'Insider trading' in financial markets refers to trading in securities such as
equity and bonds by company insiders who have access to exclusive information
about the issuer of a particular security before such information is released to
the general public. This allows insiders to benefit from buying or selling
shares before they fluctuate in price.
Insider trading has been present throughout the history of financial markets,
and was particularly prevalent during periods of elementary years of Indian
stock markets. Insider trading is common in developing countries like India,
where it is practiced by a wide range of market participants, corporate officers
and regulative authorities. Primary insiders gain access to information by
virtue of their position, employment or responsibility.
They include controlling
shareholders, corporate executives and officers, as well as financial-market
professionals who compile information on a firm's operation. Government
officials with access to insider information also fall into this category.
Secondary insiders are friends or relatives of primary insiders. Dynamic
regulations not only help reduce the impact of such events but also help in
restoring stability.
This study reviews the Insider Trading provisions in the Securities Market of
India and the emerging trends and issues.
Insider Trading: An Introduction
Insider Trading essentially denotes dealing in a company's securities on the
basis of confidential information, relating to the company, which is not
published or not known to the public, also called as unpublished price sensitive
information, used to make personal profits or avoid loss. It is fairly a breach
of fiduciary duties of officers of a company. It arises when an individual with
potential access to non-public information about a company buys or sells shares
or stocks of that company. The practice of Insider Trading came into existence
ever since the very concept of trading of securities of joint stock companies
became prevalent among the investors worldwide and has now become a formidable
challenge.
The growing magnitude of the worlds' securities markets wherein trading in
shares, derivatives and bonds takes place at international levels has further
raised the concerns of the regulators all over the world. Insider trading caught
attention of the public and the government owing to them suspecting unusual
profit/gain of businessperson as well as shareholders. The Companies Act in
India has exhibited dearth of competency to resolve trading issues along with
limiting unfair trading.
The SEBI Act was enacted in the year 1992 to provide a regulatory framework to
promote healthy trading and protect investors' interest to ensure growth of
securities market. Under Section 11(1), 11(2) of SEBI Act and Section 30, SEBI
has the legal power to intervene and prevent insider trading while the said
sections also implement further regulations to limit illegal activities. The
first case regarding violation of insider trading regulation was registered
against Hindustan Lever Limited in India.
Insider trading is an extremely complex issue and it is almost impossible to get
rid of it because it evolves from a very basic human instinct i.e., greed. One
who is having insider information and arrive at a decision of future profit or
reduction of loss by discounting such information, it is extremely difficult for
him to keep himself abstained from trading based on that information. Present
effort is an endeavor to understand the magnitude of this problem and regulatory
practices that exist to combat it.
Literature Review
Rishikesh Desai and Yosham Desai (2010) in their article states that one of the
fundamental and most general principles of law is that when any individual
acquires any kind of special knowledge or price sensitive information by virtue
of his or her confidential or fiduciary relationship with another individual, he
cannot use such knowledge or information to his own advantage or for his own
personal benefit and must account for any such profit so derived.
Koch Von (2014) says that the insiders regulate the price and status of stock
market being aware of the firm's condition. UPSI is the key factor in insider
trading while lack of monitoring, supervision and regulatory framework
implicated in economic collapse of firms as well as nations.
Yesha Yadav (2016) in her research paper "Insider Trading and Market Structure"
argues that the emergence of algorithmic trading raises a significant challenge
for the law and policy of insider trading. It shows that the securities market
are dominated by a cohort of "structural insiders" namely a set of traders able
to utilize close physical and informational access to trade at speeds measured
in milliseconds and microseconds, a practice loosely termed as high frequency
trading (HFT).
Anil K. Manchikatla and Rajesh H. Acharya (2017) state the term insider trading
is subject to many definitions and connotations and it encompasses both legal
and prohibited activity. When a corporate insider trades by adhering to all
regulations, it is called legal insider trading, and any violation of that
amounts to prohibited insider trading. The past several decades have witnessed
an increase in insider trading.
