Insider trading 30.01.05

transcript

Insights of

INSIDER TRADING

Pavan Kumar Vijay

What IsINSIDER TRADING?

INSIDER TRADINGIt is dealing in the securities

by a Insider,

who has the knowledge of

material “inside” information

which is not known

to the general public

How BAD It Is ???

Used to make profit at the expense of other

investors

Leads to loss of confidence of investor in stock

market

The process corrupts the ‘Level Playing Field’

It is easier to identify the beneficiaries of insider

dealing. But the extent of losses occurred is

impossible to calculate.

SEBI (Insider Trading) Regulations, 1992

Governing Regulations

SEBI (Insider Trading) (Amendment) Regulations, 2002

SEBI ( Prohibition of Insider Trading) (Second Amendment) Regulations, 2002

19.11.1992

20.02.2002

29 .11.2002

Who IsINSIDER ???

Reg 2 (e) ANY PERSON

CONNECTED WITH THE COMPANY

DEEMED TO HAVE BEEN CONNECTED

WHO IS REASONABLY EXPECTED TO HAVE

ACCESS HAS RECEIVED HAS HAD ACCESS OR OR

UNPUBLISHED PRICE SENSITIVE INFORMATION

INSIDER

Connected Person??Who Is

Reg 2 (c)ANY PERSON

Deemed to be a directorU/s 307(10) of Co. Act

Is a director U/s 2(13) of Co Act

HOLDS A POSITION INVOLVING

WHO MAY REASONABLY EXPECTED TO HAVE ACCESS TO UPSI

OR EmployeeOfficer

Business RelationshipProfessional Relationship OR

WhetherTemporary PermanentOR

Connected Person

Connected Person Explanation :

WHO IS CONNECTED PERSON

ANY PERSONSHALL MEAN

THE WORD “CONNECTED PERSON”

SIX MONTHS

PRIOR TO AN ACT OF

INSIDER TRADING

“Person Deemed

Connected” ?

Who Is

Company under Same Management / Group / Subsidiary

Reg 2 (h)Person Deemed to be Connected

All Intermediaries, Their Employees & Directors

Investment / Trustee / Asset Management Company,their Employees & Directors

Officials of Stock Exchange / Clearing House / Corporation

Board of Trustee Members & Directors of Mutual Fund

Public Financial Institution, Its Employees & Directors

Relative of any of the aforementioned Persons

Bankers of the company

Reg 2 (h)Person Deemed to be Connected Contd.

Relatives of the Connected Persons

Any Concern / Firm / trust / HUF/ Company / AOP

In which

Directors or Deemed Directors / Relatives of Connected /Deemed Connected Persons or company banker

Have More than 10% of the holding or Interest

Price Sensitive Information

Reg 2 (ha)

ANY INFORMATION

TO A COMPANY

LIKELY TO MATERIALLY AFFECT THE PRICE OF SECURITIES OF THE COMPANY

INDIRECTLYDIRECTLY

Price Sensitive Information

WHICH RELATES

WHICH IF PUBLISHED

Deemed Price Sensitive Information Reg 2 (ha)

Periodical Financial Results of the company;

Intended declaration of dividends;

Issue of securities or buy-back of securities;

Expansion Plans / New projects;

Amalgamation, mergers or takeovers;

Disposal of undertaking;

Changes in policies of the company

Price Sensitive Information Listing

Change in the general character or nature of business

Disruption of operations due to natural calamity.

Commencement of Commercial Production/ Commercial Operations

Litigations/ dispute with a material Impact.

Revisions in Ratings

As per Clause 36 Listing Agreement Contd.

Any other information having bearing on the operation/ performance of the Company as well as price sensitive information which includes but not restricted to;

Change in market lot / sub-division ;

Voluntary delisting by the company ;

Forfeiture of shares;

Alteration in terms of any securities ;

Information regarding securities issued abroad ;

Cancellation of dividend/ rights/ bonus etc.

Price Sensitive Information Listing As per Clause 36 Listing Agreement Contd.

Un - Published

Un - PublishedReg 2 (k)

Information, which is not published

by the company or its agents and

is not specific in nature.

