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PROJECT REPORT

ON

A study on the Compliances and Analysis of the issues related to

Insider Trading Regulations

Submitted To:

The Institute of Company Secretaries of India

Submitted by:

Name : Nitika Kumari

Registration No. : 140584109/02/2019
Mail Id. : nitika9969@gmail.com
Phone No. : 8789726632
Address : 17, Sarkar Lane, Babita Girls Hostel, Near Peary
Charan Girl's High School, Tarak Pramanick Road
Girish Park, Kolkata-07
Training Under : PCS Vivek Mishra (F8540)
Training Commencement Date : 1st November, 2021
Training Completion Date : 04th August, 2023
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PREFACE

As per the Company Secretaries Regulations, 1982, an Apprenticeship Trainee is required

to prepare a Project report in the Final Quarter of his/her training period. The said project
report should be prepared in consultation with the Company Secretary under whom he/she
has trained.

Keeping in view this requirement, I have prepared this project report in consultation with
my Trainer, Mr. Vivek Mishra under whom I have trained. The topic chosen by me is ―A
study on the Compliances and Analysis of the issues related to Insider Trading
Regulations‖.

The Project Report has been prepared by me after taking into consideration all the possible
areas which may have an impact on the secretarial work of the Company Secretary. The
said Project has been prepared after referring various Books on the topic and the various
issues & publications by the ICSI.

Nitika Kumari
CS Apprenticeship Trainee
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ACKNOWLEDGEMENT

This project is a culmination of the constant endeavor to learn while working and training,
while pursuing a professional course such as the Company Secretaryship Course. At the
outset I would like to express my sincere acknowledgements to my parents who have
always encouraged me to pursue the Company Secretaryship Course as well as all my
other family members. Further, I would also like to thank my Trainer Mr. Vivek Mishra,
who has always trained me with great enthusiasm and sincerity.

Further, I would also like to express my gratitude to my professional colleagues at work

who have always helped me while I was pursuing my apprenticeship training and last but
not least to the Almighty, who has given me the strength, courage, perseverance and the
power to grasp knowledge which are all essential attributes to pursue a professional course
such as the Company Secretaryship Course.

Place: Kolkata
Date: 04.08.2023

Nitika Kumari
CS Apprenticeship Trainee
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TABLE OF CONTENTS

Chapter 1: Introduction page no.

1.1 Background of the study 5-6
1.2 Literature review 7-9
1.3 Objectives of the study 10
1.4 Research methodology 10

Chapter 2: conceptual framework

2.1 Indian regulations on insider trading 11-14

2.2 Regulations on insider trading in the U.S. 15
2.3 Selected case studies on insider trading in India 16
2.4 Selected case studies on insider trading in the USA 17

Chapter 3: analysis and findings

3.1 Comparative study of the insider trading regulations of 18

India and USA
3.2 Findings 19
3.3 Limitations of the study 20

Chapter 4: conclusion and recommendations

4.1 Conclusion 21-22

4.2 Recommendations 22

Bibliography 23
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Chapter -1
INTRODUCTION

1.1 Background of the study

Insider Trading essentially denotes dealing in a company‘s securities on the basis of
confidential information, relating to the company, which is not published or not known
to the public, also called as unpublished price sensitive information, used to make
personal profits or avoid loss. The practice of Insider Trading came into existence ever
since the very concept of trading of securities of joint stock companies became
prevalent.

The growing magnitude of the worlds‘ securities markets wherein trading in shares,
derivatives and bonds takes place at international levels has further raised the concerns
of the regulators all over the world. Insider trading caught attention of the public and
the government owing to them suspecting unusual profit/gain of businessperson as well
as shareholders. The Companies Act in India has exhibited dearth of competency to
resolve trading issues along with limiting unfair trading.

The prevention of insider trading is widely treated as an important function of

securities regulation. In the United States, which has the most-studied financial
markets of the world, regulators appear to devote significant resources to combat
insider trading. This has led many observers in India to mechanically accept the notion
that the prohibition of insider trading is an important function of SEBI (Securities and
Exchange Board of India).

Insider trading in India was unhindered in its 125 year old stock market till about 1970.
It was in the late 1970‘s this practice was recognized as unfair. In 1979, the Sachar
committee said in its report that company employees like directors, auditors, company
secretaries etc. may have some price sensitive information that could be used to
manipulate stock prices which may cause financial misfortunes to the investing public.
The company recommended amendments to the Companies Act, 1956 to restrict or
prohibit the dealings of employees / insiders. Penalties were also suggested to prevent
the insider trading.

