INTRODUCTION
The stock market shapes the foundation of any financial structure of any country because it helps in increasing expansion and investment by uniting companies and individuals who put their money into them. In any case, the effective functioning of this capital market can only be guaranteed if it remains stable. To maintain the stability of the market there is a need to protect the trust of investors in the operation and control of this market. But this trust of investors is shaken by various securities exchange misconducts and malpractices which further results in impeding the development of the market in which ‘Insider Trading’ is the most uncontrolled, critical, and enormous. In any capital market, malpractices of Insider trading are perhaps the hardest to regulate. To introduce this topic, insider trading can be defined as an action of purchasing and selling of securities by an individual having UPSI (unpublished price sensitive information) of the company before it is accessible to the common public intending to create irregular profits and escape losses.
WHAT IS INSIDER TRADING?
As this term suggests, the literal meaning of Insider trading is the illegal trading of a company’s bonds, shares, and securities to other places and the information which is confidential and concealed from the common public. Henry G. Manne defines ‘Insider Trading’ as: “Insider trading generally refers to the practice of corporate agents buying or selling their corporation securities without disclosing to the public significant information which is known by them but which has not affected the price of the security.”[1] The term is defined in Section 2(e) of the SEBI Prohibition of Insider Trading Regulations Act, 1992 while there is no section in the Company law Act that defines illegal trading. It can be both legal and illegal depending on when the insider makes the trade. [2]Trading in UPSI is illegal but not all insiders trading are barred by law. Many senior staff of the company will regularly keep material information and yet time to time trade in shares, for example selling their ESOPs, etc., for their requirements. Note that if such trades are unveiled to the stock exchanges as per SEBI rules, it isn’t illegal.[3]
LAWS AND REGULATION REGARDING INSIDER TRADING IN INDIA
With the fast extension of the financial and business sectors in the country, the offenses related to monetary breaches were likewise at an ascent. To consolidate the Indian economy with the world economy there have been made various new financial policies with the expectation to open some ways of foreign investment extending in India. These events prepared for setting up insider trading laws in the country. In April 1988, the parliament of India introduced the Securities and Exchange Board of India to manage the securities exchange market and ensure the interest of the investors. SEBI was established under the general management of the Central Government’s Ministry of Finance. Before long, after, SEBI Act, 1992 was enacted by the parliament to provide legislative support and statutory status to SEBI. Under this Act, SEBI must ensure to protect the investors and control the securities market. “Counteraction of Insider Trading” is one of the obligations that are explicitly specified in the Act.[4]
Section 2(e) of this act defines insider as “Insider” means any person who,
- is or was connected with the company or is deemed to have been connected with the
Company and is reasonably expected to have access to unpublished price sensitive
Information in respect of securities of company, or
- has received or has had access to such unpublished price sensitive information
Section 2(c) of the act also defines connected person as any person who is directly or indirectly related to the affairs of the company.
Section 3 of SEBI regulations of Insider trading 1992, provides that no insider or a connected person has the right to publicly disclose or display any secret information related to the affairs of the company if the made public can affect the price or securities of the company.[5]
After the Regulation of 1992, an immense difference was made to Insider Trading laws in India in the year 2002 and 2015. Subsequently the “SEBI (Prohibition of Insider Trading) guideline, 2015”, was instituted to settle the shortcomings and flaws in the prior guideline as the unlawful transactions were not covered with the flimsy ambit of the guideline. Another enormous change has been made in the year 2019 where attempts have been made to cover direct and indirect transactions.
Section 7A (b) of the amended act 2019 provides for the inclusion of new term ‘Informant’ which can be any person who informs the SEBI regarding disclosure of any secret information of the company or has a belief that such insider trading is about to occur.
The companies’ act 2013 also had the provision for the prohibition of insider trading. Section 195 of the act restricted any communication of sensitive information by the key managerial persons but later this section was omitted because section 458 of the same act delegates power to SEBI to conduct trials against accused persons.
LANDMARK JUDGMENTS
Hindustan Lever Limited v. SEBI– The facts of the case involved the purchase of 8 lakh shares of BBLIL by HLL from the Unit Trust of India (UTI) on March 25, 1996. This purchase was made just two weeks before the public announcement for a proposed merger of HLL with BBLIL. After completion of the investigation, SEBI by its Order dated March 11, 1998 (Order) found that, at the time of the purchase of shares of BBLIL from UTI, HLL was an “insider” as under Section 2(e) of the 1992 Regulations. After this case, SEBI made a change to the guidelines and added and defined the word ‘unpublished’. This was the origin of the meaning of the term ‘Unpublished Price Sensitive Information in India.[6]
Indiabulls Insider Trading Case– This case is one of the most recent case laws which is associated with insider trading. The case has such facts- The executive director of Indiabulls was accused of making Rs. 87 lakhs unlawfully by trading in Indiabulls when they (executive director and her husband) knew unpublished secret information of sale of land and property secretly which is the subsidiary of Indiabulls venture ltd. As told by the regulator, the executive director of Indiabulls venture ltd was in the administration group of the Indiabulls, Therefore, she was an insider and her husband was too. These unlawful profits were made in the year from 2017-19. The SEBI ordered that severe criminal action be made against the IVF and both the executive director of the organization and her husband.[7]
CONCLUSION/SUGGESTION
Recognizing the problem of the current issues is the initial step in solving the problem. To manage the lacunae in the current legal framework, there are different approaches that can be attempted. The first being the spreading of training, guidance, and information about insider trading. In the event that the ordinary citizens don’t know about what’s going on is going on against them, they can’t be ensured against it. SEBI can take part in distributing manuals or booklets and ensuring it contacts individuals who are influenced by the offense of insider trading. There is a need to expand the application of insider trading laws beyond national boundaries to shield domestic businesses and investors from insider trading committed by foreign nationals. Inside India, there is a need to make a private right of action for people oppressed because of this offense. Even though SEBI has been dealing with this wicked offense in an effective way, there still subsist a lot of lacunae in the present legal framework because of which this menace is prevailing. The present laws need to be developed and enhanced to make them more suitable for the current situation.[8]
Author’s Name: Udit Jain (Nirma University, Ahmedabad)
[1] Roopanshi sachar and M. Afzal wani, ‘INSIDER TRADING LAWS IN INDIA – STATUS BEFORE AND AFTER THE ENACTMENT OF SEBI (PROHIBITION OF INSIDER TRADING) REGULATION, 2015’ (Thelawbrigade.com, 2021)
[2] Rachit Garg, ‘Changes In The Insider Trading Laws In India – Ipleaders’ (iPleaders, 2021)
[3] Maulik Madhu, ‘All You Wanted To Know About Insider Trading’ (@businessline, 2021)
[4] Garvit Tripathi, ‘INSIDER TRADING LAWS IN INDIA: LACUNAE AND POSSIBLE SOLUTIONS’ (Lexlife India, 2021)
[5] SECURITIES AND EXCHANGE BOARD OF INDIA ( 1 [PROHIBITION OF] INSIDER TRADING) REGULATIONS, 1992′ (Sebi.gov.in, 2021)
[6] Baishali Das, ‘Insider Trading Law In India’ (latestlaws.com, 2021)
[7] Rachit Garg, ‘Changes In The Insider Trading Laws In India – Ipleaders’ (Ipleaders, 2021)
[8] Garvit Tripathi, ‘INSIDER TRADING LAWS IN INDIA: LACUNAE AND POSSIBLE SOLUTIONS’ (Lexlife India, 2021)