Explanation: Speculative reports in print or electronic media

shall not be considered as published information

Dealing in Securities

Dealing in SecuritiesReg 2 (d)

"Dealing in Securities" means an act of

subscribing buying, selling

or agreeing subscribe to buy, sell or deal in any securities

by any person either

as principal or agent;

Prohibition on Dealing,

Communicating or Counseling

Reg 3 Prohibition On Insider

NO INSIDER

On Other’s behalf Either on his own behalf

DEAL IN SECURITIES OF THE COMPANY

IN POSSESSION OF ANY UPSI

COMMUNICATE / COUNSEL / PROCURE

Directly IndirectlyOR

ANY UPSI TO ANY PERSON

Reg 3 Exemption to Prohibition For Insider

For any communication which is required in the

ordinary course of business or profession or employment

or under any law.

Reg 3A Prohibition On Company

NO COMPANY

Deal in Securities of

IN POSSESSION OF ANY

Other companyAssociate of that other company OR

UNPUBLISHED PRICE SENSITIVE INFORMATION

Reg 3B Exemption to Prohibition

The decision of transaction or agreement was not taken by officer or employee of the company who is in possession of UPSI; AND

Adequate Procedures in place to demarcate the persons having UPSI & persons dealing in securities; AND

Proper arrangement in place to block the dissemination of UPSI; AND

The information was not so communicated and no such advice was so given; OR.

The acquisition was in line with SEBI SAST Regulations

Exemption to Prohibition For Company

Violations

of Provisions Relating to

Insider Trading

Reg 4 Violation

Any insider, who

deals in securities in contravention of the

provisions of Regulation 3 or 3A shall be

guilty of Insider trading.

Power of SEBI To Make Inquiries &

Inspections

Reg 4A Power to make Inquiries & inspection

If the Board suspects that any person has violated any provision of these regulations, it may make inquiries OR appoint persons to inspect books & recordsof such persons OR any Stock Exchange / Mutual Fund / Intermediaries/ Any other personas deemed fit, to form a prima facie opinion as to whether there is any violation of these regulations.

Right of SEBI

Investigate

Reg 5 Right to Investigate

The Board may appoint investigating authority to investigate

into the complaints received from investors, intermediaries or any other person

on any matter having a bearing on the allegations of insider trading;

AND To investigate suo-moto

upon its own knowledge or information in its possession

to protect the interest of investors in securities against breach of these regulations.

Procedure

Investigation

On Complaints/ Suo-moto

On ConclusionReport to Board

Board will Issue directions

Investigation Started

Appointment of Invtg. Auth.

Notice Issued

To provide all assistance

Shall Reply within 21 days

Findings to suspected person

Procedure for InvestigationReg 6 - 9

Directions

Reg 11 Directions by Board

INDEPENDENTof right to Initiate Criminal proceedings

OR any action under Chapter VIA of the Act (Penalties & Adjudication) ,

May Direct• Not to deal in securities • Prohibition on Disposal

• Restraining to Communicate or Counsel• Declare transaction as null & void

• To deliver securities back to the seller• Or market price equivalent be paid to the seller

• To transfer the proceeds to the Investor Protection Fund of Stock Exchange

Disclosures

Reg 13(1)

PARTICULARS

TO BE SUBMITTED

To PERIOD

Initial disclosure by person who holds

more than 5% shares/ voting rights in any

listed company

Company

within 4 working days of receipt of

information of allotment or the acquisition of

shares/voting right

Disclosures To be Made

To Intimate The number of shares held by such persons

Reg 13(2)

PARTICULARS

TO BE SUBMITTED

To PERIOD

Initial disclosure by person who is

either director or officer

of listed company

Company

within 4 working days of becoming the

director or officer of company

To Intimate The number of shares held by such persons

Reg 13(3 & 5)

PARTICULARS

TO BE SUBMITTED

To PERIOD

Continual disclosure by

person who holds more than 5% shares/ voting

rights in any listed company

Company

shares/voting right

To Intimate The number of shares held & any Change

exceeding 2%

Reg 13(4 & 5)

