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INSIDER TRADING IN EMERGING ECONOMY AND AN EFFECTIVE ROADMAP:

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 Accountancy Business and the Public Interest Volume: 41
ISSN: 1745-7718 Issue Number: 04

INSIDER TRADING IN EMERGING ECONOMY AND AN EFFECTIVE

ROADMAP: CASES IN INDIA

Dr. AMEYA PATIL1, Dr. MAHESH KUMAR2, Dr. RAHUL B. HIREMATH3,

Dr. ANKITA BHATT4 and Dr. RAKESH YADAV5
1,2
School of Business, Dr. Vishwanath Karad MIT World Peace University, Pune, India.
ORCID: 1https://orcid.org/0000-0002-4920-7630, 2https://orcid.org/0000-0003-3819-7868
3
Indian Institute of Management, Raipur, India.
ORCID: https://orcid.org/0000-0001-9976-274X
4
Smt. Kashibai Navale College of Commerce, Pune, India.
ORCID: https://orcid.org/0009-0004-1404-2129
5
S. P. Mandali's Prin. L. N. Welingkar Institute of Management Development and Research,
Mumbai, India. ORCID: https://orcid.org/0000-0001-7872-3100

Abstract
Smooth functioning of financial markets is essential for the development of the economy, given the importance
of finance for corporates. However, activities like Insider trading dampen the trust of investors. Insider trading
refers to trading of a financial security by an insider person who has access to material, nonpublic, confidential
information about the security. Majority of the countries around the world, prohibit insider trading. In India, SEBI,
the regulator of capital markets makes and amend laws related to Insider trading, investigates related cases and
penalizes concerned entities. This research paper discusses the cases dealt by SEBI in relation to insider trading.
After the discussion, the authors find that though SEBI has been performing its functions seriously, there are
certain loopholes in the system which have allowed the violators of Insider trading norms to get away. Moreover,
SAT has revoked SEBI’s orders on various case related to insider trading. The researchers suggest several
measures to counter insider trading such as better co-ordination between investigating agencies, effective
corporate whistle blower policy ensuring safeguards for whistle blowers and assimilation of certain regulations
from developed markets such as USA. Finally, the researchers advocate a road map that can be useful for
regulators and policy makers to curb insider trading cases, and also effectively deal with such cases when they
arise.
Keywords: Insider, Insider Trading, Price Sensitive Information, Connected person, SEBI, SAT, UPSI.

INTRODUCTION
Companies Act, 2013 in India serves the purpose of improving the country's economic affairs
and protecting the rights of investors. When it comes to equity market transactions, there exists
a legislation called Securities and Exchange Board of India Act (SEBI Act), passed in 1992.
SEBI is a statutory regulatory body for capital markets, which has been given the powers to
create subordinate legislation and to investigate wrong-doing and impose relevant penalties
(Sanyal, 2012). Hereafter, SEBI will be referred to as regulator. As the equity transactions have
been rising day by day, protection of the investor rights and resolving their grievances is of
paramount importance Prohibition of Insider trading is an important element in this regard.
In India, a large number of small investors have fallen victim to corporate crime, Insider trading
which is illegal as per the directives issued by the Indian capital market regulator, in accordance
with SEBI Act, 1992. The key objective of this regulation was to ensure that all market
participants had a level playing field and that no one could benefit from unpublished price
sensitive information when making investment decisions (Chauhan et al., 2016). Insider trading
is simply the trading of a financial security by a person who has access to material, nonpublic
information about that financial security. It is a form of malpractice in which a company's
securities are traded by people who, by virtue of their profession, have access to otherwise

