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INTERNATIONAL JOURNAL OF LAW

MANAGEMENT & HUMANITIES
[ISSN 2581-5369]
Volume 5 | Issue 3
2022
© 2022 International Journal of Law Management & Humanities

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Insider Trading in India

SAURABH CHAKRABORTY1

ABSTRACT
The smooth functioning of the securities market, its health growth and development
depends to a large extent on the quality and integrity of the market. Such a market can
alone inspire the confidence of investors which depends on the assurance that the market
can afford investors and that they are placed on an equal footing and will be protected
against improper use of inside information. Inequitable and unfair practices like insider
trading and other security frauds can affect the integrity, fairness and efficiency of the
securities market and confidence of Investors. In India, therefore, The Securities and
Exchange Board of India (‘SEBI’) was established to protect the interests of the investors
in securities and to promote the development and regulation of the securities market and
was empowered to make regulations, consistent with the Securities and Exchange Board
of India Act, 1992 (‘SEBI Act’) by notification. Based on these lines, the SEBI introduced
the SEBI (Prohibition of Insider Trading) Regulations, 1992 (‘1992 regulations’) which
has now been repealed and SEBI (Prohibition of Insider Trading) Regulations, 2015 (‘2015
regulations’) has come into force that aims to counter the shortcomings of the previous
regulations and to curb the menace of insider trading i.e. an illegal method used by some
vested interests in the area of corporate businesses to fulfil their own monitory expectations
or cause loss to others.
The Indian company law provides that a company should prepare an annual account
showing the company’s trading results during the relevant year. It also makes it mandatory
that the company publishes its assets and liabilities at the end of the period. This has been
provided to ensure transparency in the functioning of the company. Also, the company
should call at least one meeting of its shareholders each year known as the Annual General
Body Meeting (‘AGM’) and is kept with a view to ensure and review the working of the
company. The information released in Annual Reports and Annual General Body Meetings
plays a valuable role in shaping the minds of existing and prospective shareholders.
However, persons in the company itself or otherwise concerned to the company are in
possession of certain information before it is actually made public. For example, a
Chartered Accountant, auditing the accounts of the company; directors of the company
taking decisions etc. The knowledge of this unpublished price sensitive information in
hands of persons connected to the companies puts them in an advantageous position over
others who lack it. Such information can be used to make gains by buying shares at a

1
Author is an Assistant Professor Of Law At Indian Institute Of Legal Studies, India.

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cheaper rate anticipating that it might rise or selling them before the prices fall down. Such
transaction leads to one of the most serious charges in relation to the securities market i.e.,
insider trading.
Thus, the present research paper examines the concept of insider trading in India and the
critical analysis of the 2015 Regulations formulated by SEBI for insider trading.

I. CONCEPT OF INSIDER TRADING

Insider trading is malpractice of those who are directly related to a company or body corporate
or has any relation with the company. These persons use their position to get price sensitive
information related to value of shares etc. which is unpublished.2 In layman's language, the
term "Insider Trading" is about trading with the use of inside information i.e., information that
has not yet been disclosed to the public. However, insider trading is divided into two limbs as
legal and illegal. Legal Insider trading is done mainly by corporate insiders, who can be
classified as officers, directors and employees buy and sell stocks in their own companies. But
we are more concerned with the illegal aspect of insider trading, as well, as for example, where
secretive information is disclosed or leaked out without concerning for the needs of the
investor.

As per dictionary meaning insider trading is: “trading to one’s advantage through having inside
knowledge”.3 Insider trading generally involves the act of subscribing or buying or selling of
the company’s securities, when in the possession of any unpublished price sensitive
information (‘UPSI’) about the company4. It also involves UPSI about the company to others
who could subscribe or buy or sell the company’s securities. Regulation on insider trading
clearly says that it will be considered illegal if the insiders of public limited company trade on
basis of price sensitive undisclosed information to make profit or avoid loss.5

Trades made by these insiders in the company's own stock, based on material non- public
information, are considered to be fraudulent since the insiders are violating the trust or the
fiduciary duty that they owe to the shareholders. The corporate insider, simply by accepting
employment, has made a contract with the shareholders to put the shareholders' interests before
their own, in matters related to the corporation. When the insider buys or sells based upon
company owned information, he is violating his contract with the shareholders.

