Insider Trading

By: Prof. K.S. Murthy

Insider Trading

SEBI (Insider Trading) Regulations 1992, [Regulation 2(c)] Insider is:– Natural person or Legal Person– Connected or deemed to have been connected

with the company, and– Access to unpublished Price – Sensitive

information– Has received or has had access

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Tests to Confirm Insider

Test of Connection:– Connected person (Direct Insider)

Director, Deemed Director, Officer or an Employee – permanent/ part time/ contract basis

Person having professional or business relationship– Deem to be connected (an indirect insider)

Organization remotely connected, Directors, Officers & Relatives – Period of connection (either present or past in time dimension)

Test of Access– Actual or presumed access– Reasonable presumption is enough

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Price Sensitive Information

Specific Matters:– Financial results, Intended declaration of

dividends, issue of shares– Major Expansion plan, Amalgamation, Merger or

Takeover, Disposal– Information affecting the earning, Change in

policies, Operations

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cont… Price Sensitive Information

Unspecified Matters:– Selective leaks to the press– Published by the company as the matters

generally known– Not generally known and likely to affect the price

of the securities

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What Comprises “Insider Trading”

Dealing in securities– Beneficiary self or third party

Communicating information– Sender of information

Counseling others for trading– Communicates and positively induces

The crux is leakage and abuse of price sensitive information

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ILL effects of insider trading

Inequitable market practice– Information asymmetry gives unfair advantage

Breach of fiduciary responsibility– Seeks to enrich self at the cost of shareholders

Conflict of interest– Company lose in terms of the appreciation of its market value

Excessive speculation– Result in sharp volatility

Market in disrepute– Impairs the investor confidence

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Information Asymmetry

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Supplier

DirectorOfficer

Access toInformation

Access to Information

InsiderGainer

PublicLoser

Public

Auditor

Relative

Information Asymmetry

Direct:

Indirect:

Banks, FIs

Code of Internal procedures and conduct

Frame a code of internal procedures and conduct Initial disclosure of interest and shareholding in a

listed company Continuous disclosure change in shareholding

and voting rights Disclosure by company to stock exchange Violation liable for action under Sec 11 or 11b

and/or Sec 24 of SEBI Act

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Model code of conduct for listed companies

Appointment of compliance officer Preservation of “Price Sensitive Information” To be handled on a “Need to know Basis” Limited access to confidential information Prevention of misuse of price sensitive

information, trading window, pre clearance of trades

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Cont … Model code of conduct for listed companies

Fresh Pre-Clearance and minimum holding period

Initial, Periodic and annual reporting Violation attract disciplinary action by

company

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Corporate Disclosure policy

Prompt disclosure of price sensitive information Overseeing Coordinating Disclosure Responding Market Rumors Timely reporting of shareholding /ownership Disclosure/ Dissemination of PSI with special

reference to analysts, institutional investor Medium of disclosure/ dissemination Dissemination by stock exchanges

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Model code of conduct for the entities

Chinese wall policy to separate “Insider Area” and “Public Area”

Restricted/ Grey list Listed intermediaries to comply both

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