Scribd
Upload
18 views4 pages

Insider Trading

investment and security law

Uploaded by

Malika
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
18 views4 pages

Insider Trading

investment and security law

Uploaded by

Malika
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 4

INSIDER TRADING

INRODUCTION
Insider trading—the practice of buying or selling a company's securities based on material,
non-public information—has long been a contentious issue in financial markets. While the
term often evokes images of corporate executives secretly profiting from inside knowledge,
the reality is more complex. Some forms of insider transactions are perfectly legal, while
others can result in severe criminal penalties.
"The securities laws use 'insider' in different ways," said Marc Fagel, a lecturer at Stanford
Law School and former U.S. Securities and Exchange Commission (SEC) regional director.
"There are statutory insiders (officers, directors, 10% shareholders) who have certain legal
duties, but 'insider' for insider trading purposes is much broader."
Understanding Insider Trading
The notion of insider trading hinges on who is considered an "insider" and what constitutes
"material, nonpublic information," Fagel said. "It can be anyone with a duty to the company
—a low-level employee who is not a statutory insider still has a duty not to trade stock on
nonpublic information; a temporary insider (like a companies outside lawyers and
accountants) who receives nonpublic information has a duty not to trade."
The SEC defines an insider as "an officer, director, 10% stockholder and anyone who
possesses inside information because of his or her relationship with the Company or with an
officer, director or principal stockholder of the Company." Such trading is illegal,
the SEC notes, when it's "the buying or selling a security, in breach of a fiduciary duty or
other relationship of trust and confidence, based on material, nonpublic information about the
security."
Given the above, we can define critical terms within insider trading rules as follows:
1. "Insiders"
 Corporate insiders: Officers, directors, and employees of a company.
 Significant shareholders: Those who own more than 10% of a company's
securities.2
 Temporary insiders: Individuals who receive material, nonpublic information under
a duty of trust and confidence, such as lawyers, accountants, consultants, or other
professionals working with the company.
 Those who receive such information from insiders: Those who receive material,
nonpublic information from an insider and are aware or should be aware that the
information is not to be used to trade for profit.

2. "Material"
Material information is anything that could substantially affect an investor's decision to buy
or sell a security. Examples of topics traded on that led to SEC enforcement actions include
the following:
 Upcoming mergers or acquisitions
 Significant changes in financial performance
 New product launches or regulatory approvals
 Major changes in senior management
3. Non-public
This information hasn't been disseminated to the general public and is not readily available
through ordinary research or analysis. It's confidential or restricted to a select group of
individuals within a company or those with a special relationship to the company.
OVERVIEW OF THE SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)
ACT
SEBI's Role
SEBI is the primary regulator of the securities market in India, responsible for protecting the
interests of investors and promoting the development of the capital market.
The SEBI Act empowers the regulatory body to frame rules and regulations to prevent unfair
trade practices, including insider trading.
SEBI has the authority to investigate, adjudicate, and impose penalties on individuals and
entities found guilty of insider trading violations
PROHIBITED PRACTICES UNDER THE INSIDER TRADING LAW
 Trading on Inside Information
Using confidential information to buy or sell securities for personal gain is a clear violation
of the law.
 Tipping Off Others
Providing insider information to others, allowing them to trade on the basis of that
information, is also prohibited.
 Breach of Fiduciary Duty
Insiders who misuse their position of trust and confidence to benefit themselves or others are
subject to legal action
EXEMPTIONS AND DEFENSES TO INSIDER TRADING
 Public Disclosures
Trades based on information that has been publicly disclosed and is readily available to all
investors are generally exempt from insider trading laws.
 Inadvertent Disclosure
Individuals who receive insider information without their knowledge or due to an honest
mistake may have a valid defense against insider trading allegations.
 Compliance Programs
Companies with robust insider trading compliance programs and employee training can
demonstrate their efforts to prevent such violations
ENFORCEMENT MECHANISMS AND PENALTIES
 Investigation
SEBI has the authority to investigate suspected insider trading cases, gather evidence, and
initiate legal proceedings.
 Adjudication
Insider trading cases are adjudicated by SEBI's Adjudicating Officer, who can impose
monetary penalties and other sanctions.
 Penalties
Violators can face fines up to three times the profit made or loss avoided, as well as potential
imprisonment and market bans.

PENALTIES FOR INSIDER TRADING IN INDIA


The penalties for insider trading in India are governed by the Securities and Exchange Board
of India (SEBI) under the SEBI Act, 1992 and the SEBI (Prohibition of Insider Trading)
Regulations, 2015.
1. Financial Penalties
Monetary Fines: SEBI can impose fines ranging from ₹5 lakh to ₹25 crore or three times
the amount of profits made or losses avoided, whichever is higher.
Compensation to Affected Parties: SEBI may direct the insider trader to compensate the
parties who suffered financial losses due to insider trading.
2. Criminal Penalties
Imprisonment: Insider trading can lead to imprisonment for a term extending up to 10 years.
Fine: In addition to imprisonment, a fine can be imposed, which may vary based on the
severity of the offense.
3. Disqualification and Suspension
Disqualification from Office: Offenders may be disqualified from holding positions as
directors or key managerial personnel in any listed company.
Suspension of Trading: SEBI has the authority to suspend the trading of securities in cases
of significant insider trading violations.
CHALLENGES IN ENFORCING INSIDER TRADING LAWS IN INDIA
1. Complex and Sophisticated Schemes
Advanced Techniques: Use of sophisticated methods and technology to hide insider trading
activities.
Cross-Border Transactions: Difficulty in tracking cross-border insider trading due to
jurisdictional issues.
2. Evidence Collection
Lack of Clear Evidence: Challenges in obtaining direct evidence of insider trading.
Data Privacy: Restrictions on accessing private communications and financial records.
3. Regulatory and Institutional Constraints
Limited Resources: Insufficient resources and manpower for comprehensive investigations.
Coordination Issues: Need for effective coordination between regulatory bodies, law
enforcement & international agencies.
4. Legal and Procedural Challenges
Complex Legal Procedures: Lengthy and complex legal processes that can delay justice.
Proving Intent: Difficulty in proving the intent behind insider trading activities.
5. Market Dynamics
Market Volatility: Fluctuating market conditions can obscure patterns of illegal trading.
Anonymity in Trades: Use of anonymous trading accounts complicates tracking.
6. Awareness and Training
Lack of Awareness: Insufficient awareness and understanding of insider trading regulations
among market participants.
Training Needs: Need for continuous training and education for regulators and market
players.

You might also like