Insider Trading Final V1.1

8/6/2019 Insider Trading Final V1.1

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INSIDERTRADING &

INSIDER TRADING

GUIDELINES BY SEBI



Agenda for PresentationIntroduction

History behind insider trading

Regulatory Aspect of Insider Trading

Case



IntroductionInsider trading essentially denotes dealing in acompany s securities on the basis of

confidential information relating to thecompany which is not published or not knownto the public used to make profit or loss. It isfairly a breach of fiduciary duties of officers of a company or connected persons asdefined under the SEBI regulations,1992,towards the shareholders.



Cont dInsider terms actually includes both legal and illegal conduct.

The legal version is when corporate insider officer, directors ,and employees buy and sell stock in their own companies.when corporate insiders trade in their own securities , theymust report their trades to SEBI.

Illegal insider trading refers generally to buying or selling asecurity , in breach of fiduciary duty or other relationship of trust and confidence, while in possession of material , nonpublic information about the security.



W ho are insider traders?Corporate officers, directors , and employees.

Friends , business associates, family members.Employees of law, banking, brokerage andprinting firms.

Government employees.Other persons who misappropriated ,and tookadvantage of, confidential information fromtheir employers.



Why forbid insider trading?

The prevention of insider trading is widely treated as an importantfunction of securities regulation.In order to make sense of insider trading , we must have basicunderstanding of markets, prices and role of markets in theeconomy.Insider trading appears unfair, especially to speculators outside acompany who face difficult competition in the form of insidertrading.As per SEBI the Prohibition of Insider Trading is required to make

Securities Market:Fair & Transparent

To have a level playing field for all the participants in the market

For free flow of information & avoid information asymmetry



History behind Insider TradingRegulation in India

Insider trading in India was unhindered in its 130 year oldstock market till about 1970.

Amendments -In 1979 - the Sachar committee.

In 1986 - the P atel committee.

In 1989 - the Ab id Hussain committee.

India through SEBI regulations 1992 has prohibited thisfraudulent practice.These regulations were drastically amended in 2002 andrenamed as SEBI regulations 1992.



In IndiaOnly 14 cases taken up by SEBI for insider tradingin 2003-04 , which went down to only 7 in 2004-05.

In terms of cases completed, the no was only 9and 5 respectively.

So does India has fewer incidence of insidertrading or our systems/laws not geared enoughto detect such cases?



INSIDER TRADING GUIDELINES BY SEBI



W ho is Insider???W ho is Insider is defined under the SEBI Prohibition of Insider Trading regulation 2 (e)

I nsider is the person who is connected with thecompany , who could have the Unpu b lished pricesensitive information or receive the information fromsome b ody in the company .

For the purpose this definition, words connectedperson shall any person who is a connected person sixmonths prior to an act of insider trading



Relatives are defined very extensively in the

companies act 19561. Father2. Mother3. Son4. Son s wife

5. Daughter6. Father s father7. Father s mother8. Mother s mother9. Mother s father10.Son s son11.Son s son s wife12.Son s daughter

11.Son s son s wife12.Son s daughter13.Son s daughter s husband14.Daughter s husband

15.Daughter s son16.Daughter s son s wife17.Daughter s daughter18.Daughter s daughter s husband19.Brother20.Brother s wife

21.Sister22.Sister s husband

But several close relatives are excluded Like all in-laws (Brother-in-law, Father-in-law etc.)-Brothers¶ wife¶s brother etc.



W hat is price sensitive information???

The Price sensitive information is defined inRegulation 2(h)(a) of the prohibition of InsiderTrading.

I t means any information which relatesdirectly or indirectly with the company &which if pu b lished is likely to materially affect the prices of the security s of thecompany .



Regulation 3 of the Prohibition of Insider trading

No Insider should deal insecurity , while inpossession of UPPI.He / She should not communicate or procurethe UPPSI to others.Regulation 3(B) - This regulation states that

there should be Chinese W all W ith in thecompany & one department should not knowabout what other departments are doing.



Disclosures for prohibition of Insider Trading

Initial Disclosure

Like buying the stake greater than the 5% of thepaid up capital of the company ,the acquiringcompany should inform the Stock Exchange with in 2days of acquiring the stake.

The new director should disclose all its trade positionin Equity or derivatives with in 2 days of itsappointment.



ContdContinuous Disclosure

If the director changes its holding by 2% .

Investment of Rs 5 Lacs or 25000 shares or buyingthe 1% stake of the paid up capital which ever is theleast should be disclosed.All holdings in securities of that company.

Periodic statements of all transactions.Annual statement of all holdings.Any other disclosure of the company to stock

exchanges.



Investigation of Insider TradingRegulation 4(a) deals with the request for the enquiries.

SEBI can also appoint the outsider auditor for the enquiry & auditorwould have the same power as the SEBI possess.

Before undertaking any investigation under regulation (5) SEBI shallgive a reasonable notice to insider for that purpose.

W here SEBI is satisfied that in the interest of investors or in publicinterest no such notice should be given, it may by an order inwriting direct that the investigation be taken up without suchnotice.



SEBI s Power to make inquiries andinspection

R egulation 4A

If the SEBI suspects that any person has violated any provision of

these regulations, it may make inquiries with such persons.

The SEBI may appoint officers to inspect the books and records of insider(s) for the purpose of inspection.

The SEBI can investigate and inspect the books of account, eitherrecords and documents of an insider on prima facie.

SEBI can investigate into the complaints received from investors,intermediaries or any other person on any matter having a bearingon the allegations of insider trading.



HLL-BBLIL MERGER CASE



HLL BROOKBOND LIPTON INDIA LTDHLL bought 8,00,000 shares of BBLIL from UTI at apremium.

Two weeks later, formal announcement of HLL andBBLIL merger.

HLL claimed that the purpose of the purchase of shares

was to enable Uniliver to acquire 51% shares of BBLIL.

SEBI held that HLL was using UPPSI to trade, and wastherefore guilty of insider trading.



HLL BROOKBOND LIPTON INDIA LTDSEBI directed HLL to pay UTI Rs 3.4 Crore in compensation,and also initiated criminal proceedings against the fivedirectors of HLL and BBLIL.

HLL appealed against the SEBI verdict to the Union Ministryof Finance.

HLL s contention : merger was the subject of widespeculation by the market and the media.

HLL pointed out that the share price of BBLIL moved upfrom Rs 242 to Rs 320 between January and March, beforethe transaction, indicating that the merger was generallyknown information .



HLL BROOKBOND LIPTON INDIA LTDHLL contended that to be considered as an insider, itshould have received information by virtue of suchconnection to the other company.

According to HLL, it was an initiator and the transferee,and it was the primary party to the merger and noprimary party to the merger can be considered aninsider from the point of view of insider-trading.

HLL argued that they had no information about theSwap ratio.



OBSERVATION

Inability of SEBI in proving its cases.

W ide definition of Insider Trader as defined in the 1992

Act.

Lack of assistance from Central Economic IntelligenceBureau (CEIB) to investigate the cases.

Absence of an adequate remedy available to theinvestors at large.



Model Code of Conduct for ProhibitionAppointment of a compliance officer.

There should be pre-clearance of trade by the officer

of designated employees.

Trading window should be closed for certain durationprior & post event for the connected persons duringthe UPPSI activities like RESULTS,IPO,CAPEX,BUY BACK ,etc.Legalizing Insider Trading

Code of Insider Trading.pdf



Thank you

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Insider Trading Final V1.1

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