ROLE PLAYED BY SEBI IN RESTRICTING INSIDER TRADING

Coverage

1. Abstract
2. Introduction
3. Governing regulations
4. Who is an insider
5. Definition
6. Objectives
7. Data& analysis
8. Suggestions & recommendations
9. Conclusion
10.References
 Abstract:

Since the empowerment of the Securities and Exchange Board of India (SEBI)
through an Act of Parliament in 1992, SEBI has come up with a number of initiatives
aimed at regulating and developing the Indian securities market and improving its
safety and efficiency. These initiatives have made an impact on nearly every aspect
of the market. Some of those initiatives have transformed the market fundamentally.
Particularly noteworthy is the growth in the following:

 Market capitalization
 Number of listed firms
 Trading volumes and turnover both in the spot and futures markets.

There is a growing network of financial intermediaries that operate in a highly

competitive environment while being governed by a tight set of norms. India has one
of the most sophisticated new equity issuance markets. Disclosure requirements and
the accounting policies followed by listed companies for producing financial
information are comparable to the best regimes in the world. The Indian securities
market is among the safest and the most efficient trading destinations internationally.

Keywords Keywords: Securities and Exchange Board of India (SEBI), Indian Securities
Market, Primary Market, Secondary Market
 INTRODUCTION:
Insider trading is one of the most violent crimes on the faith of fair dealing in a capital
market. The scope and stringency of the violation and penalties differ wildly from country to
country. Trading by an insider of a company in the shares of a company is not per se a
violation of law. For instance, a person (an investigative journalist for example may
interview an insider and thus become one) may come across insider information by his
perseverance in uncovering a corporate fraud and disclose the fraud. A person can create
inside information by his future actions, for instance a future tender offer bidder knows that
the price of the target company will go up by his actions. In fact trading by insiders,
including directors, officers and employees of the company in the shares of their own
company is a positive feature, which companies should encourage because it aligns its
interests with those of the insiders. What is prohibited is the trading by an insider in breach
of a duty of trust or confidence in the stock of a company on the basis of non-public
information to the exclusion of others. Insider trading violations may also include "tipping"
such information and securities trading by the person "tipped".
Although the precise explanation of Insider Trading is very difficult to define, the following
activities of an insider constitute insider trading:

1) Taking advantage of inside information with full knowledge of the facts by dealing for his
own account or for the account of a third party, either directly or indirectly, in transferable
securities to which the inside information relates;
 2) Disclosing inside information to a third party unless such disclosure is made in the
normal course of the exercise of his employment, profession or duties.

 GOVERNING REGULATIONS:

Securities & Exchange Board Of India Act, 1992 SEBI (Insider Trading)
Regulations, 1992 SEBI (Prohibition of Insider Trading) (Amendment)
Regulations, 2002 SEBI (Prohibition of Insider Trading) (Amendment)
Regulations, 2003 SEBI (Prohibition of Insider Trading) (Amendment)
Regulations, 2008 SEBI (Prohibition of Insider Trading) (Amendment)
Regulations, 2011 SEBI (Prohibition of Insider Trading) Regulations, 2015

 HISTORY BEHIND INSIDER TRADING IN INDIA:

Insider trading in India was unhindered in its 130 year old stock market till about 1970. The
earliest record of dealings in securities in India traces back to East India Company. The first
Indian legislature to regulate securities market was Bombay Securities Contract Act, 1925, it
was enacted to regulate purchase and sale of securities. However, the legislature had several
shortcomings which resulted into investors making huge losses during the period 1928 to 1938.
Therefore government was compelled to appoint certain committees to assess the
shortcomings of the legislation.

Thomas Committee had pointed out the lack of a special legislation to deal with “unfair use of
insider information” in 1948 itself, it took a few decades to actually formulate a legislation to
curb insider trading. In 1979, the Sachar Committee recommended amendments to the
companies Act, 1956 to restrict prohibit the dealings of employees. Penalties were also
suggested to prevent the insider trading. In 1989 the Abid Hussein Committee recommended
that the insider trading activities may be penalized by civil and criminal proceedings and also
suggested the SEBI formulate the regulations and governing codes to prevent unfair dealings.
  Who is An Insider?

The concept of 'Insider' is very important one, and on this concept only, the whole
play of insider trading rests. Broadly, there are two types of insiders—Primary
Insiders and Secondary Insiders, A primary insider is a person who has access to
inside information by virtue of his relationship to an issuer of securities. While a
secondary insider is person who acquires inside information from a primary insider.

Above explanations of an insider, bring a concluding definition of the insider and that is
what explained by Greek law, "a person becomes an insider if he acquires confidential
information as a result of offering services under any capacity on a permanent or
temporary basis to an issuer or for an issuer".

DEFINITIONS

1. INSIDER Regulation 2(g): Insider is the person who is “connected” with the company,
who could have the unpublished price sensitive information or receive the information from
somebody in the company.