In 1986 the Patel committee recommended that the Securities Contracts (Regulations)
Act, 1956 may be amended to make exchanges to curb insider trading and unfair stock
deals. It suggested heavy fines including imprisonment apart from refunding the profit
made or the losses averted to the stock exchanges.
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In 1989 the Abid Hussain Committee recommended that the insider trading activities
may be penalized by civil and criminal proceedings and also suggested that the SEBI
formulate the regulations and governing codes to prevent unfair dealings.

Following the recommendations by the committees, SEBI has, in exercise of the

powers conferred on them by section 30 of the Securities and Exchange Board of India
Act 1992, made regulations which are known as the Securities and Exchange Board of
India (Insider Trading) Regulations 1992. This regulation of 1992 has prohibited this
fraudulent practice and a person convicted of this offence is punishable under Section
24 and Section 15 G of the SEBI Act, 1992.

These regulations were drastically amended in 2002 and renamed as SEBI (Prohibition
of Insider Trading) Regulations 1992.

Subsequently an immense need was felt to address the challenges faced in closure of
cases relating to insider trading and to bring about a clear, comprehensive and
definitive regulatory policy. This resulted in the constitution chaired by former Chief
Justice Mr N.K. Sodhi, which made a range of recommendations to formulate an
effective legal framework to prohibit insider trading. Based on recommendations made
by the Sodhi Committee, SEBI (Prohibition of Insider Trading) regulations, 2015
came into force.

Both the Insider Trading Regulations are basically punitive in nature in the sense that
they describe what constitutes insider trading and then seek to punish this act in
various ways. More importantly, they have to be complied with by all listed
companies; all market intermediaries (such as brokers) and all advisers (such as
merchant bankers, professional firms, etc.).

Until these regulations were framed there were no specific provisions in India for the
offence of insider trading. Now, by virtue of the said regulations, definitions have been
provided as to what is an "insider", and dealing, communicating or counselling on
matters relating to insider trading have been prohibited.

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. Present effort is an endeavour to understand the
magnitude of this problem and regulatory practices that exist to combat.
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1.2 Literature Review

Views on insider trading and its effect on information asymmetry have evolved over
the years. In the very early days, academic research on insider trading focused on
establishing its initial existence and the need for regulation.

Subsequently, research focused extensively on gauging the effectiveness of insider

trading regulation. In recent times, the focus has shifted to identifying factors that
contribute to effective enforcement of insider trading regulation.

Corporate insider trading as a theme has resonated with researchers across domains
spanning disciplines such as Accounting, Economics, Finance, Law, Management and
Social Science. Various facets of Insider Trading and Insider Trading Regulation have
been explored extensively in academic literature across such disciplines. This is
especially true in the context of the developed world and more so with regard to the
US. In this report, I present an overview of the literature coverage on this theme with a
special focus on Insider trading regulations.

1. Views against Insider Trading Regulations

Manne1 (1966) is clearly the most quoted on discussions of the benefits of insider
trading and correspondingly, why insider trading regulations should not be adopted.
Manne put forth two primary arguments in support of insider trading. He argued that
insider trading helps to gradually move the price of a stock closer to its fair value since
insiders‘ trade on the basis of potential material non-public information when the news
turns public, which he contended could adversely affect investors. Manne also argued
that Insider Trading is the best means to reward entrepreneurship and promote
(MNPI). He asserted it prevents abrupt adjustment shocks in the share price
innovation. He believed this would be an effective solution to tackle the agency
problem between shareholders and managers, as it rewards producers of information
and encourages them to produce more information and add to the value of the firm2.
Meanwhile, Carlton and Fischel (1983) debated that if insider trading was bad,
investors would have put in place even tougher restrictions than what is observed
currently. They opined that Insider trading serves as an effective alternative to costly
renegotiations of manager compensation contracts. In addition, they claimed that
Insider trading would promote the generally risk- averse managers to take up more
risky projects3 and reduce their aversion to disclose negative news.
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2. Arguments in support of Insider Trading Regulations

Broadly, the arguments in support of Insider Trading Regulations can be grouped
under three categories: Market participant benefits, overall market benefits and firm
benefits.