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nonpublic confidential information. Insider trading refers to the use of material nonpublic
information in trading a firm’s shares by a corporate insider or any other person who owes a
fiduciary obligation to the organization (Black’s Law Dictionary, 2011). Insider trading is when
key employees or executives who have access to the company's strategic information use it to
trade in the company's shares or other securities. It is highly discouraged by capital market
regulators worldwide including the Indian capital market regulator, in an effort to support fair
market trading for the benefit of the common investor. Trading activities by insiders of a
company generate interest and sometimes create panic (Jain and Sunderman, 2014). Insider
trading is excessively profitable, due to information asymmetry associated therein (Seyhun,
1986). Majority of the nation’s prohibit insider trading as it likely to undermine the confidence
of investors and may prejudice the smooth stock market operations (Thapa, 2010). One can
view insider trading as private corruption, wherein an individual uses an entrusted position for
his own gains (Kim, 2013). Illegal insider trading has been rightly categorized as a crime based
on 3 theories namely the Misappropriation theory, Market Fairness and Confidence theory and
the Market Efficiency theory (Sharma, 2018).
Insider trading is thus an unethical practice in which other shareholders are considerably
disadvantaged due to a lack of critical insider non-public information. However, it won't be
regarded as illegal insider trading if the information has been made public in a way that allows
all interested investors to access it. Modus operandi of insider trading starts with insiders acting
as initiators of price change by being the first to learn the information, acting (trading shares)
on the basis of this information and then spreading this information to select group of
individuals (Singh,2002).
The primary negative of Insider trading is that it disadvantages outside investors, who would
then exit the market, taking their capital with them (Chakravarty & McConnell, 1999). The
other notable negatives of insider trading are that insider trading is used to make profit at the
expense of other investors and leads to loss of confidence of investor in stock market .In other
words, the process of insider trading degrades the ‘Level Playing Field’. Moreover, Insider
trading activity emasculates the fiduciary relationship (Moore, 1990).
The term "insider" refers to any individual who is, was, or is deemed to have been associated
with the company and who has received or had access to unpublished price sensitive
information regarding a company's securities or who is otherwise reasonably expected to have
such access. Price Sensitive Information denotes any information relating to a company that, if
published, has the potential to materially affect the price of the company's securities. The
information deemed to be price sensitive information includes periodical Financial Results of
the company, intended dividend declarations, issuance of securities or buy-back of securities,
expansion plans, new projects, amalgamation, mergers or takeovers, disposal of undertaking
and changes in policies of the company. Even information regarding R&D breakthrough, which
is yet to be made public, has been utilized by managers and employees of R&D intensive
organizations to make good profits (Coff & Lee, 2002). A price-sensitive information, which
is yet to be announced to the public by various media is deemed to be UPSI (Unpublished price
sensitive information). For example: an announcement regarding mergers and takeovers. It has
been seen that insiders have earned excessive returns in acquired firms prior to the first public
announcement of planned mergers, which can be interpreted by the systematic unusual price
movements and the market’s reaction to information earlier of these public announcements
(Keown & Pinkerton, 1981; Zdanowicz,1992; King ,2009). As a result, regulatory efforts have
been highly focused towards mergers and takeovers, in a bid to counter insider trading
(Agrawal and Nasser, 2012).

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A connected person is someone who is, or deemed to be a director of the company, or who
holds a position as an officer or employee of the company, or who holds a position entailing a
professional or business relationship between himself and the company, whether temporary or
permanent, and who could reasonably be expected to have access to unpublished price sensitive
information about that firm. It is extremely difficult to prove an insider trading crime. The
underlying act of buying or selling a scrip is, no doubt, a perfectly legal activity. It is only the
thoughts in the mind of the trader that can transform this legal activity a prohibited act of insider
trading. It's unusual to find concrete proof of insider trading. The evidence is almost entirely
circumstantial unless the insider trader confesses in some admissible form. The investigation
of the case and the proof presented to the fact-finder is a matter of placing the varied parts of a
puzzle.
However, it is mandatory to prevent insider trading in the interest of investors and the capital
markets. If insider trading goes rampant, it will lead to a collapse of capital markets (Agarwal
and Singh, 2006). According to WSJ blog (April 2014), it’s hard to catch insider trading in
India due to lack of tools with SEBI, long duration for court cases and punishments being too
light to offset the potential profits.

REVIEW OF LITERATURE
Misra(2011) evaluated Indian legal system concerning the prosecution of those who engage in
insider trading. They did found existence of pertinent laws addressing insider trading. However,
the system is still not effective in combating insider trading. Owing to lengthy formalities and
necessity of proving it “beyond all reasonable doubt”, criminal remedies are not implemented
whereas civil penalties are used, but they have many flaws and are insufficient to serve as a
deterrent..
Dalko and Wang (2016) revealed the core of insider trading and explained the major reason
behind ineffectiveness of the insider trading laws. According to them, the major limitation of
insider trading laws is that it has not attacked the information monopoly power exercised
frequently by the corporate insiders. In order to break this information monopoly power, they
suggested three-fold measures, which are preventive in nature. Firstly, public disclosure and
the corporate information generation must be separated. Upon generation of corporate
information, it should be first submitted to the regulating agency, which will decide the timing
of public disclosure of this information. Secondly, shareholding concentration should be broken
by placing an upper limit on insider’s shareholding change on a daily as well as monthly basis.
Thirdly, a quota should be imposed on corporate insiders, withholding their shares from
trading.
According to Pillai, Kar and Shah (2014), insider trading has negative implications on the
investment behavior and is harmful for the organization. As per the study conducted by Du and
Wei(2003), Even after adjusting for the volatility of real output growth, the volatility of
monetary and fiscal policies, and the maturity of the stock market, more insider trading is still
linked to higher market volatility. Bhattacharya and Daouk (2002) studied insider trading laws
and its enforcement in 22 developed nations and 81 emerging markets. They did found the
existence of insider trading laws in these countries. However, these laws were not strictly
enforced. Chakravarty and McConnell (1999) found a positive correlation between insider
trading and stock price change. According to them, insider trades affect price discovery
differently compared to non-insider trades. Further, insider trading leads to a speedier price
discovery.