2
A.K Pathak and Banu Pratap Singh, “Insider Trading in India; An analysis with special reference to V.K. Kaul
Case”, Company Law Journal, Vol.4, 2013, p. 40-48
3
Oxford Dictionary
4
Rakesh Agarwal v. SEBI (2004) 1 Comp LJ 193 (SAT)
5
SEBI v. Mefcom Capital Markets Limited

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Hence, the use of material non-public information in trading the shares of the company by a
corporate insider or any other person who owes fiduciary duty to the company amounts to
insider trading6. It has generally been defined to mean trading in the shares of the company for
gaining or for avoiding losses by manipulation of prices by persons who are in the management
of the company or are close to them, on the basis of UPSI regarding the working of the company
which they possess but which is not available to others, Most of the countries in the world with
reputed stock exchange have prohibited this.7 The rationale behind the prohibition of insider
trading is ‘the obvious need and understandable concern about the damage to public confidence
which insider dealing is likely to cause and the clear intention to prevent, so far as possible,
what amounts to cheating when those with inside knowledge use that knowledge to make a
profit in their dealings with others8. The Insider Trading Regulations under the SEBI Act
specifically prohibit dealing in securities of a listed company or proposed to be listed while
communicating or in possession of UPSI to a person who is prohibited from dealing in
securities while in possession of the information. Any insider who deals in securities ‘in
contravention of’ these provisions is guilty of insider trading. 9

II. EVOLUTION OF INSIDER TRADING LAW IN INDIA

India was not late in recognizing the harm that insider trading can inflict upon the rights of the
public shareholders, corporate governance in India and the financial markets. The first concrete
attempt to regulate insider trading was the constitution of the Thomas Committee in the year
1948, which committee evaluated the global practices in restricting insider trading inter alia,
the Securities Exchange Act, 1934. Pursuant to the recommendation of the Thomas
Committee,10 sections 307 and 308 were introduced in the Companies Act 1956. This change
paved way for certain mandatory disclosures by directors and managers, but was not very
effective in achieving the objective of preventing insider trading.

Subsequently, the Sachar Committee and the Patel Committee were constituted in the years
1978 and 1986, respectively, to recommend measures for controlling insider trading in India.
The Patel Committee had defined insider trading as “the trading in the shares of a company by
the person who are in the management of the company or are close to them on the basis of

6
Black Law’s Dictionary
7
Udai Khanna, “The Concept of Insider Trading: A Comprehensive Study”, Company Law Journal, Vol.3,2016,
p.33-46
8
Attorney General’s Reference No.1 of 1998, In re (1990) 3 Comp LJ 9 (CA)
9
Garima Srivastava, “Insider Trading Laws In India: Persisting Problems and Comparison with USA”, Company
Law Journal, Vol no. 3, 2013, p.1-13
10
P.J Thomas, “Report on the Regulation of the Stock Exchanges in India – 1948”, available at:
http://www.sebi.gov.in/History/HistoryReport1948.pdf

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undisclosed price sensitive information regarding the working of the company, which they
possess but which is not available to others”. Along with other recommendations, both the
Sachar Committee and the Patel Committee had recommended the enactment of a separate
statute for curbing insider trading.

The Abid Hussain Committee constituted in 1989 had recommended that a person guilty of
insider trading should be penalized, both in the form of civil and criminal proceeding. A
separate statute for prevention of insider trading was one of the recommendations of the Abid
Hussain Committee too. On the basis of the recommendations made by these committees, a
comprehensive legislation, ‘SEBI (Insider Trading) Regulations, 1992’ was promulgated and
brought in to force. This regulation was substantially amended in the year 2002 and was
renamed as the SEBI (Prohibition of Insider Trading) Regulations, 1992. Ever since then, the
Insider Trading Regulations have been amended 5 (five) times and the last amendment was in
the year 2011. However, SEBI (Prohibition of Insider Trading) Regulations, 1992 has now
been repealed with subsequent effect on 15th May, 2015 and the new regulations have come
into force. As on date, SEBI, the market watchdog regulates insider trading through the SEBI
Act and the Insider Trading Regulations.

III. ILL-EFFECTS OF INSIDER TRADING

Insider trading is an unfair practice, wherein the other stock holders are at a great disadvantage
due to lack of important insider non-public information. Various other disadvantages of insider
trading are as follows-

• It is fraudulent for the investors at the time of buying the shares- Insider Trading
is a dominant evil in stock markets. It is fraudulent and illegal because it is unfair to
those who do not have access to price sensitive information and when a person uses
such information to make money, he puts others at the risk of buying at a higher price
or suffering a higher loss.