PARTICULARS

TO BE SUBMITTED

To PERIOD

Continual disclosure by person who is

either director or officer

of listed company

Company

shares/voting right

To Intimate The number of shares held & any Change exceeding

Rs. 5 Lakh OR 25000 Shares OR 1% whichever is Lower

of Conduct

Code of Conduct

To be Abide By

Reg 12

All Listed Companies Organizations Associated with Securities Markets including: All intermediaries AMC and trustees of mutual funds; The Self Regulatory Organizations; The Stock Exchanges / Clearing House / Corporations; The Public Financial Institutions The Professional Firms

Such as Auditors, Accountancy Firms, Law Firms, Analysts, Consultants, etc.,

Assisting or Advising Listed Companies

Model Code of Conduct Schedules

SCHEDULE I

MODEL CODE OF CONDUCT FOR PREVENTION OF INSIDER TRADING

PART A - FOR LISTED COMPANIESPART B – FOR OTHER ENTITIES

SCHEDULE II CODE OF CORPORATE DISCLOSURE PRACTICES

FOR PREVENTION OF INSIDER TRADING

Important Terms

Code of Conduct

PSI should be disclosed only to those within the company who need the information to discharge their duty.

Limited access to confidential information

Files containing confidential information shall be kept secure.

Computer files must have adequate security of login and pass word etc.

Model Code of Conduct

IMPORTANT TERMS

NEED TO KNOW

All D/O/E of the Co who intend to deal in the securities beyond a limit should pre-clear the transactions.

An application to the Compliance officer indicating

The estimated number of securities that the D/O/E intends to deal in, The details as to the depository with which he has a security account,

The details of securities in such depository mode.

Other details as may be required by any rule made by the company in this behalf.

IMPORTANT TERMS PRE CLEARANCE OF TRADES

Company shall specify a trading period, to be called "Trading Window", for trading in the company’s securities.

The trading window shall be closed during the time the Price Sensitive information is un-published.

When the trading window is closed, the D/ E /O shall not trade in the company's securities in such period.

The trading window shall be opened 24 hours after the Price Sensitive Information is made public.

Model Code of ConductIMPORTANT TERMS

TRADING WINDOW

To restrict trading in certain securities and designate such list as restricted / grey list.

Client Companies for which any assignment or appraisal report or credit rating assignments are going on.

Any security which is purchased or sold by the organisation / firm on behalf of its clients / schemes of mutual funds, etc. shall be put on the restricted / grey list.

As the restricted list itself is a highly confidential information, It shall be maintained by CO.

RESTRICTED /GREY LIST

"Chinese Wall" policy demarcates “inside areas” from "public areas".

Those areas having access to confidential information,

considered “inside areas” and areas which deal with sales / marketing / investment considered "public areas".

The employees in the inside area shall not communicate any PSI to anyone in public area.

In exceptional circumstances employees from the public areas may be brought "over the wall" and given confidential information on the basis of "need to know" criteria, under intimation to the CO

IMPORTANT TERMS CHINESE WALL

Compliance Officer ‘Senior Level Employee’ who shall report to the MD / CEO.

The CO shall be responsible for - setting forth policies, procedures - monitoring adherence to the rules for the preservation of “PSI”, - pre-clearing of designated employees’ and their dependents’ trades - monitoring of trades and the implementation of the code of conduct under the overall supervision of the Board of the listed company.

The CO shall maintain a record of the designated employees and any changes made in the list of designated employees. To Provide clarifications regarding the SEBI (Prohibition of Insider

Trading) Regulations, 1992 & the company's code of conduct to the Company’s employees..

COMPLIANCE OFFICER (CO)

Code provides Penalty and Appropriate action by the company for violations of code. Disciplinary action by the company, include wage freeze, suspension, ineligible for future participation in ESOP etc The action by the company shall not preclude SEBI from taking any action incase of violation of SEBI (Prohibition of Insider Trading), Regulations, 1992.

