INSIDER TRADING
SECURITIES LAW
INTRODUCTION
Insider trading is the buying or selling of a security by someone who has
access to material non-public information about the security. Insider
trading can be illegal or legal depending on when the insider makes the
trade. It is illegal when the material information is still non-public.
WHO IS AN INSIDER?
The term ‘insider’ has been defined under Regulation 2(e) of SEBI
(Prohibition of Insider Trading) Regulations, 1992. Basically, the term
‘insider’ can be classified into three broad categories, which are:
▪ Persons who are connected to the company,
▪ Persons who were connected with the company,
▪ Persons who are deemed to be connected to the company.
PENALTIES FOR COMMITING INSIDER TRADING
The penalties and punishments for committing insider trading have been
defined under Chapter IV-A of the SEBI Act. The penalties have been
discussed below according to the SEBI (Amendment) Act, 2002.
▪ Section 15(G)(i)– if an insider either on its own or on behalf of any person
has dealt on behalf of his company any unpublished information then he
may be fined with RS. 25 crores or 3 times the profit made, whichever is
higher.
▪ Section 15G(ii)– if an insider has given any price sensitive information then
he may be fined up to RS. 25 crores or 3 times the profit made.
▪ Section 15G(iii)– if an insider has procured any other person to deal in
securities of anybody corporate on basis of published information then he
may be fined up to RS. 25 crores or 3 times the profit made which is higher.
UNPUBLISHED PRICE SENSITIVE INFORMATION
Unpublished price sensitive information means any information which
refers to the internal matters of the company and ordinarily it is not
disclosed by the company in the regular course of the business.
TRACK RECORD
INVESTIGATIONS INVESTIGATIONS
▪ Efficiency is very low YEAR
TAKEN COMPLETED
▪ Very hard to prove 2010-11 28 15
▪ Not enough employees to run 2011-12 24 21
everything effectively 2012-13 11 14
2013-14 13 13
2014-15 10 15
CASE 1
Hindustan Lever Limited v. SEBI (1996)
Hindustan Lever Limited v. SEBI (1996)
▪ This case mainly concerns the purchase of 8 lakh shares by HLL of
BBLIL from the Unit Trust of India on March 25, 1996. This purchase
was made barely two weeks prior to a public announcement for a
proposed merger of HLL and BBLIL. Upon investigation, SEBI found
that HLL was an insider at the time of purchase.
▪ SEBI upon investigation found that at the time of purchase of shares
of BBLIL from UTI, HLL was an insider under Section 2(e) of the 1992
Regulations. HLL filed an appeal before the appellate authority
asking on what grounds they can be termed as an insider. But after
hearing on the evidence of HLL, the authority appreciated the
evidence but it was not enough to prove it. Consequently, the
appellate authority found the SEBI investigations right. The matter is
currently pending before the Supreme Court.
CASE 2
TISCO case (1992)
TISCO case (1992)
▪ In this case, the profit of TISCO for the first half of the financial year
1992-93 felt to Rs. 50.22 crore in comparison to the profit of Rs.
278.16 crore for the financial year 1991-92. Before the announcement
of the half-yearly results, there was intense activity in the trading of
share between October 22, 1992, and October 29, 1992. However,
the SENSEX saw a decline of 8.3% during the same period. The
insiders who had the knowledge of the same had manipulated the
market to make short sales. Small investors were hit badly. Due to
the absence of insider trading regulations in India, it was not possible
to investigate the case.
CASE 3
DSQ Holdings Ltd. v. SEBI (1994)
DSQ Holdings Ltd. v. SEBI (1994)
▪ DSQ biotech ltd. (DSQB) was originally promoted by KND engineering and
technologies ltd., jointly with Tamil Nadu industrial development corp. DSQ
Holdings Ltd. Is a same promoter group company of DSQB. The board of directors
held a meeting on 30 July 1994 considered rights issue and same was
communicated to the stock market. The purpose of sending information to the
public was to properly disseminate it.
▪ The erstwhile management of DSQB entered into an agreement in April 1994 with
DSQH Ltd. promoted by Shri Dinesh Dalmia (DD) group. Through the agreement,
the DSQ Holdings Ltd. (DSQH) purchased 44, 98,995 shares of DSQB at the rate of
Rs. 15.94 per share from the erstwhile promoters. Thereafter DSQ group made an
offer as per clauses 40A and 40B of the Listing Agreement to acquire a further
17,66,400 shares (20% of the paid-up capital of the company) during the last
quarter of 1994. The scrip of DSQB prior to the takeover of the company by the
DSQ group in April 1994 was not actively traded on the exchanges with the price
hovering in the region between Rs.12 and Rs.18 during most part of 1993 and also
during the first half of 1994. The scrip witnessed considerable movement both in
terms of price and volume immediately after the DSQ group took over the
company.
A detailed investigation was carried out by SEBI. It was found that there
was a steep jump in shares of DSQB from RS. 20 to RS. 92. From the
investigation of SEBI, the DSQB failed to give the actual proof of
dispatch of AGM notice. Regulation 2(k)(iii) of the SEBI (Prohibition of
Insider Trading) Regulations, 1992 considers the information regarding
the issue of shares by way of public, rights, bonus etc. as unpublished
price sensitive information. In this case, it was clear that DSQB made an
advantage over other investors. So DSQH was a ‘connected person’
under regulation 2(c) of SEBI Insider trading regulations.