• Insider trading shakes the public/investor’s confidence- Insider trading can shake
the confidence of ordinary investors or public. Too many insider trading scandals in a
condensed period of time could leave investors frustrated and wondering how they can
make any money in stocks if they are consistently being put at a disadvantage by
unscrupulous insiders.

• The corporate reputation is at stake and the overall industry gets affected-
Corporates often experience substantial negative publicity when insider trading is
detected and revealed. Such negative publicity and the resulting reputational losses
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likely have a deterring effect on informed trading Further, the executives of firms with
more reputational capital; thereby have more to lose from negative publicity, to profit
less from insider trading. It is pertinent to note that even an individual behaviour can
also damage a firm’s reputation.11

• Harms the efficiency, fairness and integrity of the capital market-Trading on inside
information, especially illegal insider trading, can cause significant harm to the fairness
and efficiency of capital markets.

IV. CHANGES IN SEBI’S INSIDER TRADING PERSPECTIVE

On 15th January, 2015, Securities Exchange Board of India notified “Prohibition of Insider
Trading Regulations, 2015” in exercise of its wide-ranging powers conferred by Section 30
of the Securities and Exchange Board of India Act, 1992. With these new regulations coming
into force, the two-decade old predecessor law i.e., SEBI (Prohibition of Insider Trading)
Regulations, 1992 was repealed with subsequent effect on 15th May, 2015.

The 2015 Regulations chalks out a stricter and more focused regulatory regime and have put
in place a stronger legal and enforcement framework for prevention of Insider Trading.
Following are the important provisions of the Regulations:

(A) Analysis Of The Definitions:

1. Insider12- Instrumental to the functioning of an insider trading regulation is the

definition of an ‘insider’. Under the Regulations, an ‘insider’ has been defined
to mean any person who is (i) a connected person; or (ii) in possession of or
having access to unpublished price sensitive information (‘UPSI’). Every
connected person is an ‘insider’ under the Regulations. An outsider i.e., a person
who is not a ‘connected person’ would qualify as an ‘insider’ if such person was
‘in possession of’ or ‘having access to’ UPSI. The Regulations, whilst not
deviating drastically from the definition under the 1992 Regulations, have
strengthened the definition of who an ‘insider’ is by expanding the definition of
‘connected person’. Further, the important part of this definition is the
possessions / having access to UPSI and not the source through which a person
is in possession of / had access to such UPSI. Onus of showing that certain

11 Organizational research suggests that corporate culture is a social control mechanism that influences
individual behaviour by encouraging conforming activities and discourages nonconforming activities (O’Reilly
and Chatman, 1996; Sun stein 1996; Sorensen, 2002)
12
Clause (g) of sub-regulation (1) of regulation 2

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person is in possession of / had access to UPSI at the time of trading would,

therefore, be on that person levelling the charge after which the person who has
traded when in possession of/having access to UPSI may demonstrate that he
was not in such possession.

2. Connected Person13- Every ‘connected person’ under the Regulations is an

insider. The qualifying test of whether or not a person would fall within the
definition of a ‘connected person’ is if a person who is or has during the six
months prior to the concerned act been associated with the company, directly or
indirectly, in any capacity including: -

➢ by reason of frequent communication with its officers; or

➢ by being in a contractual, fiduciary or employment relationship; or

➢ by being a director, officer or an employee of the company; or

➢ holds any position including a professional or business relationship

between himself and the company whether temporary or permanent that
allows such person, directly or indirectly, access to UPSI or is
reasonably expected to allow such access

This definition has been completely overhauled. Under the 1992 Regulations,
connected persons included director/person occupying position of
employee/officer. There is no reference of director in the definition of
“connected person” in the 2015 Regulations. Also, immediate relative, holding
company, associate company, subsidiary company, etc., are deemed to be
connected persons under the 2015 Regulations, unless otherwise is established.
Definition intends to bring into its ambit those persons who may not seemingly
occupy any position in a company but are in regular touch with the company
and its officers and are involved in the know of company’s operations. It is
intended to bring within its ambit those who would have access to/could access
UPSI about any company/class of companies by virtue of any connection that
would put them in possession of UPSI.