2. TRADING Regulation 2(l):

Trading means and includes

1. Subscribing
2. Buying
3. Selling
4. Dealing
5. Agreeing to buy sell, subscribe, deal in any securities.

3. INSIDER TRADING: Insider trading is dealing in securities of a listed company by any

person who has knowledge of material “inside” information which is not known to the general
public.

1. Objective:
This memorandum places before the Board to proposed amendments to SEBI (Prohibition of
Insider Trading) Regulations, 2015 (hereinafter referred to as PIT Regulations). The proposed
amendments to PIT Regulations are enclosed as Annexure A and draft amendment regulations are
enclosed as Annexure B.
Finding and Analysis

On the basis of the experts opinion survey and case study a various world Famous insider
Trading Cases and other source the following are the finding:-

On paper, India's laws on insider trading are more stringent than international ones. From
merely barring insiders from trading on the basis of unpublished price-sensitive
information, the laws have moved on to prohibiting anyone in the possession of such
information from trading.
"Insider Trading is victimless Crime" the following quote here in suggested that this crime is
not done with an intention to effect the financial position of the General Investor. But
without any intention, the general investor comes into this trap and is effected largely.
 The "Close window Scheme before 24 hr. of SEBI also seems as a failure because all the
parties that trade on the basis of inside information buy or sell the securities well before 24
hrs. The window is closed for them to trade.
 Despite the control and regulation restriction imposed on insider trading at stock exchange
in India or all over the world, these laws have not been effective to curb these kinds of
activities within the stock exchange.
In recent amendments, the SEBI is including insider trading under "Prevention of Money
laundering of Act” (PMLA) so that the punishment for the inside Trader are sever and they are
afraid to indulge in such kind of trading activity.

 Data and Methodology:

We use a proprietary data set on insider trades provided to by the India’s largest stock
exchange, National Stock Exchange (NSE) of India. The dataset contains 18,276 insider
transactions reported for all listed firms in NSE for the period between January 1, 2007 to
December 31, 2009. Given that the regulation was introduced for public discussion during
January 2008 and later imposed during October 2008, we exclude 2008 for pre and post
regulation comparison. Hence, our pre-regulation period is year 2007 and the post-regulation
period is year 2009. The dataset covers 13 company name, individual insider name, mode of
trade (market transactions, ESOPs and gifts etc.) side of trade (purchase or sale), number of
share traded, and date of intimation to company and date of announcement to the stock
exchange. Since in this study, we study those trades that are encouraged by the special
information, we exclude stocks acquired by the exercise of options or through compensation
plan (ESOPs), gifts, and private sales. Moreover, under SEBI prohibition of insider trading
regulations1992 Regulation 13(1) and 13(2), every listed firm’s directors and shareholders are
required to disclose their interest or holding as an initial disclosure. As these kinds of disclosure
of interest or holding are not an outcome of open market trading, they are not considered for
analysis. Also, the short-swing profits regulation does not cover employee stock options.

Suggestions and Recommendation

With the knowledge gained various source and on the basis of finding and analysis of the
various aspect of insider trading some of the suggestion are stated here below.

 There should be China's wall constructed between the department having price
sensitive information and other departments of companies and outsider's who deal
with the Company. So that they do not take advantage of price sensitive information
and a proper list of all information, which are "Price Sensitive" should be maintained
so that such information is taken extra care when dealing with such information.
 The Companies should disseminate price sensitive information to stock exchange on
continuous and immediate basis and should also improve investor & access to their
public announcements.
 SEBI should make a law/or appoint an Committee that can bring in cases of insider
Trading well before such trading take place in the stock market so that interest of
general investor is safe guarded.
 SEBI should disallow the directors/officer, designated employees of the companies
to buy or sell the shares well before some important announcements are to be
made and which effect the share market.

Conclusion
According to the recent survey India is the largest hub of insider trading, which has
determent the interest of individual investors and their confidence in the capital market
because of the non-availability of proper monitoring authority to investigate and prosecute
insiders. If such activities continue the basic function of stock exchange i.e. capital
formation will be reduced as general investors trust will be lost on functioning of stock
exchange.
"Complaining about insider trading without finding a workable solution is like crying
that the government should do something about smoking as it causes cancer, but doing
nothing."
Quote By Trading Guru
Same is the situation with the Indian Government and SEBI both have not been
successful to curb insider trading. Though SEBI is now making some efforts to
prevent insider to trade in stock exchange and disturb the main functioning of it.
Efforts made by SEBI are on a slow pace which needs to be fasten up otherwise this
kind of activities will loses the trust of general investors.
References
 FISCHER, DONALD E. AND RONALD J. 1994, SECURITY ANALYSIS AND PORTFOLIO
MANAGEMENT, 5TH EDITION.
 S BHAT, 2009 BUILD UNDERSTANDING OF THE INVESTMENT ENVIRONMENT.
 S KEVIN, 2015 SECURITY ANALYSIS AND PORT FOLIO MANAGEMENT.