Primary argument in support of Insider Trading Regulations is that it ensures fairness

and equality for all market participants. Insiders could profit from both positive and
negative information. This could force them to not act in the best interest of the
shareholders. This moral hazard issue can be addressed with Insider Trading
Regulations (Mendelson, 1969). Leland (1993) estimated that liquidity traders would
be hurt the most with Insider Trading while outside investors will have to live with
lower returns since part of the risk gets passed through the price if Insider Trading is
allowed. Investor confidence would also collapse in a market with Insider Trading,
making them reluctant to trade (Bhattacharya and Spiegel, 1991).
From an overall market benefit perspective, academic researchers believe that Insider
trading could facilitate insiders to manipulate information and earn profits from
artificial price volatility (Masson and Madhavan, 1991). It could also encourage them
to deliberately delay information release (Easterbrook, 1985; Ausubel, 1990). Further,
Insider trading would result in concentrated ownership as outsiders stay away from
such market leading to lower liquidity4 (Beny, 2005) and market as a medium of
communication would be lost (Bhattacharya and Spiegel5, 1991). The incentive for
traders to research for more information would cease to exist if they suspect their
counterparty could be an informed trader, leading to less informed trades and overall
market inefficiency (Fishman and Hagerty, 1992). Glosten (1985) showed how Insider
trading could result in higher bid-ask spreads as specialists quote wider levels to
discount and compensate for the presence of informed insiders.
Even at the firm level, academic researchers see a negative impact with Insider trading.
Easterbrook (1985) believes that it could force firms to venture into excessively risky
projects. He further notes that investors could react by lowering managerial
compensation significantly to ensure they do not over- incentivise dishonest managers.
This in turn, could lead to good managers leaving the firm. Firms would have to
manage with lesser levels of capital with Insider trading as outsiders may turn less
willing to part with their money (Ausubel, 1990). It could also lead to corporate
underinvestment, as existing investors might approve lesser number of projects as
outsiders see lower value in their investments (Manove, 1989). Leland (1993) argues
that in an environment where share issuance is less sensitive to current prices, insider
trading could lead to an overall decline in firm welfare.
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3. Insider Trading Regulations in the Indian context

Anil K. Manchikatla and Rajesh H. Acharya (2017) state the term insider trading is
subject to many definitions and connotations and it encompasses both legal and
prohibited activity. When a corporate insider trades by adhering to all regulations, it is
called legal insider trading, and any violation of that amounts to prohibited insider
trading. The past several decades have witnessed an increase in insider trading.
As per Vinita Sharma (2016) as the world continues to shrink, global financial markets
are expanding and trading of shares, bonds, derivatives and other instruments
continues to increase. These markets are the lifeline of capitalist economies, bringing
in the much needed investment to fuel economic growth. A natural corollary to this
function is the need for dynamic regulation that keeps pace with new developments –
domestic as well as global to ensure global financial stability. Growing investments of
middle classes of their savings in equity investment across the global markets makes it
imperative that market fraud be taken seriously.

1
Manne, Henry G., 1966, 'Insider trading and the stock market', New York Free Press, 1966
2
Value addition argument also supported by Jensen and Meckliing (1976), Meulbroek (1992) and
Leland (1993)
3
Carlton and Fischel (1983)also were supportive of the price efficiency argument and felt insider
trading helps identify prospective good managers as only good managers would be open to have
insider trading included in their compensation contracts
4
Also supported by Ausubel (1990) and Bhattacharya and Spiegel (1991)
5
As a result, Bhattacharya and Spiegel (1991) felt it could result in higher risk premiums
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1.3 Objectives of the study

Against this backdrop, the specific objectives of the present study include the
Following:
i) To explore the nature, magnitude and mechanism of the problem of Insider trading;
ii) To examine the effectiveness of insider trading regulatory practices in India and
some developed countries; and
iii) To find out the ways and means for the securities market regulators in General and
SEBI in particular in order to curb the menace of Insider Trading.

1.4 Research Methodology

The Training Project Report has been prepared by following a ―learn while you work‘‘
approach to learning. This is basically a descriptive research. It describes phenomena,
as they exist. The research is based on a qualitative approach. A major part of the data
collected and used in conducting this study is qualitative in nature. This has been done
with full knowledge of the fact that the qualitative approach is bound to be somehow
subjective.