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Research by Agarwal & Singh (2006) investigated the corporations whose merger
announcement dates were announced between 1996 and 2000, for possibility of insider trading
through examining the stock price effects and trading volume pattern of these corporations.
According to them, Insider trading does rises in India just before the merger announcements.
According to Summe & McCoy (1998), large resources and ardent public enforcement do not
guarantee a reduction in insider trading activity. They advocated for other measures which
includes more disclosure, rigorous accounting standards. They also called on for suitable
technologies and adequate staffing to monitor insider trading effectively. As per them,
sufficient funding must be provided to public prosecutors to effectively investigate and to
prosecute insider trading cases. Singh (2013) analyzed the legal framework of India and its
implementation. They found the prevalent laws in India to be ineffective to combat insider
trading, and suggested a few reforms therein. The significant ones include the statutory
incorporation of element of mental health and bolstering of enforcement mechanism.
Kumar and Acharya (2019) studied insider trading behavior in Indian stock market. They
categorized companies on different parameters such as size, book-to- market equity and
momentum, and then applied regression. The corresponding results revealed that insiders are
more likely to buy in large size companies, companies with momentum, and value category
companies. Bris (2005) examined stock reaction prior to the announcement of a tender offer
on a sample of 4,541 acquisitions from 52 different countries in the world. The findings of this
study were two-fold. Firstly, potential trading profits, as well as the incidences of insider
trading rise with enforcement of new laws on insider trading. Secondly, toughness of the laws
matters as tougher laws serve better to decrease illegal insider trading activities. They suggested
for more disclosure requirements for business entities, increasing of penalties for violators, and
improving the detection technology.
Gupta and Ray (2021) covered the investigation process under SEBI Acts. They expressed
concerns over the increasing number of insider trading cases and briefed the challenges
confronted by SEBI in prosecuting culprits of insider trading. According to them, Government
support in this regard will be of a great help to SEBI to fight insider trading. Iqbal and
Santhakumar (2018) revealed a comparatively high degree of information asymmetry in India.
As per their research, profitable insider traders in India earn on an average, 19.28 percent excess
profit over outsiders. Herein, purchase transactions are more profitable as compared to sales
transactions. As per this research, the company size and information asymmetry bear an inverse
association.
Betzer & Theissen (2009) studied a sample of 2051 insider trades in Germany from 2002 to
2004.The results revealed significant abnormal returns associated with insider trading. Insider
trades happening before the earnings announcement were found to have a bigger impact on
prices. Additionally, ownership structure and the accounting standards used by the business
corporation impact the degree of the price reaction.
Sapkota, Kumar and Mathur (2021) used machine learning algorithms to predict insider trading
in Indian stock market, from the period starting from 1st January to a day prior to publication
of financial results. They found enormous transactions done prior to publication of financial
results in some companies belonging to Nifty 50, which can be suspected as insider trading.
Zekos (1999) discussed European, US and UK legislative framework to deal with insider
trading and highlighted a few insider trading cases in USA which led to changes in these laws.

