“INSIDER TRADING”

Presented by:

Manoj Verma

THE UNETHICAL FACE OF SECURITY MARKET

INSIGHTS

Concept of Insider TradingTheories & types of IT Imp. Incidents of Insider tradingObligation of listed Co. acc. to the

SEBI Regulation Act 2002.SEBI measures to prevent IT

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Insider

Person who is or was connected with the company or is deemed to have been connected with the company and is reasonably expected to have access, by virtue of such connection, to unpublished price sensitive information in respect of securities of the company, or who has received or has had access to such unpublished price sensitive information.

UNPUBLISHED PRICE SENSITIVE INFORMATION:-

1. Financial results of the company

2. Intended declaration of dividends

3. Issue of shares by way of public rights, bonus, etc

4. Any major expansion plans or execution of new projects

5. Amalgamation, mergers and takeovers

6. Disposal of the whole/ substantial of the undertaking.

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What is Insider Trading?

Trading of a corporation`s stock or other securities (e.g. bonds or stock options) by individuals with potential access to non-public information about the company.

In most countries, trading by corporate insiders such as officers, key employees, directors, and large shareholders may be legal, if this trading is done in a way that does not take advantage of non-public information.

Term frequently used to refer to a practice in which an insider or a related party trades based on material non-public information obtained during the performance of the insider's duties at the corporation

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American domestic guru and TV tycoon Martha Stewart went to jail for five months. When she was allowed out on probation, she wore an electronic ankle bracelet so that the police would know if she has stepped out of her house.

Her crime? She was told by her friend, Sam Waksal, that his company Imclone's cancer drug has been rejected by the food and drug administration. Before this information was made public, Stewart told her broker to sell her 4,000 shares in the company and escaped unhurt when the stock got hammered. The day after she sold the stock, it dropped 16 per cent to $46 and Stewart saved $45,673.

From the above example, it is evident that those trading on the basis of insider information have an opportunity to enter and exit at the correct time. Finally, when the news goes public, the stock goes back to its realistic price level.

Result: an ordinary investor, with little information, is stuck with the stock at a price, which could be too high or too low, while those who have inside knowledge manage to make a packet and a safe exit.

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History of IT in India

1970-Practice recognized unfair 1979, the Sachar committee-company employees have some

price sensitive information that could be used to manipulate stock prices.

company recommended amendments to the Companies Act, 1956 to restrict or prohibit the dealings of employees / insiders.

Penalties were also suggested to prevent the insider trading. 1986- Patel commttee recommended that the securities

contracts (Regulations) Act, 1956 may be amended to make exchanges curb insider trading.

1989- Abid Hussain Committee recommended that the insider trading activities may be penalized by civil and criminal proceedings and also suggested that the SEBI formulate the regulations and governing codes to prevent unfair dealings.

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History..contd..

India through Securities and Exchange Board of India (Insider Trading) Regulations 1992 has prohibited this fraudulent practice and a person convicted of this offence is punishable under Section 24 and Section 15G of the SEBI Act 1992.

regulations were drastically amended in 2002 and renamed as SEBI (Prohibition of Insider Trading) Regulations 1992.

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Types of Insider Trading

Legal

Illegal

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Why to Control Insider Trading?

To protect the general investors. To protect the interest and reputation of the

company. To maintain confidence in the stock exchange

operations. To maintain public confidence in the financial

system as a whole.

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Examples of IT cases by SEBI

Corporate officers, directors, and employees who traded the corporations securities after learning of significant, confidential corporate developments;

Friends, business associates, family members, and other tippees of such officers, directors, and employees, who traded the securities after receiving such information;

Employees of law, banking, brokerage and printing firms who were given such information to provide services to the corporation whose securities they traded;

Government employees who learned of such information because of their employment by the government; and

Other persons who misappropriated, and took advantage of, confidential information from their employers.

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The Early Story: Examples of Insider Trading

SEC v. Texas Gulf Sulphur Co. case in 1964

(earliest and most imp. Case)

The Enron Fraud case in 2001

Martha Stewart story case in 2001

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Theories of Insider trading Liability

Classical theory

Misappropriation theory

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Significant Penalties

SEBI may impose a penalty of not more than Rs 25 Crores or three times the amount of profit made out of insider trading; whichever is higher; or

SEBI may initiate criminal prosecution; or SEBI may issue orders declaring transactions in securities SEBI may issue orders declaring transactions in securities

based on unpublished price sensitive information; orbased on unpublished price sensitive information; or SEBI may issue orders prohibiting an insider or refraining an

insider from dealing in the securities of the company

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Obligations of listed company under SEBI Regulations, 2002

1. To appoint a senior level employee generally the Company Secretary , as the Compliance Officers;

2. To set up an appropriate mechanism and to frame and enforce a code of conduct for internal procedures,

3. To abide by the Code of Corporate Disclosure practices as specified in Schedule ii to the SEBI (Prohibition of Insider Trading)Regulations , 1992

4. To initiate the information received under the initial and continual disclosures to the Stock Exchange within 5 days of their receipts;

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5. To specify the close period;

6. To identify the Price Sensitive Information

7. To ensure adequate data security of confidential information stored on the computer;

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SEBI`s measure to Prevent Insider Trading May appoint an investigating officer, auditor. Communicate with insider and give him an

opportunity for his explanation. SEBI amends the act, by updating the list of

connected persons with the insiders. SEBI may:

1. initiate criminal prosecution against insider.

2. gives directions to insider for protecting the interest of investors and security market.

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BIBLIOGRAPHY

Weblinks

http://en.wikipedia.org/wiki/Enron#Insider_trading

http://www.courttv.com/trials/stewart/chronology.html

http://blogs.chron.com/legalcommentary/archives/2006/03/post.html

http://beginnersinvest.about.com/cs/newinvestors/a/102702a.htm

http://en.wikipedia.org/wiki/Whistleblowers

http://www.cfo.com/article.cfm/3002308/c_2984379/?f=archives

http://en.wikipedia.org/wiki/Insider_trading

http://www.seclaw.com/docs/insidertrading033104.htm

Legislations/Regulations

Securities and Exchange Board Of India (Insider Trading) Regulations, 1992

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THANKS ! ! ! !

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