INSIDER TRADING

AN OVERVIEW

o History

o Legal Framework

o Meaning of Insider Trading

o Need of Insider Trading Regulation

o Meaning of Insiders

o Connected Persons

o Price Sensitive Information

o Prohibition of Trading

AN OVERVIEW

o Free Period

o Disclosures as per Securities And Exchange Board of India (Prohibition of Insider Trading), 1992

o Penalties

HISTORY OF INSIDER TRADING REGULATION

o In 1979, the Sachar Committee recommended amendments to the Companies Act,1956 to prohibit the insider trading.

o In 1986, the Patel Committee recommended that the Securities Contracts Act, 1956 may be amended to curb insider trading and unfair stock deals.

o In 1989, the Abid Hussain Committee recommended that the insider trading activities may be penalised by civil and criminal proceedings and also suggested the Securities And Exchange Board of India (SEBI) to formulate the regulations and the governing codes to prevent unfair dealings.

o In 1992, Securities And Exchange Board of India (prohibition of Insider Trading) Regulations, came into force to prohibit insider activities.

o SEBI introduced regulations to govern Insider Trading in 1992

o Regulations modified from time to time

o Applicable to all Listed Companies

o Applicable to all Registered Intermediaries

o Regulations require Company to adopt internal code of conduct

LEGAL FRAMEWORK

MEANING OF INSIDER TRADING

Saira is an Accounts

Manager in XYZ Ltd

Sahil is her husband who runs his own recruitment consultancy firm

MEANING OF INSIDER TRADING

One fine day when Saira was checking her emails she received a mail from Secretarial Department. It contained an information that her Company is Going to buy over some another Company (takeover of a Company).

MEANING OF INSIDER TRADING

Realising that the email was sent to her by mistake , Saira deleted it and carried on with her day’s routine.

MEANING OF INSIDER TRADING

While taking dinner Saira discussed about the email she received with her husband.

MEANING OF INSIDER TRADING

Sahil made a misuse of this unpublished price sensitive

information and made profit out of it by dealing in the securities of the Company.

MEANING OF INSIDER TRADING

Would Saira and Sahil be guilty of Insider Trading?

MEANING OF INSIDER TRADING

The answer is YES. Saira and Sahil will be punished as per the Companies and SEBI’s Rules.Reasons: 1. Dealing in unpublished price sensitive information 2. Opposite Transation 3 Pre-clearance not taken

As per SEBI the prohibition of Insider Trading is required to make securities market:

oFair and Transparent

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

oFree flow of information

oAvoid information asymmetry

NEED OF INSIDER TRADING REGULATIONS

An insider means any person who,

o is connected with the Company or is deemed to have been connected with the Company and is reasonably expected to have access to unpublished price sensitive information in respect of securities of a Company, or

o has received or has had access to such unpublished price sensitive information

MEANING OF INSIDERS

CONNECTED PERSON

As per Securities And Exchange Board of India (Prohibition of Insider Trading), 1992 , connected persons are as below:

o Member of the Board of Directors of the Company Officer or an employee of the Company

o Company under the same management or group or any subsidiary company thereof

o Intermediaries like investment company, trustee company,asset management Company, merchant Banker, share transfer Agent, Registrar to an issue, broker, portfolio manager, Investment advisor, banker etc

o Official or an employee of a self regulatory Organisation

o An Official of a stock exchange or of clearing house corporation

o Relatives of all the above (as per section 6 of the Co. Act, 1956)

The following shall be deemed to be price sensitive information:

oPeriodical financial results of the Company

oIntended declaration of dividends (both interim and final)

oIntended issue of securities or buy-back of securities

oAny major expansion plans or execution of new projects

oAmalgamations, mergers or take-overs

oDisposal of the whole or substantially the whole of an undertaking

PRICE SENSITIVE INFORMATION

o Any changes in policies, plans of the Company

o Revision of credit ratings assigned to any debt or equity instrument of the Company

o Litigation /dispute with a material impact

o Cancellation of dividend/rights/bonus, etc

o Any other information which materially affects the prices of the securities of the Company

PRICE SENSITIVE INFORMATION

PROHIBITION OF TRADING

oProhibited Period Transactions

Connected Person (CP) not to deal during prohibited period (CP shall be entitled to exercise the option under ESOP but cannot sale during the Period

oOpposite Transaction

CP not to buy/sell during the next six months following the prior transactions (except ESOPs)

o Any period other than the prohibited period is free period

o Share Dealing can be done in this period subject to pre-clearance from the Compliance Officer

FREE PERIOD

oInitial Disclosure (as per regulation 13(1) of the SEBI (Prohibition of Insider Trading) Regulations, 1992

Any person who holds more than 5% shares or voting rights in any Listed Company shall disclose to the Company in Form Awithin 2 working days of acquiring the shares or voting rights

Any person who is a Director or Officer (including their dependants) of a Listed Company should disclose to the Company in Form B all its trade positions in equity or derivatives within 2 days of appointment

DISCLOSURES FOR PROHIBITION OF INSIDER TRADING

o Continual Disclosure (as per regulation 13(1) of the SEBI (Prohibition of Insider Trading) Regulations, 1992

Any person holding more than 5% shares or voting rights in any listed Company shall disclose to the Company in Form C the number of shares or voting rights held or any change exceeding 2% of total shareholding or voting rights in the Company within 2 days of acquisition of shares

Any person who is a Director or Officer (including their dependants) of a Listed Company should disclose to the Company in Form D, if change exceeds Rs. 5 Lakhs in value or 25000 shares or 1% of total shareholding or voting rights whichever is lower within 2 days of acquisition or sale of shares

DISCLOSURES FOR PROHIBITION OF INSIDER TRADING

PENALTIES

o Initiate Criminal Prosecution against the defaulter

o Prohibition from Dealing in any kind of Securities

o Restraining the defaulter from any counseling to any person to deal in securities

o Null and voiding such transactions

o Penalty of Rs. 25 crore or 3 times the amount of profit made whichever is higher

o Imprisonment upto 10 years or fine upto 25 crores or both.

THANK YOU

PRESENTED BY:SHIKHA JAIN