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He also compared economic and financial approaches for addressing the problem of insider
trading. His analysis revealed a few significant outcomes. Firstly, specific uniform rules ought
to be applied to all the securities markets. Secondly, economic factors overpower any legal
aspects. Thirdly, Insider dealing is feeble in front of macroeconomic elements. Fourthly, there
is a need to publish more updated information about the companies listed on stock exchanges.
According to Gangopadhyay and Yook (2022), enactment of new securities laws leads to
renewed regulatory focus, increasing fear amongst insiders and a decrease in illegal insider
trading. This was proven by the Dodd-Frank Act (DFA), 2010 enacted in USA in order to
considerably widen criminal insider trading prohibitions. Opportunistic insider purchases
diminished from around 18 % prior to the enactment of DFA to around 5.5% post enactment
of DFA. Also, their profitability decreased.
Singh and Kumar (2014) conducted a study which compared the regulatory frameworks of
India and USA regarding that of insider trading. They found that the laws in force in USA
provides for more stringent punishments and protections against insider trading as compared
to Indian laws. Hence, they suggested for incorporation of certain laws in USA in the SEBI
Act. Major ones include the granting of powers to the Indian regulator to award rewards to the
informants, to the extent of 10% of civil penalties imposed on insider, and incorporation of the
element of mental intent.
An empirical study by Min (2010) revealed that insider trading sanctions in USA in 1980’s
were effective in reducing insider trading in terms of volume, prior to mergers and acquisitions.
Prior to 1980s, sanctions in USA were aimed at conventional corporate insiders, like CEOs and
directors,. The sanctions in the 1980s targeted wider sphere of people who have access to
corporate information in advance, particularly around M&A announcements. This view
regarding stricter regulations leading to reduced insider trading has been echoed by various
other studies, the notable ones being by Boardman etal. (1998) and Bris(2005).
Mehta (2021) examined the insider trading concept and the rules framed by the regulator in
this regard. They found that the regulations in case of insider trading are ineffective. They
suggested for better co-ordination and information exchange between the regulator and other
investigating agencies. Moreover, they added that SEBI should be given more investigative
authority, including access to electronic records, especially wiretapping.
Reddy and Balachandran (2015) suggested that corporate whistleblowing can serve as a robust
mechanism for detection and deterrence of insider trading. A company's adoption of a
whistleblower policy gives its employees the right and a secure mechanism to report any
concerns they may have regarding actual, suspected, or planned wrongdoings, including insider
trading in the company's stock, involving that company or any of its subsidiaries or associate
companies or any of its directors, key personnel, or employees. Thompson(2013) conducted a
study which compared insider trading laws, penalties, and convictions in nations which possess
the 14 largest stock exchanges globally .He found the presence of vital differences pertaining
to insider trading laws and their enforcement amongst these 14 nations. He advocated for
efforts to standardize the treatment of insider trading issues, in the interest of investors and
stock markets.
Coff & Lee (2002) described insider trading as a rent appropriation mechanism for employees
and managers of R&D intensive firms. According to them, insider trading is use by managers
of these forms to appropriate rent from R&D breakthroughs, without directly impacting the
shareholders. Initially, managers purchase shares in view of a pending R & D breakthrough.

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The announcement of their trades induce other investors to purchase shares, driving up the
share prices. When R&D breakthrough is made public, shares prices surge further. They
elucidate insider trading as an effective mechanism to align employee and shareholder interests
with regards to distributing rent from a resource-based advantage.
Moore (1990) stated that the real reason to prevent insider trading is that it dents the fiduciary
relationship. According to him, other moral arguments against insider trading such as insider
trading being an unfair practice, or it encompasses misuse of information, or it impacts ordinary
investors and markets have some severe deficiencies, as they do not provide adequate
reasoning, so as to outlaw insider trading.
Hodgson, Seamer& Uylangco (2018) examined the role of internal corporate governance in
restricting insider trading opportunities for companies listed on Australian Stock Exchange
(ASX). According to them, a strong internal corporate governance does restrain insider sales,
but not insider purchases. Tougher corporate governance leads to additional restrictive insider
trading policies. However, it does not translate into lower trading volume, or reduced profits
from insider purchases.
Jain and Sunderman (2014) investigated the stock price movements for the companies listed in
India for the period from 1996 to 2010, to find the existence of informed trading prior to the
announcement of a merger. They found market reactions well before the first public
announcement of the intended merger, which implies that some of the information held only
by insiders’ works its way into prices. Further, this activity is stronger for industry mergers
during the periods of boom and prosperity.
Katselas (2018) made a study of insider trading deals on companies listed in Australia. He
found that insiders, especially, directors are contrarian traders. They purchase shares when their
company is in bottom tercile as per prior returns. Further, directors were found to be associated
with net buying action, prior to positive accounting performance changes in the subsequent and
following 1 year period.

