UNIT -3

Insider Trading
AVANTIKA BANERJEE
 What is Insider Trading?
• Insider trading generally means trading in the
shares of a company by the persons who are in
the management of the Company or are close
to them on the basis of undisclosed price
sensitive information” regarding working of
the company, which they posses but which are
not available to others
 Why is Insider Trading a
punishable offence?
• Unfair practice
• Discrimination among investors
• Lack of trust in the security markets
• No real idea of companies value and standing
 What is Price sensitive
Information?
• Financial results
• Dividends
• Change in capital structure
• Corporate restructuring( mergers,
acquisitions, takeovers)
• Change in Key managerial personnel (CEO,
CFO, Managing Director, CS)
 Insider Trading definition by
SEC(Security Exchange
Commission, USA)
• The U.S. Securities and Exchange Commission defines illegal

insider trading as:

• "The buying or selling a security, in breach of a fiduciary duty

or other relationship of trust and confidence, on the basis of

material, non-public information about the security."

 Cases on Insider Trading
• Strong v. Repide in this case it was held by the
US supreme court that actions of the directors
who sold his shares without informing the
other investors of the probable losses can be
held as fraudulent. His action was also called
as deceitful and intimidating.
 Cases on Insider Trading
• United states V. O’Hagan case (United States V.
O'Hagan , 1997)In this case the Law firm of the
accused was retained by the company and he
eventually learned that the company was going to
take over another profitable entity and bought its
share on this piece of Insider information and made
a huge profit and then was charged guilty of Insider
trading as he possessed information which no other
investor had thus making him guilty of the same.
 Martha Stewart Case
• The Martha Stewart Case The Martha Stewart case grabbed the attention
of the whole world as strictness of the Security Exchange commission was
well demonstrated as served severe penalty of. In this case American
business tycoon Martha Stewart had invested in a bit coin company
ImClone which faced a huge loss and subsequently the price of its stock
fell. But Martha Stewart had old all her shares before the actual falling of
the share prices and saved herself from a loss of millions of dollars. Later
upon investigation it was found that she was tipped an insider information
by the broker who used to deal for her and he was connected to the director
the said company Sam Waskal who had given him the access to that
unpublished piece of information. She was finally imprisoned for five
months had to step down from CEO Position of her company and had to
give a penalty of millions of dollar.
 Laws on Insider Trading in India
• The motive behind establishment of Security and Exchange
board of India was investor protection and creating
transparency in the securities market.
• SEBI deals with the instances of Insider trading very seriously
and prosecution under the Act takes places. Section 15G of the
SEBI Act, 1992 (SEBI, n.d.)lays down that if insider:
• (i) either on his own behalf or on behalf of any other person,
deals in securities of a body corporate listed on any stock
exchange on the basis of any unpublished price sensitive
information; or
 Laws on Insider Trading in India
• (ii) communicates any published price sensitive information to any
person, with or without his request for such information except as required
in the ordinary course of business or under any law; or
• (iii)counsels, or procures for any other person to deal in any securities of
anybody corporate on the basis of unpublished price sensitive information,
• Shall be liable to a penalty not less than ten lakh rupees but which may
extend to twenty-five crore rupees or three times the number of profits
made out of insider trading whichever is higher. Also, under section 15 HA
penalty for fraudulent and unfair trade practices are imposed in which it
can amount from five lakh rupees to twenty-five crore rupees.
 SEBI regulation 2015
• SEBI (Prohibition of Insider Trading) Regulation 1992 was passed to deal
with the cases of Insider trading but it was replaced by SEBI (Prohibition of
Insider Trading) Regulation 2015.This law was passed to align the Indian
laws with the global dealing of the issue.
• This regulation is divided in Five chapters and two schedules.
• Under the regulations the person who can act as an insider has been divided
in to different categories ‘Insider’ means any person who is connected or
having possession and access to unpublished sensitive information. The other
category includes ‘Connected’ person and ‘Person deemed to be connected’.

• The term ‘ Insider’ includes ‘person connected ‘ ‘ person deemed to be

connected ’.