13
Clause (d) of sub-regulation (1) of regulation 2

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3. Unpublished Price Sensitive Information14 & Generally Available

Information15- The Regulations make clearer what constitutes UPSI by
defining it to mean any information relating to a company or its securities,
directly or indirectly, that is not generally available which upon becoming
available is likely to materially affect the price of the securities and shall
include: financial results; dividends; change in capital structure; mergers,
demergers, acquisitions, de-listings, disposals and expansion of business and
such other transactions; changes in key managerial personnel etc.

The Regulations further define the term ‘generally available’ to mean

information that is accessible to the public on a non-discriminatory basis.

Under the 1992 Regulations, price sensitive information would remain

‘unpublished’ if the information was not published by the company or its agents.
However, that concept has been done away with in these Regulations.
Therefore, the criteria to determine what constitutes UPSI is whether the
information is ‘generally available’ or not under the Regulations. Another key
change lies in the definition of price sensitive information in 1992 Regulations
which earlier had reference to a company only. The definition of UPSI shall
now extend to both a company and securities.

4. Compliance Officer16- This definition has been introduced for the first time in
the Regulations. The term “compliance officer” is defined as any senior officer,
designated so and reporting to the Board of directors, who is financially literate
and is capable of appreciating requirements for legal and regulatory compliance
under the Regulations. He shall be responsible for compliance of policies,
procedures, maintenance of records, monitoring adherence to the rules for
preservation of UPSI, monitoring of trades and the implementation of codes
specified in the Regulations, under the overall supervision of the Board of
directors. Similar to the 1992 Regulations, the 2015 Regulations require every
listed company to (i) formulate an internal code of conduct on insider trading;
and (ii) appoint one of its officials who is qualified to understand and implement
provisions of the regulations, as compliance officer. Although individual
persons are responsible for their non-compliance (if any), it is the duty of the

14
Clause (n) of sub-regulation (1) of regulation 2
15
Clause (e) of sub-regulation (1) of regulation 2
16
Clause (c) of sub-regulation (1) of regulation 2

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compliance office to monitor and regulate acts of the employees, and ensure
that the company is being managed as per the provisions of the regulations.

5. Trading17- Under the 2015 Regulations trading has been defined to mean and
include ‘subscribing, buying, selling, dealing, or agreeing to subscribe, buy,
sell, deal in any securities. Although, the Committee had recommended
streamlining of the definition of ‘trading’ to only include transacting in
securities by way of acquisition and disposal of the securities. The Regulation
has been kept wide so as to include ‘dealing’ in securities keeping in mind the
principal legislation i.e., SEBI Act which prohibits ‘dealing’ in securities on the
basis of material non-public information, amongst other things. Therefore, even
transactions such as creation of security interest or pledging would come within
the scope of ‘trading’ for the purpose of this Regulation.

(B) Procurement Or Communication Of UPSI18

Prohibition on insider trading consists of the following key components: (i) prohibition on
communicating UPSI by an insider (ii) prohibition on other persons on procurement of UPSI
and (iii) prohibition on trading by an insider while in possession of UPSI.

As stated above, at stark variation with the 1992 Regulations, the Regulations restricts
communication by insiders and by outsiders of UPSI of a company or its securities listed or
proposed to be listed. This provision intends to cast an obligation on all insiders who are in
possession of UPSI to handle such information with care and to deal with information with
them when transacting their business strictly on ‘need-to-know’ basis. SEBI’s intention is that
to organisations develop practices based on ‘need-to-know’ principles for treatment of
information in their possession. However, the charge of insider trading will not get attracted in
case such communication or procurement is in furtherance of legitimate purposes, performance
of duties or discharge of legal obligations.

As regards the charge under ‘trading while in possession of UPSI’, the Regulations have
provided certain circumstances in which an insider may prove his innocence.