RESEARCH QUESTIONS
The various studies reviewed here have basically tried to study the crime of insider trading and
its effects on markets and investors. Some studies made an attempt to study legal aspects of
SEBI’s act pertaining to insider trading and compare it with similar regulations in developed
markets. Through the study of a few high-profile insider trading cases investigated by India’s
capital market regulator, this research study tries to find answers to following questions:
• Is the Indian capital market regulator serious in prosecuting culprits of insider trading?
• Is the legal framework related to insider trading in India, effective in curbing insider
trading and punish related offenders?
• Is the appellate body in India undermining the regulator’s efforts to curb insider trading?
• What are the additional measures for the India’s watchdog of capital markets to prevent
insider trading?

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RESEARCH METHODOLOGY
Several theories as well as regulations in different countries have accepted illegal insider
trading as a financial crime and there is a need to prevent it. The researchers have done a study
of insider trading mechanism and regulations. A case study approach is used wherein different
cases related to insider trading are thoroughly studied. Hence, the title ‘Insider trading in India
– Case study approach’ is apt. Conclusions are derived through analysis and understanding of
cases and the existing literature on this topic.
Scope of the Research
The research is limited to the case study of some famous and high-profile insider trading cases
in India, which have been investigated by India’s capital market regulator. Decisions of the
regulator and its later manifestations are studied. A qualitative methodology is employed,
relying on the researchers' aptitude and observations.
Objectives of the Study
• To study Indian capital market regulator’s investigation of insider trading cases.
• To understand the issues pertaining to insider trading cases, especially possession of
UPSI and its use, through a case study approach.
• To suggest improved measures to prevent insider trading cases.
We have endeavored to determine the regulator’s effectiveness in handling insider trading
cases.
Utility/Importance
The study will aid in comprehending the finer points of the insider trading mechanism and the
right formulation of regulations to counter this financial crime. It will be helpful for newly
hired officers of investigative organizations like SEBI, to understand the loopholes in the
insider trading regulations, which can be used by the culprits to escape. The study can help
regulators to make effective insider trading laws and implement their stricter enforcement.
Based on the analysis of the cases and the literature on the subject, the researchers propose a
road-map which can be used by the capital market regulators in various emerging markets to
curb illegal insider trading

DISCUSSION / CASE STUDIES

Case 1: Hindustan Lever Limited (HLL)
This was the first major case where the Indian capital markets regulator had initiated action
against the entities who had violated insider trading laws. The parties involved in the case
included Hindustan Lever Limited (HLL), Brooke Bond Lipton India Limited (BBLIL), Unit
Trust of India (UTI) and SEBI. HLL and BBLIL were divisions of Unilever, their shared parent
organization. HLL intended for the merger with BBLIL to give Unilever a significant stake in
the combined company. HLL was supposed to buy shares of BBLIL in order to complete the
merger. On April 19, 1996, the relevant stock exchanges were informed of the merger. HLL
acquired 8,00,000 shares of BBLIL from UTI two weeks prior to the merger's public
announcement. In light of this transaction, the regulator accused HLL of violating provisions
of Insider Trading Regulations and SEBI Act. Accordingly, the then-Chairman, the Company
Secretary, and all of HLL's Executive Directors received a show cause notice from the
regulator. The regulator held that HLL and its directors were insiders since they had prior

