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Insider trading, the practice of trading securities based on material non-public information.
Insider trading’ in financial markets refers to trading in securities such as equity and bonds by company insiders who have access to exclusive information about the issuer of a particular security before such information is released to the general public. This allows insiders to benefit from buying or selling shares before they fluctuate in price.
Insider trading is an extremely complex issue and it is almost impossible to get rid of it because it evolves from a very basic human instinct i.e., greed. One who is having insider information and arrive at a decision of future profit or reduction of loss by discounting such information, it is extremely difficult for him to keep himself abstained from trading based on that information.
This articles is an endeavour to understand the magnitude of this problem and regulatory practices that exist to combat it.
Insider Trading has a long and complex history worldwide. Here’s an overview of its evolution:
Early History:
The earliest known case of insider trading dates back to the late 18th century, during the early days of securities trading in the United States.
United States:
In 1909, the United States Supreme Court addressed insider trading in the case of Strong v. Repide, acknowledging the unfairness of trading on undisclosed information.
Securities Act of 1933 and Securities Exchange Act of 1934: These acts laid the foundation for securities regulation in the US and introduced disclosure requirements, but did not specifically address insider trading.
1960s-1980s: Several high-profile cases highlighted the need for specific regulation. The SEC began to enforce rules against insider trading more vigorously.
1984: The landmark case Dirks v. SEC established the concept of a "personal benefit" requirement for insider trading liability.
2. Europe:
Insider trading regulations varied widely across European countries, with some adopting stringent rules earlier than others.
The European Union harmonized insider trading laws with the Market Abuse Directive in 2003, aiming to create a consistent framework across member states.
3. India:
i. Pre-Regulation Era (Before 1992):
Insider trading was not specifically regulated.
The Securities Contracts (Regulation) Act, 1956 did not address insider trading directly.
ii. The Securities and Exchange Board of India (SEBI):
The SEBI was established in 1988 as the regulatory body for securities markets in India.
Initially, SEBI's focus was on development and regulation of the securities market.
iii. SEBI (Insider Trading) Regulations, 1992:
The first comprehensive regulations addressing insider trading were introduced in 1992.
These regulations defined who constitutes an insider and prohibited trading based on unpublished price-sensitive information (UPSI).
Over the years, SEBI has amended and strengthened the insider trading regulations to enhance transparency and prevent market abuse.
iv. SEBI (Prohibition of Insider Trading) Regulations, 2015:
Replaced the earlier regulations and further refined the rules.
Introduced provisions for:
Definition of insiders and related persons.
Codes of conduct for prevention of insider trading.
Trading Window- Insiders can trade only during specified trading windows when they are not in possession of UPSI.
Disclosure requirements for insiders.
establishment of a structured reporting mechanism.
Penalties for violations include fines, disgorgement of profits, and restrictions on market activities.
Overall, insider trading regulations in India have progressed from a basic framework in 1992 to a robust and comprehensive system under the 2015 regulations. The aim is to maintain market integrity, protect investor interests, and ensure a level playing field for all participants in the securities market.
Modern Era:
Global Harmonization:
Countries worldwide have increasingly adopted laws and regulations against insider trading, often influenced by international standards and agreements.
Organizations like the International Organization of Securities Commissions (IOSCO) play a role in promoting consistent global standards.
2. Technological Challenges:
Advances in technology have posed new challenges for regulating insider trading, such as high-frequency trading and the rapid dissemination of information.
3. Enforcement and Penalties:
Enforcement efforts have become more coordinated and robust globally, with significant penalties for violations to deter unethical behavior.
Countries vary in the severity of penalties, but many impose fines, disgorgement of profits, and criminal sanctions for serious offenses.
Recent Developments:
Market Surveillance:
Regulators increasingly use advanced surveillance techniques and data analytics to detect and prevent insider trading.
2. International Cooperation:
Cooperation among regulators across borders has strengthened, particularly in cases involving multinational corporations and cross-border transactions.