Books, journal-articles, newspaper-articles, committee reports, seminar papers,

exchange bye-laws, SEBI regulations, securities regulations of some developed
countries, and related websites etc. pertaining to insider trading in securities markets
have been used extensively as information sources for the study. Information
concerning the securities market regulatory practices abroad has mostly been procured
from published books, journals and website literatures. This is essentially a qualitative
research work based on application of deductive logic. Analysis has been made to
examine whether existing regulatory provisions are able to combat the menace of
Insider Trading.
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Chapter 2
CONCEPTUAL FRAMEWORK
2.1 Indian Regulations on Insider Trading

The current regulations regarding insider trading in India are the SEBI (Prohibition of
insider trading) Regulations, 2015 and section 12A (Prohibition of insider trading) and
15G (penalty for insider trading) of the SEBI Act.

In this report the primary focus is on SEBI (Prohibition of insider trading) Regulations,
2015.

Definitions

 “connected persons”
any person who is or has during the six months prior to the concerned act been
associated with a company, directly or indirectly, in any capacity including by reason
of frequent communication with its officers or by being in any 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 unpublished price sensitive information or is reasonably expected
to allow such access.

 „Deemed connected persons”

Without prejudice to the generality of the foregoing, the persons falling within the
following categories shall be deemed to be connected persons unless the contrary is
established,
(a) An immediate relative of connected persons specified;
(b) A holding company or associate company or subsidiary company;
(c) An intermediary as specified or an employee or director thereof;
(d) An investment company, Trustee Company, asset Management Company or an
employee or director thereof;
(e) An official of a stock exchange or of clearing house or corporation;
(f) A member of board of trustees of a mutual fund or a member of the Board of directors
of the asset management company of a mutual fund or is an employee thereof;
(g) A member of the board of directors or an employee, of a public financial Institution as
defined in section 2 (72) of the Companies Act, 2013;
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(h) An official or an employee of a self-regulatory organization recognised or authorized

by the Board;
(i) A banker of the company;
(j) A concern, firm, trust, Hindu undivided family, company or association of Persons
wherein a director of a company or his immediate relative or Banker of the company,
has more than 10% of the holding or interest.

 “Insider” means any person who is

i) a connected person; or
ii) in possession of or having access to unpublished price sensitive information.

• “Trading plans”
An insider shall be entitled to formulate a trading plan and present it to the compliance
officer for approval and public disclosure pursuant to which trades may be carried out
on his behalf in accordance with such plan.

 "unpublished price sensitive information" means any information, relating to

a company or its securities, directly or indirectly, that is not generally available which
upon becoming generally available, is likely to materially affect the price of the
securities and shall, ordinarily including but not restricted to, information relating to
the following: –
(i) financial results;
(ii) dividends;
(iii) change in capital structure;
(iv) Mergers, de-mergers, acquisitions, delisting, disposals and expansion of business and
such other transactions;
(v) Changes in key managerial personnel.

Restrictions on communication and trading by Insiders

No insider shall communicate, provide, or allow access to any unpublished price
sensitive information, relating to a company or securities listed or proposed to be
listed, to any person including other insiders except where such communication is in
furtherance of legitimate purposes, performance of duties or discharge of legal
obligations.
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Trading when in possession of unpublished price sensitive

information.
No insider shall trade in securities that are listed or proposed to be listed on a stock
exchange when in possession of unpublished price sensitive information: Provided that
the insider may prove his innocence by demonstrating the circumstances including the
following: –
(1) the transaction is an off-market inter-se transfer between insiders who were in
possession of the same unpublished price sensitive information without being in breach
of regulation and both parties had made a conscious and informed trade decision.
(2) the transaction was carried out through the block deal window mechanism between
persons who were in possession of the unpublished price sensitive information without
being in breach of regulation and both parties had made a conscious and informed trade
decision;
(3) the transaction in question was carried out pursuant to a statutory or regulatory
obligation to carry out a bona fide transaction.
(4) the transaction in question was undertaken pursuant to the exercise of stock options in
respect of which the exercise price was pre-determined in compliance with applicable
regulations.
(5) in the case of non-individual insiders: –
a. the individuals who were in possession of such unpublished price sensitive
information were different from the individuals taking trading decisions and such
decision-making individuals were not in possession of such unpublished price
sensitive information when they took the decision to trade; and
b. appropriate and adequate arrangements were in place to ensure that these
regulations are not violated and no unpublished price sensitive information was
communicated by the individuals possessing the information to the individuals taking
trading decisions and there is no evidence of such arrangements having been
breached;
(6) the trades were pursuant to a trading plan set up in accordance with regulation