(C) Trading Plan19

A ‘Trading Plan’ is essentially a plan comprising of all the possibilities regarding price
movements, liquidity of shares, trading structure, risks of trading business, amount of capital

17
Clause (l) of sub-regulation (1) of regulation 2
18
Regulation 3 and 4
19
Regulation 5

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to be traded20 and the like. The provision for the introduction of a trading plan is a novel
addition in the 2015 regulations. Under the regulation the trading plan is a formulation that is
done by the insider and presented to the Compliance Officer of the company for his approval.
The Compliance Officer shall on receiving permission can make the trade plan public by public
disclosure and trades as per the trade plans may be carried out. This provision intends to give
an option to persons who may be perpetually in possession of unpublished price sensitive
information and enabling them to trade in securities in a compliant manner. This provision
would enable the formulation of a trading plan by an insider to enable him to plan for trades to
be executed in future. By doing so, the possession of unpublished price sensitive information
when a trade under a trading plan is actually executed would not prohibit the execution of such
trades that he had pre-decided even before the unpublished price sensitive information came
into being. For the trading plan, SEBI has prescribed six detailed conditions. The trading plan
once approved shall be irrevocable and insider shall mandatorily implement it, without being
entitled to either deviate from it or to execute any trade in the securities outside the scope of
the trading plan. The need for corporate compliant mechanism for insiders and better regulation
of insider trading in the Indian securities market necessitated the need for such provision.21

(D) Disclosure Obligations:

The initial and continual disclosures to be made by certain categories of persons in a company
whose securities are listed on a stock exchange along with the public disclosure requirements
for the company:

The regulation provides for initial disclosures22 as follows:

• Transitional provision- Every promoter, key managerial personnel (‘KMP’) and director
of every company shall disclose their holding of securities of the company as on 15th May,
2015 (date of Regulations taking effect), to the company within 30 days of the 2015
Regulations taking effect.

• Trigger for initial disclosures- Every person on appointment as KMP or director or upon
becoming promoter shall disclose his holding of securities of the company as on date of
appointment or becoming a promoter, to the company within 7 days of such appointment
or becoming promoter.

20
Justine Pollard, Smart Trading Plans (John Wiley & Sons,2011)
21
High Level Committee Report: (2013) 6 Comp LJ 81 (Journal)
22
Sub-regulation (1) of regulation 7

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• Continual disclosures23- Under this regulation, every promoter, employee and director of
every company shall disclose to the company the number of such securities acquired or
disposed of within two trading days of such transaction if the value of the securities traded,
whether in one transaction or a series of transactions over any calendar quarter, aggregates
to a traded value in excess of Rs. 10 lakhs. Every company shall notify the particulars of
such trading to stock exchange within two trading days of receipt of the disclosure or from
becoming aware of such information.

Under the 1992 Regulations, such a continual disclosure obligation was only on promoters,
directors and officers of the company. Here it would be significant to note that the term
‘officer’ has been replaced by ‘employee’, in the 2015 Regulations. The term employee has
neither been defined in the 2015 Regulations nor a special carve out has been made only to
cover a certain class of employees, for disclosure purposes. Such a change brings all the
employees of a corporation, under the ambit of the regulations. While this may theoretically
ensure a stricter check on insider trading, it however pushes the scope of duties of the
compliance officer to vast limits. As number of employees in any large corporation would
be much greater than the number of high-ranking officials.

• Disclosure by Connected Person24: The regulation states that listed company may, at
its discretion require any other connected person/class of connected persons to make
disclosures of holdings and trading in securities of the company in such form and at such
frequency as determined by the company for monitoring compliance with the
Regulations.

A key change introduced by the Regulations is that the provision relating to initial and continual
disclosures for persons holding more than 5% shares or voting rights has been done away with.
Further, it is intended that the disclosure to be made by any persons shall also include those
relating to trading by such person’s immediate relatives, and by any other person for whom
such person takes trading decisions (regardless of whether the person has title to the trades is
in such possession or not).25

(E) Code Of Fair Disclosure And Conduct26:

The Board of every listed company is required to formulate and publish a code of practices and
procedures to be followed for fair disclosure of UPSI in accordance with the principles set out

23
Sub-regulation (2) of regulation 7
24
Sub-regulation (3) of regulation 7
25
Sub-regulation (2) of regulation 6
26
Regulation 8 & 9 read with Schedule A & B

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in a new Schedule “Schedule A” of the Regulations and sets out certain minimum standards
such as equality of access to information, publication of policies such as those on dividend,
inorganic growth pursuits, calls and meetings with analysts, publication of transcripts of such
calls and meetings etc.

