautions were taken to ensure compliance with regulations and to prevent any breach. The trades were in compliance with the trading plan provided by Regulation 5.³

Obligation of the Board of Directors of a listed company (other than those listed above) in relation to UPSI

The Table of Directors and the organization’s head might keep an inside online database that contains info on UPSI’s objective and features, plus the titles of individuals with whom it has been divided and their PANS or other legally admitted identifiers. To prevent any tampering, the database shouldn’t be outsourced and needs internal supervision.

For at least eight years after the end of the relevant transaction, the well-kept online database must be sustained. Besides, the information in the database must be upheld throughout the whole of any investigation or applying action!!!!!

Disclosure requirements in relation to UPSI

Initial disclosure requirements-

Any person seeking to become a director, key managerial staff, part of the promoter group, or a promoter must disclose any securities they possess in the company either at the time of their appointment or within a seven-day period after it.

Continual disclosure requirements-

The corporation’s top executives, chosen individuals, backers, and promoter group members must disclose all shares they have bought or sold in the past two trading periods. This disclosure is mandatory when the traded shares amount to more than Rs. 10 lakh or a predetermined threshold. Moreover, the company must inform the stock exchange about such transactions within two trading periods.

Disclosure by other connected persons-

Companies with listed securities on a stock exchange may request any related individual or group of related individuals to disclose their ownership and transactions involving the company’s securities.

Trading plans of insiders: formulation and notification of the same-

As per Regulation 5, each individual with insider information is required to develop a trading plan in advance, seek approval from the Compliance Officer, and make it publicly available. These represent the key aspects of such trading strategies:-

The duration for which the lock-in agreement remains effective is at least 12 months.

• The avoidance of overlap is necessary for an existing plan.
• Trading activities can only begin after six months following the public announcement of the plan.
• The plan must detail either the total value or quantity of securities to be traded, along with the specific trade dates or intervals.
• No trades are allowed between the 20th day before the financial period ends and the second trading day after financial results are disclosed.
• Approval of the trading plan by the compliance officer is mandatory and once approved, it becomes binding, requiring the insider to execute the plan without deviation.

Role of SEBI in regulating insider trading

Established under the Securities and Exchange Board of India Act 1992, SEBI functions as a legal entity. Section 11 of the SEBI Act outlines SEBI’s role and authority, emphasizing its vital responsibilities in safeguarding investor interests and overseeing the securities markets. In instances of insider trading accusations, SEBI can review reports from

investors, traders, or other involved parties. SEBI may assign specific officials to review the financial records and paperwork of the parties in question. Before starting an inquiry, SEBI will give the accused insider sufficient notification. The investigating team has the authority to examine all pertinent materials, including documents, records, electronic data, and other physical evidence obtained from individuals such as owners, associates, employees, directors, insiders, and others.

Procedure and penalty

India considers insider trading a serious offense under Sections 12Z and 15G of the Securities and Exchange Board of India Act, 8. These regulations are designed to protect the integrity of the securities market and prevent the exploitation of non-public information for personal profit. Section 12Z prohibits insiders, such as directors and officers, from trading company stocks if they have undisclosed, price-sensitive information. Section 15G imposes stricter rules and penalties on insiders engaged in illegal trading activities. In India, the consequences for insider trading are severe. Offenders may be fined up to 25 rupees, three times the profits gained from legal trading, or a maximum of 10 lakh rupees. These substantial fines highlight the seriousness with which insider trading is addressed in the Indian legal system. Those found guilty of insider trading could face three to ten years in prison in addition to financial penalties. The courts take into account the gravity of the offense and its impact on the securities market when making decisions. This serves as a deterrent, emphasizing the potential harm that insider trading can cause. The Securities and Exchange Board of India (SEBI), the regulatory authority for the Indian securities market, has the power to enforce further penalties like disgorgement of profits, trading restrictions, and banning individuals from certain roles within the securities industry. These measures aim to safeguard investments and promote fair and transparent market activities.

India stumbled upon the first instance of insider trading at Infosys Technologies Ltd., leading to the punishment of the company’s CEO, Sri Gopalkrishnan. Along with Gopalkrishnan, independent ruler Jeffrey Lehman was also pennywise $2000 for the identical infra-red. Mr. Lehman was hit with a fine for failing to adhere to the correct procedure for selling shares, and that bubble had also been donated to a different non-stick organization.

Means of controlling insider trading

Criminal-

Penalty’s is meant to discourages people from did something that the law forbids. Thus, enacting legislations that forbids these kinds of transactions, makes them illegal, and pursue criminals charges against those who did so be one approaches.

Civil and administrative penalties-

The enforce of multiple managerial maneuvers, such as a rejection from the industry lacking the requirement for a legal session, is absolutely a noteworthy fix. Yet, civil and managerial restraints, which might embody compensation, recompense, or reimbursement, might be more efficient solutions. Monetary detriment arises from the overseer’s power to levy penalties of 25 crores, or triple the gain achieved, but discouragement can be aptly executed in this mechanism. Sadly, the phrasing of the civil financial punishments is scripted so inadequately that it will quite likely be understood as anti-constitutional and lessened or eradicated.