3. Public Awareness and Corporate Governance:
There is growing emphasis on corporate governance and ethical behavior to prevent insider trading within organizations.
Challenges and Future Directions:
Technological Advancements:
Continued advancements in technology necessitate ongoing updates to regulations and surveillance methods.
2. Legal Interpretations:
Courts around the world continue to interpret and refine insider trading laws, influencing the development of regulatory frameworks.
3. Globalization:
As financial markets become increasingly globalized, the need for harmonized international standards remains critical.
Judicial Systems:
The Courts have played a significant role in interpreting and applying insider trading regulations, contributing to the evolving jurisprudence.
Notable judicial activist on insider trading law worldwide can be presented as below:
Globally
Martha Stewart (United States): Martha Stewart, a well-known American businesswoman and TV personality, was involved in an insider trading case in 2001. She sold shares of ImClone Systems based on non-public information about an impending FDA decision that negatively affected the company's stock. Stewart was convicted in 2004 of conspiracy, obstruction of justice, and making false statements to investigators.
Raj Rajaratnam (United States): Raj Rajaratnam, a billionaire hedge fund manager, was convicted in 2011 for insider trading involving several high-profile companies. The case was notable for its use of extensive wiretaps to gather evidence against Rajaratnam and others involved in the insider trading network.
Hollinger International (Canada/United States): Conrad Black, former CEO of Hollinger International, and several associates were accused of diverting funds and engaging in insider trading by selling company assets without proper disclosure. Black was convicted in 2007 on charges of fraud and obstruction of justice, including instances of insider trading.
Fujitsu (Japan): In 2018, several executives of Fujitsu Limited, a major Japanese technology company, were found guilty of insider trading. The executives were accused of selling shares
before disclosing poor financial results, based on insider knowledge of the company's performance.
India
Reliance Petroleum Limited (RPL) Merger Case: This case involved Reliance Industries Limited (RIL) and its chairman, Mukesh Ambani, who were accused of insider trading related to the merger of RPL with RIL in 2007. The Securities and Exchange Board of India (SEBI) alleged that RIL and Mukesh Ambani traded RPL shares based on unpublished price-sensitive information (UPSI) before the merger announcement. SEBI imposed a penalty, which was later overturned by the Securities Appellate Tribunal (SAT) due to procedural lapses in the investigation.
Rajat Gupta Case: Rajat Gupta, a former director of Goldman Sachs and Procter & Gamble, was convicted in the United States in 2012 for insider trading. Although Gupta is an Indian- born American citizen, his case had significant implications globally. He was found guilty of leaking confidential information to hedge fund manager Raj Rajaratnam, facilitating illegal trades that benefited Rajaratnam's hedge fund, Galleon Group.
Satyam Computer Services Scandal: While primarily known for accounting fraud, the Satyam scandal (2009) also involved elements of insider trading. Founder and chairman Ramalinga Raju admitted to inflating the company's financial figures for years, causing a significant drop in Satyam's stock price when the fraud was revealed. Insider trading allegations arose as certain insiders sold their shares based on non-public information about the company's true financial condition.
KPIT Technologies Case: In 2016, SEBI imposed a penalty on Rajiv B. Batra, a former promoter of KPIT Technologies, for insider trading. Batra was found guilty of trading in the company's shares while in possession of unpublished price-sensitive information related to a merger deal with Birlasoft. SEBI's investigation highlighted the importance of stringent compliance with insider trading regulations in corporate transactions.
Idea Cellular Case: SEBI penalized several entities, including some prominent individuals, in 2012 for insider trading in the shares of Idea Cellular. The case involved allegations of trading based on non-public information about the company's financial results, demonstrating SEBI's commitment to enforcing insider trading norms to protect investor interests.
These scandal prompted regulatory reforms in India to strengthen corporate governance and investor protection measures. It also highlighted the importance of effective enforcement of insider trading regulations to maintain market integrity and investor trust. By: Sunil Agarwal, Vice President Legal and Company Secretary Garware Technical Fibres Ltd.
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