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Insider Trading
By: Prof. K.S. Murthy
Insider Trading
SEBI (Insider Trading) Regulations 1992, [Regulation 2(c)] Insider is:– Natural person or Legal Person– Connected or deemed to have been connected
with the company, and– Access to unpublished Price – Sensitive
information– Has received or has had access
04/28/232
Tests to Confirm Insider
Test of Connection:– Connected person (Direct Insider)
Director, Deemed Director, Officer or an Employee – permanent/ part time/ contract basis
Person having professional or business relationship– Deem to be connected (an indirect insider)
Organization remotely connected, Directors, Officers & Relatives – Period of connection (either present or past in time dimension)
Test of Access– Actual or presumed access– Reasonable presumption is enough
04/28/233
Price Sensitive Information
Specific Matters:– Financial results, Intended declaration of
dividends, issue of shares– Major Expansion plan, Amalgamation, Merger or
Takeover, Disposal– Information affecting the earning, Change in
policies, Operations
04/28/234
cont… Price Sensitive Information
Unspecified Matters:– Selective leaks to the press– Published by the company as the matters
generally known– Not generally known and likely to affect the price
of the securities
04/28/235
What Comprises “Insider Trading”
Dealing in securities– Beneficiary self or third party
Communicating information– Sender of information
Counseling others for trading– Communicates and positively induces
The crux is leakage and abuse of price sensitive information
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ILL effects of insider trading
Inequitable market practice– Information asymmetry gives unfair advantage
Breach of fiduciary responsibility– Seeks to enrich self at the cost of shareholders
Conflict of interest– Company lose in terms of the appreciation of its market value
Excessive speculation– Result in sharp volatility
Market in disrepute– Impairs the investor confidence
04/28/237
Information Asymmetry
04/28/238
Supplier
DirectorOfficer
Access toInformation
Access to Information
InsiderGainer
PublicLoser
Public
Auditor
Relative
Information Asymmetry
Direct:
Indirect:
Banks, FIs
Code of Internal procedures and conduct
Frame a code of internal procedures and conduct Initial disclosure of interest and shareholding in a
listed company Continuous disclosure change in shareholding
and voting rights Disclosure by company to stock exchange Violation liable for action under Sec 11 or 11b
and/or Sec 24 of SEBI Act
04/28/239
Model code of conduct for listed companies
Appointment of compliance officer Preservation of “Price Sensitive Information” To be handled on a “Need to know Basis” Limited access to confidential information Prevention of misuse of price sensitive
information, trading window, pre clearance of trades
04/28/2310
Cont … Model code of conduct for listed companies
Fresh Pre-Clearance and minimum holding period
Initial, Periodic and annual reporting Violation attract disciplinary action by
company
04/28/2311
Corporate Disclosure policy
Prompt disclosure of price sensitive information Overseeing Coordinating Disclosure Responding Market Rumors Timely reporting of shareholding /ownership Disclosure/ Dissemination of PSI with special
reference to analysts, institutional investor Medium of disclosure/ dissemination Dissemination by stock exchanges
04/28/2312
Model code of conduct for the entities
Chinese wall policy to separate “Insider Area” and “Public Area”
Restricted/ Grey list Listed intermediaries to comply both
04/28/2313