Failure of SEBI to regulate insider trading-

The SEBI Insider Trading Regulations are known to have multiple drawbacks, making it hard for investors to trust the laws meant to protect their rights from trading insiders. SEBI often struggles to find enough evidence to convict those accused of insider trading due to a lack of proof. The case of Rakesh Agarwal v. SEBI in 2003 sheds light on the weaknesses in SEBI’s 1992 regulations. In this case, Bayer A.G. and Rakesh Agarwal, the managing director of ABS Industries Ltd. (ABS), were in discussions about Bayer’s potential acquisition of ABS, which involved sensitive, non-public information that belonged to Agarwal. SEBI instructed Mr. Rakesh Agarwal to deposit Rs. 34,00,000 into of the National Stock Exchange (NSE) and   the Investor Education and Protection Funds the Bombay Stock Exchange (BSE) as a safeguard for investors. This measure aims to prevent potential legal issues. Mr. Agarwal’s contribution to these funds demonstrates SEBI’s commitment to fostering a fair and transparent trading environment that prioritizes investor well-being. The Investor Education and Protection Funds are instrumental in educating investors on their rights, responsibilities, and different facets of the securities industry. They also provide a platform for resolving disputes through conciliation and arbitration. SEBI’s directive for Mr. Agarwal to support these funds represents a significant stride towards enhancing investor safeguards and instilling trust in the Indian securities sector. SEBI serves as a safety mechanism that aids investors and upholds the overall integrity and health of the market by ensuring a dedicated fund is available to address investor grievances. The terms “connected person” and “insiders” are extensively defined in the 2015 rule. The 2015 rule broadened the insider definition to encompass individuals who engage in contracts with a company but do not hold official positions that facilitate interactions with the company or its employees. These individuals possess deep insights into the company’s operations and may access price-sensitive information through their connections. The 2015 Regulation also introduced the use of trading plans to ensure compliance among insiders with access to Unpublished Price Sensitive Information (UPSI). In line with the 2015 regulations: Insiders can draft a trading plan and submit it for approval and public disclosure to the compliance officer, enabling the execution of transactions on their behalf.

Role of committees to prevent insider trading

In addition to the legislative actions, several committees have been established to focus on the problem of insider trading and propose strategies for its efficient supervision and deterrence. These committees comprise:

1. The Sachar Committee (1979): The committee led by Justice P.N. Bhagwati was formed to evaluate the Companies Act of 1956 and recommend adjustments to improve corporate governance and curb insider trading. Some of the recommendations put forth by the committee included introducing a code of ethics for directors and establishing a separate regulatory body for the securities market.
2. The Patel Committee (1987): Justice S.N. Patel headed the task force set up to assess the stock market’s functioning and recommend measures for enhancing its efficiency and transparency. The task force’s report underscored the need for increased supervision of insider trading and recommended the creation of a dedicated enforcement agency to manage inquiries and legal actions concerning insider trading.
3. The Abid Hussain Committee (1989): Headed by Justice Abid Hussain, this committee was established to assess the existing legal regulations on insider trading and suggest improvements to strengthen them. The recommendations presented by the committee included a comprehensive definition of insider trading, the creation of a separate offense for insider trading, and the implementation of stricter penalties for violations.

CONCLUSION

Those within the company mainly participate in transactions with company shares to facilitate fair and unrestricted transfer of shares on the stock market. The main objective of these rules is to encourage fair and unimpeded trading of stocks. The law aims to increase public awareness that trading using insider, non-public, or confidential information does not result in any profit.

Any sort of trade, communication, or negotiation on any topic pertains to insider trading is prohibit by insider restrictions in India. Any linked individual acting in violation of these rules will be deem to have engaged in insider trading, and SEBI may pursue legal action against them in accordance with Section 24. The topic can be ended by say that no matter what measure the regulatory bodies adopt to protect insider trading and price-sensitive inform, some peoples will always have access to this information, hence the situation will never be satisfy. These peoples have an obligation to protect this information, just as any other responsibility person would.

These defendant are typical exonerate and get no punishment. Even in situations when they are found to be at fault, they are only obliged to pay a small amount of money that is not even close to the profit they may have gained, and they are also forbidden from trade in security for the duration of the order. Consequently, the insider is ultimately content with the profit.

SUGGESTION

Education and training regarding the impacts of insider trading be very much needed for investors, companies, and insiders alike. SEBI must possess highly trained manpower, technical backup, and the political sector should not impact SEBI. More severe punishments, like imprisonment, are very much necessary to instill fear in the minds of wrongdoers. Within companies, the Compliance Officer, who needs to be independent and transparent, plays a major role in overseeing internal operations. The corporate executive officer is appointed by the board, so he cannot be entirely independent, so SEBI has to designate him as independent. Companies also need to be attentive, enhancing their governance system, timely response, and investigation of misdeeds are very critical. Insider trading doesn’t just impact the stock market, but it also tarnishes the company’s image and reputation. The current legal structure is inadequate to handle a vast securities market like India and a single regulator like SEBI with limited resources. While it functions effectively, penalties are still not sufficient. The existing laws need refinement to be more adaptable to manage a vast securities market like India.

Reference:

1. The Bombay Securities Contracts Control Act,1925.
2. Capital issue control act 1947.
3. Thomas committee report 1948.
4. The Companies Act, 2013.
5. The SEBI Act, 1992.
6. The Securities Contracts (Regulation) Act, 1956.
7. The Securities Contracts (Regulation) Rules, 1957.
8. Abid Hussein Committee report 1989.
9. Corporate governance; An Emerging Scenario, published by National Stock Exchange 2010).
10. SEBI (Prohibition of Insider trading) Regulations 2015.
11. Sachar Committee report 1979.
12. Patel Committee report 1986.
13. Justice N.K SODHI committee report 2013.
14. Corporate insider trading: literature review by Iian

CASE

1. DLF versus SEBI, Delhi HC, 100/2012.
2. RIL versus SEBI, 120/2017, SAT
3. NDTV versus SEBI, WP 3581/2019, Bombay H.C
4. Satyam Ramalinga Raju versus SEBI, C.A No. 16805 of 2015, S.C.