.
Disclosures of trading by insiders
Initial disclosures
Every person on appointment as a key managerial personnel or a director of the
company or upon becoming a promoter or member of the promoter group shall disclose
his holding of securities of the company as on the date of appointment or becoming a
promoter, to the company within seven days of such appointment or becoming a
member of the promoter group.
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Continual disclosures
(a) Every promoter, member of the promoter group, designated person 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 ten lakh rupees or such other value as may be
specified;

(b) Every company shall notify the particulars of such trading to the stock exchange
on which the securities are listed within two trading days of receipt of the disclosure or
from becoming aware of such information.

Codes of fair disclosure and conduct

Code of Fair Disclosure

The board of directors of every company, whose securities are listed on a stock
exchange, shall formulate and publish on its official website, a code of practices and
procedures for fair disclosure of unpublished price sensitive information that it would
follow in order to adhere to each of the principles set out in Schedule A to these
regulations, without diluting the provisions of these regulations in any manner.

Code of Conduct
The board of directors of every listed company and the board of directors or head(s) of
the organisation of every intermediary shall ensure that the chief executive officer or
managing director shall formulate a code of conduct with their approval to regulate,
monitor and report trading by its designated persons and immediate relatives of
designated persons towards achieving compliance with these regulations, adopting the
minimum standards set out in Schedule B (in case of a listed company) and Schedule C
(in case of an intermediary) to these regulations, without diluting the provisions of
these regulations in any manner.
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2.2 Brief regulations of Insider Trading in the U.S.

Until the 21st century and the European union‘s market abuse laws, the united states
was the leading country in prohibiting insider trading made on the basis of material
non-public information.

Statutory
U.S. insider trading prohibitions are based on English and American common law
prohibitions against fraud. In 1909, well before the Securities Exchange Act was
passed, the United States Supreme Court ruled that a corporate director who bought
that company‘s stock when he knew the stock‘s price was about to increase committed
fraud by buying but not disclosing his inside information.
Section 15 of the Securities Act of 1933 contained prohibitions of fraud in the sale of
securities, later gently strengthened by the securities act of 1934.
Section 16(b) of the Securities Exchange Act, 1934 prohibits short-swing profits (from
any purchases and sales within any 6 month period) made by corporate directors,
officers, or stockholders owning more than 10% of a firm‘s share.
Under section 10(b) of the 1934 Act, SEC rules 10b-5 prohibits fraud related to
securities trading.
The Insider Trading Sanctions Act, 1984 and The Insider Trading and Securities Fraud
Enforcement Act, 1988, place penalties for illegal insider trading as high as three times
the amount of profit made or loss avoided from illegal trading. It also requires all
directors, officers and beneficial owners of more than 10% of its registered equity
securities to mandatorily file an initial statement with the SEC as well as with
exchange on which the stock may be listed.

SEC regulations
SEC regulation FD (‗FAIR DISCLOSURE‖) requires that if a company intentionally
discloses material non-public information to one person, it must simultaneously
disclose that information to the public at large. In the case of an unintentional
disclosure of material non-public information to one person,
the company must make a prompt public disclosure ―promptly‖.
Insider trading, or similar practices, are also regulated by the SEC under its rules on
takeover and tender offers under the Williams Act.
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2.3 Selected case studies on Insider Trading in India

Hindustan Lever Limited v. SEBI

The facts of the case concerned the purchase by HLL of 8 lakh shares of BBLIL from
the Unit Trust of India (UTI) on March 25, 1996. This purchase was made barely two
weeks prior to a public announcement for a purchased merger of HLL with BBLIL.
Upon investigation, SEBI by its order dated march 11, 1998 found that, at the time of
the purchase of shares of BBLIL from UTI, HLL was an insider as under the SEBI
(Prohibition of Insider trading) Regulations.

SEBI held that, since, HLL and BBLIL were subsidiaries of the same London based
Unilever, and were effectively under the same management; HLL and its directors had
prior knowledge of the merger. Thus HLL was covered under the definition of an
insider.