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knowledge regarding this merger, and hence they were in possession of UPSI. Also, it stated
that this transaction resulted in incurring of loss to UTI. The regulator, exercising its power in
accordance with the Insider Regulations ordered HLL to compensate the UTI to extent of its
incurred losses in the said transaction which involved insider trading. According to the
regulator’s estimate, this loss to UTI was around Rs.3.4 crores. This figure was arrived at by
subtracting the price at which UTI sold its shares of BBLIL to HLL after the merger
announcement from the price at which those same shares traded on the open market before the
merger announcement, excluding premiums. SEBI penalized HLL with the said amount. Also,
criminal proceedings were initiated against five common HLL & BBLIL directors
Issues Pertaining to the Case
1. Was HLL an insider?
As per the regulations in insider trading laws in India, HLL has to be treated an insider as it
possessed access to price sensitive information of merger, being a party involved in the merger,
though, not through connections.
2. Did HLL had access to UPSI?
HLL had access to pre-merger information. However, this cannot be treated as an unpublished
price sensitive information as merger was the subject of rumours long before the deal between
HLL and UTI.
3. Did HLL gained unfair advantage through their deal with UTI?
HLL acquired BBLIL shares from UTI at Rs.350 per share. Shares of BBLIL jumped from Rs.
318 to Rs. 405 on the stock market after the merger was officially announced. If UTI had not
sold these shares earlier, but after the formal announcement of the merger they would have
received Rs. 20.83 crore more. So, we can clearly see the extent of HLL’s benefit and UTI’s
loss.
However, SAT (Securities Appellate Tribumal), which is an appellate body constituted under
the SEBI Act, in order to hear appeals against any order passed by SEBI or its adjudicating
officers, concluded that HLL could not be considered an insider in the context of SEBI Act,
1992 since HLL, BBLIL and the parent company were effectively managed together, in spite
of the presence of common directors. SAT will hereafter be referred to as ‘Appellate’. The
appellate did agreed to the regulator’s judgment regarding merger information as price
sensitive. However, it differed from the regulator as this information being an unpublished one.
In July, 1998, Finance Ministry, Government of India released HLL of all insider trading
charges and annulled all legal actions taken against its Directors. It upheld HLL’S argument
that the information regarding happening of this merger was widely known since it was
frequently rumoured in Indian media. It further stated that decision made by the regulator to
order for compensation to UTI has procedural deficiencies and lacks jurisdiction.
Case 2: Ranbaxy
In January 2012, the Indian capital market regulator alleged Mr. V. K. Kaul, independent
director at Ranbaxy and his wife, Mrs. Bala Kaul of the charges of Insider trading. Solrex
Pharma, the subsidiary of Ranbaxy was about to invest in the Orchid Chemicals. Mr. V. K.
Kaul and his wife purchased a large number of shares of Orchid Chemicals. On March 27-28,
2008, Bala Kaul had purchased shares of Orchid Chemicals from stockbroker Religare
Securities. These dates were just prior to the start of share purchasing of Orchid Chemicals by

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Solrex, started on March 31, 2008.Thus, the shares were purchased by Bala Kaul, just prior to
the start of share purchasing of Orchid Chemicals by Solrex. She bought a total of 35,000 shares
at an average price of Rs 131.71. On April 10, 2008, she sold these shares at an average price
of Rs 219.94.
The regulator thus concluded that these trades were carried out by virtue of unpublished price
sensitive information possessed by Mr. Kaul. According to the regulator, Kaul was privy to
information on Solrex's investment in Orchid Chemicals as he was a connected person, based
on which he traded on behalf of his wife in the scrip (Business Standard, 2013). The capital
market regulator ordered a penalty of Rs.50 Lac and Rs.10lac for Mr. V. K. Kaul and his wife
respectively. Even, the Appellate body upheld the decision of the regulator mentioning that
the decision of Solrex to purchase shares of Orchid Chemicals was UPSI for the insiders of
Solrex and hence, the insiders were prohibited from dealing in shares of Orchid till the
information is made available in the public domain (Business Standard, 2013). The Appellate
also stated that the regulator had placed enough evidence in the form of telephone records to
show that Kaul was in continuous touch with the top management between March 24th, 2008,
and March 26th, 2008 (Business Line, 2012).
Issues Pertaining to the Case
1. Insider
We can clearly see that Mr. V. K. Kaul was an insider, and was a connected person with the
company.
2. Access to UPSI
Mr. V. K. Kaul had access to unpublished information regarding subsidiary Solrex Pharma’s
decision to invest in Orchid Chemicals, and used this information to his advantage for trading
in shares of Orchid Chemicals.
Case 3: Infosys
On 31st May, 2021, the Indian capital market regulator banned several entities from buying
and selling securities directly or indirectly until further notice, in a case related with Infosys
Ltd. These included two key personnel of Infosys, as well as key people of Capital One Partners
and Tesora Capital (Times of India, 2021).
The case was based on trading in Infosys derivatives by Partners of Capital One and Tesora
Capital prior to the company's announcement of its results for the quarter ended June, 2020.
Audited financial statements of Infosys which comprised of P&L and Balance sheet, for the
quarter which ended June 30, 2020 were released to BSE and NSE on July 15, 2020. The
Partners of Capital One and Tesora Capital traded in the Future and Option (F&O)
segment prior to this corporate announcement. Immediately after the results were announced,
they squared off their positions. These trades helped these entities to make whooping gains of
Rs 3.06 crores. According to the regulator, the two employees of Infosys named in the case
were found to be involved in the said transaction. These two employees were in constant
contact from June 29, 2021 to July 15, 2021, resulting in the passing of UPSI, i.e. financial
results for the concerned financial period, with each other. Later on, this UPSI was shared with
the partners of Capital One and Tesora Capital.
The regulator put forth that the Infosys personnel named here were listed as designated persons
likely to have reasonable access to company’s UPSI. In addition to this initial observation, a
series of phone calls between these entities was traced(Financial Express,2021).As per the