Further, the board of directors of every listed company and market intermediary shall formulate
a code of conduct to regulate, monitor and report trading by its employees and other connected
persons in accordance with Schedule B to the Regulations. The Regulations further provide
every other person who is required to handle UPSI in the course of business operations such as
auditors, accountancy firms, law firms, analysts, consultants, other capital market participants
etc. are also required to formulate such a code of conduct. Therefore, even entities that normally
operate outside the capital market may be required to formulate such a code depending on their
exposure to UPSI. Also, every such person formulating a code of conduct is required to identify
and designate a compliance officer to administer the same.

(F) Presumption Of Guilt Of The Insider:

The striking difference between the 1992 and 2015 regulations is the shift in burden of proof.
Where in the earlier provisions, the presumption only related to the fact that any insider in
possession would be presumed to have traded on the basis of the possessed UPSI27, it has now
been extended to the effect that any connected person would be presumed to have access to
such UPSI28. Regulation 4(2) says that “In the case of connected persons the onus of
establishing, that they were not in possession of unpublished price sensitive information, shall
be on such connected persons and in other cases, the onus would be on the Board.” Thus,
where first, at least possession was a burden that had to be discharged by the
prosecution/accusing authority, it is now a presumption, rebuttable by the one accused of being
a connected person. Such shift has been brought to curb the menace of insider trading more
effectively and more strictly29 compared to the earlier regime.

(G) Penalties:

No separate penalties have been prescribed under the Regulations. Reference is made however
to the penalty provisions under the SEBI Act, 1992 which shall apply. As per the Act, insider
trading is publishable with a penalty of INR 250,000,000 (Rupees Two Hundred Fifty Million

27
Rakesh Agarwal vs. SEBI, Appeal No. 33 of 2001
28
Suriti Chowdhary and Shivani Vij, “New Insider Trading Norms”, Company Law Journal, Vol. 2, 2015, p.25-
32
29
High Level Committee Report: (2013) 6 Comp LJ 81

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Only) or 3 times the profit made out of insider trading, whichever is higher 30. SEBI is also
empowered to prohibit an insider from investing in or dealing in securities, declare violative
transactions as void, order return of securities so purchased or sold. Any person contravening
or attempting to contravene or abetting the contravention of the Act may also be liable to
imprisonment for a term which may extend to ten years or with fine which may extend to INR
250,000,000 (Rupees Two Hundred Fifty Million Only) or with both.

The Regulations, also, prescribe certain disciplinary sanctions such as wage freeze, suspension
may be taken by companies or market intermediaries to require due compliance of the
Regulations.

(H) Restrictions On Esop’s:

Unlike the 1992 Regulations, the 2015 Regulations do not exempt exercise of ESOPs by
employees during the trading window closure period. Further it appears that the exemption
available for trading of converted shares and subscription of fresh ESOPs within the restricted
period of six months has been withdrawn. Stock options are usually used by companies as
incentives, to be granted to its preferred employees. The changes introduced by the 2015
Regulation do little to keep employees interested, in such instruments.

Hence, the 2015 regulations appear to be promising, more practical, and largely in line with
the global approach to insider trading. They also seem to be equipped to ensure better
compliance and enforcement. There is a great responsibility on SEBI to ensure compliance of
provisions of the new regulations by the concerned corporate entities. 31 However, there are
certain points that require certain clarity from SEBI:

1) Regulation 9(2) under the Code of Fair Disclosure, there is a requirement for
companies to come up with codes for regulating, monitoring and reporting trading
activities by connected persons and fair disclosure of material information (from the
perspective of the Regulator) by the company. Compliance with such codes can be a
complicated process for companies with larger employee population.

2) Secondly, as one proceeds with regulations, there is a need felt to determine the import
of the term ‘legitimate purposes’ as used in Regulations 3(1) and 3(2). In the absence
of any clarification, the expression will have vague interpretation. However, it is
expected that there will be periodic notifications issued by the Board in the days to
come so that the regulations are interpreted in a progressive and advanced manner.

30
S.15G and S. 24 of the SEBI Act,1992
31
Divya Bhardwaj, “Regulation of Insider Trading In India”, Company Law Journal, Vol. 3,2003, p.92-99

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3) In addition to listed companies, the 2015 regulations apply to companies that are
proposed to be listed. It is unclear what “proposed to be listed” means. Does it mean
that if I get some insider information about a company which intends to go for an initial
public offering in a couple of years, I wouldn’t be able to trade in the securities of such
company? Unfortunately, it’s really unclear as to what is meant by the phrase. It may
be intended to cover companies that have filed a draft red herring prospectus with
SEBI. This lack of clarity could create some issued.