Rakesh Aggarwal vs. SEBI

In this case, Rakesh Aggarwal the managing director of ABS Industries Limited was
involved in talks with Bayer AG regarding their plans to take over the ABS Company.
Because of which he had access to non-public and sensitive information. The
statement was made by SEBI that there were allegations that Rakesh Aggarwal and his
brother in law Mr I P Kedia has purchased the shares of ABS Industries LTD before
the announcement of Bayer. SEBI investigated the case and affirmed all the
allegations. Rakesh Aggarwal justified it by saying that it was needed for the
company‘s benefit. SEBI directed Rakesh Aggarwal to deposit Rs.3400000 with
Investor Protection funds of Stock Exchange, Mumbai and NSE to compensate which
may make any claim subsequently.
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2.4 Selected case of Insider Trading in the USA

Ivan Boesky
Ivan Boesky is an American who became infamous for his role in an insider trading
scandal during the 1980s. This scandal also involved several other corporate officers,
employed by major U.S. investment banks, who were providing Boesky with tips
about upcoming corporate takeovers. Boesky had his own stock brokerage company,
Ivan F. Boesky & company, and starting in 1975 when he opened his firm, he made
vast amounts of money speculating on corporate takeovers. In 1987, after a group of
Boesky‘s corporate partners sued Boesky for misleading legal agreements detailing
their partnership, the Securities and Exchange Commission (SEC) began investigating
Boesky. It was later revealed that he was making his investment decisions based on
information received from corporate insiders.

Boesky had been paying employees of the investment banking firm Drexel Burnham
Lambert involved with the mergers and acquisitions (M&A) branch for information to
help him guide his buys. Boesky ended up profiting from nearly every major M&A
deal in the 1980s, including Getty Oil, Nabisco, Gulf Oil, Chevron, and Texaco.

Boesky ending up cooperating with the Securities and Exchange Commission (SEC)
and became an informant, providing information to the SEC which eventually led to
the case against the financier Michael Milken. Boesky was convicted of insider trading
in 1986, and received a prison sentence of 3.5 years and was fined $100 million.
Although he was released after only two years, Boesky has been permanently banned
from working with securities by the SEC.
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Chapter-3
ANALYSIS AND FINDINGS
3.1 Comparative analysis of the Insider Trading Regulations
in India and USA

Point of INDIA U.S.A

comparison

1.Name of the SEBI Act, 1992 and SEBI Securities Exchange Act, and
Act (Prohibition of Insider Insider Trading Sanctions
Trading) Regulations, 2015 Act,1984

2.Insider means any person who is a As per Federal Law; Insider

connected person; or in is a director, senior officer,
possession of or having entity or someone in control
access to unpublished price of at least 10% of a
sensitive information company‘s equity securities.

3. Regulatory Securities Exchange Board Securities and Exchange

Mechanism of India(SEBI) Commission(SEC)

4. Offense (Civil Criminal offense Both civil as well as criminal

or criminal) offense.

5. Penal Penalty of INR 250,000,000 Maximum fine of $5 million

measures or three times the profit and up to 20 years of
made, whichever is higher. imprisonment.
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3.2 Findings

The insider regulations in India prohibit dealing, communicating or counselling on

matters relating to insider trading. Violations of these prohibitions are considered as
committing the offence of insider trading.

The Indian capital market regulator, SEBI has been attempting to crack down on
insider trading for a while, but it has hardly met with any major success so far. The
table below shows the shows total number of cases taken up for investigation and
completed by SEBI in the financial year 2019-20 to financial year 2022-23.

Trend in the investigation related to insider trading

Insider trading cases FY 19-20 FY 20-21 FY 21-22 FY 22-23

Taken up 49 30 17 85
completed 57 40 48 75

Sources: SEBI Annual Report

The impact, extent and effects of insider trading might vary in each country but any
amount of insider trading has a massive effect on the reputation of the country. From
the cases of insider trading in India we have observed that the convictions by SEBI for
insider trading is very less and the penalty imposed upon the convict for the
commission of such illegal activities is way too less. Even in the US, the SEC has been
hardly successful in providing the charge of insider trading. Instead the serious
offender Ivan F Boesky went virtually scoot free since the Court rejected the
circumstantial evidence.