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regulator’s notes, this will inevitably give rise to a legitimate suspicion of insider trading based
on the sheer preponderance of possibilities, which is the result of a chain of connections and
activities involving multiple entities. As per the regulator, these entities and individuals
impounded illegal gains accordingly, it passed an order in May 2021, restricting the accused
from any further access to securities market, till further order.
Regulator’s order was challenged by these employees of Infosys by filing an appeal before the
Appellate. On 2nd May 2022, the Appellate lifted restrictions imposed by SEBI on employees
of Infosys. The Appellate body stated “When only prima facie observations are being made
which the appellant has sufficiently explained and discharged his burden we are of the opinion
that at this stage debarring a person from accessing the securities market is not justified in the
facts of the case” (Mint,2022).
Issues Pertaining to the Case
1. Insider
We can clearly see that these Infosys employees, who had occupied higher management
positions in the company were insiders
2. Access to UPSI
It can be seen that the employees of Infosys, especially, Venkata Subramaniam, who held the
position of VV, Senior Principal, Corporate Accounting Group, had access to financial
statements of Infosys prior to the announcement, by virtue of his position. Moreover, exchange
of telephonic calls between different entities and individuals accused in the case can confirm
exchange of UPSI between them.
3. Use of UPSI
The timings of execution of trades and the whooping gains made, coupled with evidence of
exchange of telephonic calls during the stated period does give rise to suspicion of insider
trading
Case 4: ABS Industries Ltd.
In 1996, takeover negotiations were in place between ABS Industries Ltd. and Bayer A.G.
Bayer AG, a German company, agreed to purchase 51 percent stake in ABS. Prior to the
acquisition's public announcement, the managing director of ABS purchased shares of ABS
through his brother-in-law. (Mehta, 2021). Following announcement of the acquisition, this
stake was sold by managing director of ABS.
The regulator began investigation into this case. The investigation revealed that the managing
director of ABS was in possession of price-sensitive information when he purchased ABS Ltd.
shares on the open market, and that he acted on the basis of this information with the intent to
make a substantial profit. In light of this revelation, the regulator held the managing director of
ABS, guilty of insider trading. Accordingly, the regulator ordered him to deposit Rs. 17 lakh
with Investor Protection Fund of Stock Exchange, Mumbai and Rs. 17 lakh with NSE, so as to
compensate any investor who may make a claim afterwards.
Managing director of ABS appealed against the regulator’s order to the Appellate. He claimed
that his actions relating to acquiring or purchasing the shares from open market were in the
interest of ABS. He added that he wanted to ensure the success of takeover negotiations. Hence,
he tried to source the required number of shares, through his brother-in-law. Later, these shares
were to be sold to Bayer. The Appellate body did agreed to the regulator’s accusations that the

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ISSN: 1745-7718 Issue Number: 04

managing director of ABS had traded securities of ABS, while he was in possession of UPSI.
However, the Appellate stated that these activities of the managing director of ABS were in the
interest of ABS Ltd. (as Bayer AG was ready to acquire ABS Ltd. only if it could acquire a
minimum of 51 percent of ABS shares). As a result, managing director of ABS cannot be held
as guilty of insider trading. As per tribunal, the managing director of ABS had no intention to
make a profit. Further, it stated that it is vital to take cognizance of the insider’s motive, even
though the regulations of the SEBI Act state that trading in securities when in possession of
price-sensitive information is prohibited, nevertheless of the accused’s intentions. The
Appellate squashed the regulator’s order, which had mandated the managing director of ABS
to deposit a total of Rs.34 lakh to NSE and SEBI’s IPEF in total. This decision made by the
Appellate was abnormal, as the insider regulations in India nowhere specify the presence of
malafide intent to implicate an offender (Rao,2011).
Issues Pertaining to the Case
1. Insider
There exists no doubt regarding managing director of ABS Ltd., which was ought to be
acquired, being an insider.
2. Access to UPSI
Managing director of ABS had access to UPSI regarding take-over, as contended by the
Appellate body as well.
3. Use of UPSI
It does seem prima-facie that the managing director of ABS traded these securities through his
brother-in-law and made tremendous profits by doing so.
Analysis of the Cases
In all these cases, readers can view that in all the 4 cases above, there was sufficient evidence
to assert the people being charged as guilty of insider trading, and that the Indian capital market
regulator has tried its best to catch culprits of insider trading. In each of these cases, the person
was insider and in possession of UPSI and made trades in company’s scrip when in possession
of UPSI. However, this very regulation in the SEBI Act has not been held by the Appellate
body. According to the regulations related to insider trading in India, if a person who is an
insider to the company trades in securities of the company, when in possession of UPSI, he has
committed the crime of insider trading. Entities and individuals accused of insider trading are
able to find loopholes, use it to challenge the capital market regulator’s decision before the
tribunal, and free themselves of the punishments or penalties imposed on them by the regulator.
This does support the contention that insider trading laws have not been strictly enforced in
India as they have been in developed markets like the United States (Manchikatla & Acharya,
2017). In fact, squashing of the regulator’s orders by the Apellate has increased the confidence
of people intended to commit insider trading crime in India. At the same time, these cases do
point out the laxity in enforcement of insider trading laws. Laws which are not enforced well
are useless at its best (Bris,2005).
The regulator’s intent and urgency to prosecute culprits of insider trading can be seen well from
the graph below, which indicates that whenever SEBI takes up an insider trading case for
investigation, it does complete it without much of time lapse.