4) The definition of “connected persons” now covers anyone who has a connection with
a company that is expected to put the person in possession of insider information. The
1992 regulations covered a specific set of people under the definition of connected
person. However, the 2015 regulations cover even public servants such as judges and
bureaucrats, who may not have any professional relationship with the company, but
who may be aware of a judgment or policy which, when made public, may impact the
price of shares of the company.

5) Also, the 2015 regulations require the compliance officer of the company to monitor
trading by employees and connected persons. Given the wide ambit of the definition
of a connected person, it may be an uphill task for the compliance officer to do so.

All in all, the SEBI seems to have adopted a balanced approach but at the same time has
managed to carve out a stricter regime in the face of the dismal convictions of accused
connected persons.32

V. LANDMARK CASES ON INSIDER TRADING

There have been many voids in the SEBI Insider Trading Regulations that have been observed
over the years, eventually making it tough for the investors to repose their confidence in the
laws designed to safeguard their rights and interests against the practice of insider trading.
SEBI has time and again encountered difficulties in establishing and proving a case (beyond
reasonable doubts in case of criminal proceedings) to convict the person/s accused of insider
trading, substantially owing to the lack of evidence. Notwithstanding the difficulties in proving
them, SEBI has been prosecuting a number of high-profile insider trading cases

In Hindustan Lever Ltd v. SEBI33, one of the first cases where SEBI took action on grounds
of insider trading, Hindustan Lever Ltd. (‘HLL’) and Brook Bond Lipton India Ltd. (‘BBIL’)

32
Suriti Chowdhary and Shivani Vij, “New Insider Trading Norms”, Company Law Journal, Vol. 2, 2015, P.25-
32
33
(1998) 3 Comp LJ 473 (SAT)

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controlled by Unilever, Inc. UK were both under the same management. HLL purchased 0.8
million shares of BBIL from UTI in March 1996 two weeks prior to the public announcement
of the HLL and BBIL merger. Post announcement, the price of BBIL’S shares shot up thereby
causing losses to UTI. HLL was held liable by SEBI for insider trading. According to SEBI,
HLL had full sensitive information to its advantage, However, the Securities Appellate
Tribunal (‘SAT’) reversed the order on the ground that the information was not price sensitive
as it was reported in the media, and, therefore, was public knowledge. As a result of this case,
SEBI amended the Regulations to specifically provide those speculative reports in the media
(print or electronic) would not be treated as publication of price sensitive information.

This was followed by the case of Rakesh Agarwal vs. SEBI34. In this famous case, Rakesh
Agarwal, the Managing Director of ABS Industries Ltd. (‘ABS’), was involved in negotiations
with Bayer A.G (a company registered in Germany), regarding their intentions to takeover
ABS. Therefore, he had access to this unpublished price sensitive information. It was alleged
by SEBI that prior to the announcement of the acquisition, Rakesh Agarwal, 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 offer made by Bayer thereby making a substantial profit. The
investigations of SEBI affirmed these allegations. Bayer AG subsequently acquired ABS.
Further, he was also an insider as far as ABS is concerned. By dealing in the shares of ABS
through his brother-in-law while the information regarding the acquisition of 51% stake by
Bayer was not public, the appellant had acted in violation of Regulation 3 and 4 of the Insider
Trading Regulations. Rakesh Agarwal contended that he did this in the interests of the
company.

However, the SEBI directed Rakesh Agarwal to “deposit INR. 34, 00,000 with Investor
Education & Protection Funds of Stock Exchange, Mumbai and NSE (in equal proportion i.e.,
INR. 17, 00,000 in each exchange) to compensate any investor which may make any claim
subsequently.” along with a direction to “(i) initiate prosecution under section 24 of the SEBI
Act and (ii) adjudication proceedings under section 15I read with section 15 G of the SEBI Act
against the Appellant.” On an appeal to the SAT, Mumbai, the Tribunal held that the part of
the order of the SEBI directing Rakesh Agarwal to pay INR 34,00,000 couldn’t be sustained,
on the grounds that Rakesh Agarwal did that in the interests of the company (ABS).