The regulation of insider trading in India is relatively of recent origin. However, it was
established much earlier in foreign countries. The United States (US) was the first
major country not only to enact insider trading regulation but also to put restrictions on
it. The roots of the US insider trading laws have been developed from the securities
legislation that was enacted in 1934 to prohibit other kinds of stock manipulation.
France was the second country to enact an insider trading law, but France did not place
prohibitions on insider trading until 1967.
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3.3 Limitations of the study

The study has some limitations. These are as follows:
i) The present study concentrates on the insider trading regulations of company securities
in India. Insider trading may take place in other markets viz. money market, derivative
market and foreign exchange market Effect of insider trading in one segment of the
financial market creates unusual volatility in other segment. This issue of cascading
effect has not been addressed in this study.

ii) In order to have a thorough idea about the regulatory practices, a comparative study
has been made in context of two countries viz. India and U.S.A. Study of insider
trading regulations of more number of countries—developed as well as
underdeveloped could enhance the depth of the present endeavour.
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Chapter -4
CONCLUSION AND RECOMMENDATIONS
4.1 Conclusion
It would be safe to conclude that; Insider Trading is no more a white- collared crime.
Countries across the globe have taken stringent measure to check and prevent on
practices such as Insider Trading. In the United States of America, the Federal Court
convicted Rajat Gupta the director of Goldman Sachs for insider trading. The facts of
this case stated that, Rajat Gupta was found guilty of passing sensitive information
about the market to Raj Rajnatnam, a co. founder of Galleon LLC hedge fund. The
ruling by the court sentenced him to two years of imprisonment and a fine.

It is high time for India to implement such measures for the persons who have been
found guilty and not treat insider trading just as a white-collar crime. SEBI has been
attempting to crack down on insider trading for a while, but it has hardly met with any
major success so far. The lack of stringent punishments for economic offences in India
or the absence of adequate powers to combat these crimes has helped people accused
of insider trading to either walk scot-free or get away by paying a small fine. In the
recent case of Infosys, two Infosys employees who had access to UPSI, had shared the
information to Capital One and Tesora that resulted in illegal gains. SEBI banned eight
entities and individuals selling and buying securities directly or indirectly until further
notice and fined Rs 3.06 crore after they were held guilty on Insider trades on Infosys
stock.

It is often claimed that insider trading reduces investors‘ confidence in the market.
Behind huge foreign investment in the United States many critics find the presence as
well as strict enforcement of insider trading laws. If confidence in the market really
decreases when insider trading exits then deregulation of the financial market is the
most effective way to increase investors‘ confidence. Stock exchanges that have
private rules of forbidding insider trading will attract more insiders and companies
wish to have their stock listed on these exchanges. The free market can provide for
sensible insider trading rules without government intervention.
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Over the last few decades, world securities markets have become significantly more
sophisticated in terms of how securities are traded as well as the variety of securities
traded. The integrity of securities markets is critical to the economy of a country and it
is necessary for regulators to enforce laws, prohibiting market abuse in order to protect
market integrity. As a result of these changes, markets are becoming truly global,
thereby, allowing traders to trade almost instantly across a wide variety of products
and in markets around the world.

4.2 Recommendations
During the last few years many well-known companies both national as well as
international have been found to be associated with this crime. In number of cases-
Indian as well foreign, it has been noticed that anomalies remains not only in loosely
drafted regulation but also in their ineffective implementations. In view of the above,
following policy implications are considered to be useful.
Ensuring better financial disclosure and harmonisation of disclosure requirements.
Making SEBI more financially powerful and by giving more power to investigate.
Advanced software and strong surveillance mechanism to detect insider trading should
be introduced.
Insider trading to be treated as a civil offence in India.
Making SEBI‘s databank relating to stock trading public to make the activities of the
SEBI transparent.
Setting up a special court to expedite the early decision of the complex cases relating to
insider trading.
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BIBLIOGRAPHY

1. www.sebi.gov.in – Securities and Exchange Board of India homepage

2. www.sec.gov – Securities and Exchange Commission homepage
3. www.bseindia.com – Bombay Stock Exchange homepage
4. www.nseindia.com – National Stock Exchange homepage
5. www.lawctopus.com
6. www.legalservicesindia.com
7. www.indianlegallive.com
8. www.statista.com
9. www.mondaq.com
10. www.cnbc.com
11. www.encyclopedia.com
12. www.cfainstitute.org
13. Business today
14. Economic Times
15. New York Times
16. Wikipedia.org
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