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 Accountancy Business and the Public Interest Volume: 41
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Figure 1: Data showing Insider trading cases taken up, and the insider trading
investigations completed by India’s capital market regulator, during the last decade

CONCLUSIONS AND SUGGESTIONS

There exists no doubt that insider trading is detrimental to the very functioning of capital
markets. In recognition of this, the Indian capital market regulator is on its toes to catch any
instance of such illegal and unethical practice. However, in most of the instances, its response
has been reactive rather than proactive. Moreover, there are a few limitations for the regulator
when it comes to deal with insider trading cases. First of all, Insider trading is very difficult to
prove. Secondly, the penalties and fines in India are not sufficient to discourage insider trading.
Thirdly, the culprits of Insider trading in India have been able to find the loopholes in the system
and thereby protect themselves.
The regulatory mechanism in India is ill-equipped to fight insider trading and not conducive to
the requirements of a rapidly changing economy and corporate structure (Singh,2013). In spite
of relevant provisions to deal with insider trading, the Indian legal system is ineffective curb
this financial crime (Misra,2011). Government of India (GOI) support will help the regulator
in controlling insider trading more effectively (Gupta and Ray,2021). Our research suggests
that there are certain key events or things around which most of the insider trading tends to
happen, viz. earnings announcement, mergers and acquisitions etc. Vigilance of the regulator
during such key events will help them detect insider trading cases, at its early stages. The
researchers also find that the regulator and the appellate are not on the same pages, when it
comes to interpreting insider trading laws.
Various cases filed by the regulator in high-profile insider trading cases have actually been
revoked by the appellate, which is actually damaging the reputation of the regulator of Indian
capital markets. The researchers recommend better coherence between these entities in the
understanding of provisions of Insider trading Act. Alternatively, the act can be modified in a

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 Accountancy Business and the Public Interest Volume: 41
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way that the wordings are not ambiguous and hence, interpretation of the regulator and the
appellate can be similar. An effective corporate whistleblowing policy, with safeguards and
bounties for whistleblowers can serve as a robust mechanism to detect and prevent insider
trading (Reddy and Balchandran,2015). Better co-ordination between the regulator and other
investigating agencies will add to the regulator’s strength in dealing with insider trading cases
(Mehta, 2021). With increased globalization, some regulations from developed markets such
as USA can be assimilated into the insider trading laws (Singh and Kumar,2014). However,
these should be applied only after taking into account, the unique characteristics of the Indian
environment (Budsaratragoon etal.,2012).
Referring to various insider trading cases and the literature on the subject, we propose a model
which can be used to prevent and cure illegal insider trading, especially with regards to earnings
announcement. The model can be of great utility to capital market regulators in emerging
economies.

Figure 2: Road map to effective prevention of insider trading for developing economies
(Source: Developed by Authors)

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As seen in the model, the measures are mostly preventive in nature. Insider trading regulation
framework is to be revamped in terms of more clear rules and regulations and a stricter
regulations and enforcement regime. Regulations should also advocate a better whistle-blower
policy, higher penalties. Stricter regulations can be borrowed from stricter regimes such as
USA. Vigilance should be stricter during key events such as release of financial results. Data
mining tools and software may be utilized for this purpose. The financial results ought to be
given by company to the regulator. The regular will then release this information in bits and
pieces so that illegal insider trades are not timed.

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