Similarly, in the case of Samir.C. Arora vs. SEBI35, Mr. Arora was prohibited by the SEBI in

34
1998 SCL 311
35
(2004) 5 Comp LJ 355 (SAT)

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its order not to buy, sell or deal in securities, in any manner, directly or indirectly, for a period
of five years. Also, if Mr. Arora desired to sell the securities held by him, he required a prior
permission of SEBI. Mr. Arora in the SAT contested this order of SEBI. SAT set aside the
order of SEBI on grounds of insufficient evidence to prove the charges of insider trading and
professional misconduct against Mr. Arora.

In the case of Dilip Pendse vs. SEBI36, Mr. Dilip Pendse was director of Tata Finance Ltd and
Niskalp Investments and Trading Co. Ltd. which is subsidiary of Tata Finance Ltd. Mr.
Talaulikar was also director of the above companies. TFL came out with rights issue between
30-3-2001 and 30-4-2001. It was observed that Niskalp, a subsidiary of TFL, had suffered huge
losses which were not disclosed in the Letter of Offer. Mr. Talaulikar transferred his family
shares on 4- 4-2001 at a higher price while possessing UPSI that Niskalp had suffered losses.
It was alleged Mr. Pendse was guilty of Counselling and arranging transfer of shares while in
possession of UPSI. However, SAT held that Mr. Pendse and Mr. Talaulikar are both
professionals and was insiders therefore, Mr. Talaulikar required no advice from the Mr.
Pendse as alleged and Mr. Talaulikar is responsible as he was the director of Niskalp at the
time when the funds were transferred.

In Satyam Case, in 2011, SEBI had levied a fine of INR 5, 00,000 on a senior official of Satyam
Computer Services for not closing the trading window in time. G. Jayaraman, compliance
officer of the company allegedly failed to close the trading window during the announcement
of acquisition of Maytas by Satyam and its subsequent cancellation in December 2008. He also
did not close the window before the subsequent confession by then chairman Ramalinga
Raju in January 2009 of a massive scam. According to SEBI, since Jayaraman did not close
the trading window despite being aware of UPSI, it led to some employees and clients selling
the stock during what should have been a no-trade period.

In the Manmohan Shetty’s Case37, in 2006, SEBI charged Manmohan Shetty, the former
managing director of Adlabs Films, with insider trading for selling shares of his firm in
violation of rules while fining him Rs 1 crore for the offence. Mr. Shetty had appealed to the
SAT and contended that the sale was not based on any insider information since the decision
of the Board had already been sent to the Stock exchanges and was disseminated on the website
of the stock exchanges. It was further submitted that the sale of shares before expiry of 24 hours
of the outcome of the Board meeting being made public was purely an inadvertent and technical

36
Appeal No. 22 of 2008
37
LSI-1160- SEBI-2016-(MUM)

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error. After analysing the entire case, SAT in 2016 however, ruled that Mr Shetty did not violate
any insider trading regulations but did violate the code of conduct, formulated by the company,
by selling shares during the period when trading window was closed. In accordance with the
ruling, the fine was reduced to INR 25, 00,000 with SAT accepting Mr. Shetty’s contention of
the transaction being a technical error, without any mala fide intention.

VI. CONCLUSION
Most financial regulations require constant modifications to keep pace with the ever-evolving
market dynamics. Insider trading is no different. With a view to do away with the lacunae and
inadequacies of the 1992 Regulations, SEBI has revamped the entire framework governing
insider trading in India. Hence, under the 2015 regulations, imperative changes including
widening the scope of ‘connected persons’, strengthening the definition of an ‘insider’,
rationalising disclosure events, removing redundant provisions, among others, have been
introduced. A unique feature of the Regulations i.e., legislative notes interspersed within
provisions will be an effective tool for interpretation of these Regulations going forward.

It may be further stated that SEBI has overhauled the entire framework for regulation of insider
trading, which is seen to be a deep rooted problem in India, with a view to ensure a level-
playing field in the securities market and to safeguard the interest of the investors. This move
by SEBI will provide a much-needed boost to the Indian capital market and facilitate further
economic buoyancy. However, on digging deep, one finds that some of the changes proposed
and new concepts introduced by the 2015 Regulations lack clarity. Therefore, it is anticipated
that the new regulations are interpreted by courts and authorities in a progressive manner and
timely clarifications are issued by the capital market regulator.

*****

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