PENALTY FOR CONTRAVENTIONOF CODE OF CONDUCT

Action By SEBI

Against

Violations

Take actions to Prohibit Insider Trading – U/s 11. Issue directions in Interest of Investors & Securities

Market – U/s 11B Impose Penalty ( 25 Crore) / Imprisonment (10 Years)

U/s - 24

Reg 14GENERAL ACTION

AGAINST VIOLATIONS

Sec 15 G of SEBISPECIFIC ACTION

AGAINST VIOLATIONSAPPLICABILITY :

Any Insider Who

Deals in Securities based on any UPSI. Communicates any UPSI to any person, with or

without his request Counsels / procures to deal in Securities Based on

PENALTY : Rs. 25 Crore OR 3 times the amount of profit made Whichever is HIGHER

Interesting

Judgements on

Insider Trading

MATTER OF DEBATE

WHETHER AN ACTION UPON ANY PRICE SENSITIVE INFORMATION WHICH TURN OUT TO BE INCORRECTFALLS UNDER INSIDER TRADING

SAMEER ARORA VS. SEBI

INFORMATION WHICH FINALLY TURNS OUT TO BE FALSE OR AT LEAST UNCERTAIN CANNOT EVEN BE LABELED AS INFORMATION.

MATTER OF DEBATE

WHEN AN PRICE SENSITIVE INFORMATION WILL BE TREATED AS MADE PUBLIC

DSQ HOLDINGS VS. SEBI

THE DAY ON WHICH THE INFORMATION IS SENT TO THE STOCK EXCHANGE AS PER THE LISTING AGREEMENT.

2. DSQ HOLDINGS VS SECURITIES & EXCHANGE BOARD OF INDIA.

BRIEF ISSUES & DECISION The appellant was charged for indulging in the insider trading in theshares of the Company via DSQ Biotech Ltd.(DSQB). The Transaction Relates to the period from 1/08/1994 to 30/09/1994. The respondent hasheld that appellant is an insider and it had purchased shares on the basisOf UPPSI relating to RIGHT ISSUE. The appellant is found guiltyof violating regulation 3(I) of the Insider Regulations.

The impugned order states that the information on the right issue Becomes public only on 309/94 when the AGM was held. The notice of AGM was dispatched to the shareholding on 25/08/94.

The Appellant states that the right issue was first discussed in the Board Meeting of the Co. held on 30/7/94. The Company send the Information to the Stock exchange as per the Listing Agreement on the Very same day. The concerned public was aware of the company’s Proposal the very same day

Thus the ingredients of insider trading not found in the case and henceThe appeal was dismissed.

Disclosure of confidential information by son to his fatherconcerning adverse Corporate developments at the Companybecause of the a new drug jointly being developed by thecompany along with Other Company. Father used theinformation and purchased the Co’s “PUT” Options.

Father sold the put options on Co’s JV termination generating an overnight profit of more than $ 55,000.

S E C VS TIMOTHY J.POTTER & GEORGE R.POTTER

INTERNATIONAL JUDGEMENT

Both Father & Son was charged of the GUILTY OF INSIDER TRADING

Alfred Teo a major shareholder of a company learned about the tender Offer for the company and then purchased the stock on the basis of this Information prior to the Company’s Public announcement of the Acquisition. Teo also tipped eight other defendants. Thereupon made illicit profits of approximately $22 Million.

It was proved that the defendants use the inside information and also Give tips to others and earned illicit profits.

S E C VS ALFRED S.TEO, SR, ET AL

The exchange ordered for disgorgement of all illicit profits, Civil penalties, permanent injunctions also.

Arjun Sekhri, a former investment banking associate having An inside confidential information about the Company tipped Various other persons in advance of six major corporate Announcements

S E C VS ARUM SEKHRI, AMLOLAK SEHGAL, & PRATIMA RAJAN

The offence of insider trading was proved against the defendants and they were sentenced for Imprisonment and were asked for disgorgement of the Trading profits.

It is easier to identify the beneficiaries of insider dealing.

But the extent of losses occurred to the

general investor is impossible to calculate.

Lastly…

Let’s we knowingly not involved in this practice

and put in place proper measures so would not get involved in

Insider Trading.

Thus…

Thanks…