As per Vinita Sharma (2016) as the world continues to shrink, global financial
markets are expanding and trading of shares, bonds, derivatives and other
instruments continues to increase. These markets are the lifeline of capitalist
economies, bringing in the much needed investment to fuel economic growth. A
natural corollary to this function is the need for dynamic regulation that keeps
pace with new developments – domestic as well as global to ensure global
financial stability.
Securities and Exchange Board of India
SEBI is the supervisory body of all the stock exchanges in India. It is
duty-bound to protect the interest of the investors in the securities market and
to regulate the stock market through such regulations as it deems fit. The SEBI
acts as the regulator in the share market by taking all preventive measures in
order to build the confidence of the investors who are investing in the market.
SEBI is responsible for carrying out the investigation on complaints received
from the shareholders about any malpractice in share market. SEBI is also duty
bound to prohibit fraudulent and unfair trade practice relating to securities
markets. SEBI as an independent body carries its functions as defined by the
Securities and Exchange Board of India Act, 1992. Any order passed by the SEBI
is contested before the Securities Appellate Tribunal.
Securities Appellate Tribunal
It is a statutory body established under the provisions of Section 15K of the
SEBI (Securities and Exchange Board of India Act), 1992 to hear and dispose of
appeals against orders passed by the Securities and Exchange Board of India,
regarding imposition of penalties or by an adjudicating officer under the Act
and to exercise jurisdiction, powers and authority conferred on the Tribunal by
or under this Act or any other law for the time being in force.
Insider trading is an extremely complex issue and it is almost impossible to get
rid of it because it evolves from a very basic human instinct i.e., greed. One
who is having insider information arrive at a decision of future profit or
reduction of loss by discounting such information, it is extremely difficult for
him to keep himself abstained from trading based on that information.
Present effort is an endeavor to understand the magnitude of this problem and
regulatory practices that exist to combat it. Stock market is also important and
an effective way of allocating scarce resources from surplus unit to deficit
unit.
However, this is only possible where different segments of the financial markets
are able to operate efficiently. The competition for external capital amongst
small, developing and emerging financial markets has resulted in a growing
awareness of the importance of investor protection laws if markets are to be
competitive and hence a need to control the behavior of insiders who are
involved in illegal insider trading is felt.
Conclusion
The impact, extent and effects of insider trading might vary in each country but
any amount of insider trading has a massive effect on the reputation of the
country. Every shareholder invests his money in the market with the prior faith
of transparency and efficiency in the market. Any investor while making his
decision about investment (to sell, buy or hold stock) relies upon the available
price sensitive information provided by the listed company in the stock
exchange.
The investment into securities market has increased many folds in
recent times. The globalization has created many ways to invest money and
investment is being made all over the world by citizens of different nations.
When an investor relies upon the available price sensitive information, he has
the prior thought of trust about the correctness of the value of the security he
is trading.
Even after making the price sensitive information public, still one
segment of the company has the information which finally decides the value of
the security. When such persons use this information to invest in the market
they are known as 'Insiders'. Such insiders get the price sensitive information
prior to the listing of the stocks in the market because of the position they
are holding in the company. When such persons pass such information to other or
use the same for their benefit either to buy or sell the shares, they are
involved in insider trading.
Over the last few decades, world securities markets
have become significantly more sophisticated in terms of how securities are
traded as well as the variety of securities traded. The integrity of securities
markets is critical to the economy of a country and it is necessary for
regulators to enforce laws, prohibiting market abuse in order to protect market
integrity. As a result of these changes, markets are becoming truly global,
thereby, allowing traders to trade almost instantly across a wide variety of
products and in markets around the world.
References And Bibliography:
- www.sebi.gov.in - Securities And Exchange Board of India - Home Page
- www.legislation.gov.uk
- www.sec.gov.in
- The Bombay Securities Contracts Control Act, 1925
- The Companies Act, 2013
- The SEBI Act, 1992
- The Securities Contracts (Regulation) Act, 1956
- The Securities Contracts (Regulation) Rules, 1957
- Bhattacharya and Daouk, (2002), "The World Price of Insider Trading", Journal of Finance 75-108, Vol. 57
- Sharma Vinita, (2016), "A review of Insider Trading provisions in the Securities Act of leading global Financial Markets", available at www.scholar.google.co.in
Please Drop Your Comments