Looking for Low Brokerage, High Margin & Free Tips?
Insider Trading
| | Trading | No Comments
More on Online Share Trading
With time a trader keeps getting desensitized to the occurrence of the stock market which otherwise would attract the attention of a beginner. But still, there are some topics that capture the interest of an experienced trader, and none better than Insider Trading.
Success in trading, after all, is reliant on the choice of stocks to invest in and the accuracy of placing those orders. On the look of it, there hardly seems to be room for anything to go wrong, but it does on most occasions.
But, what if you have definitive knowledge about the shares of a particular company and its destiny – whether they are bound to grow or come falling to the ground? Traders can then certainly control their own fate.
This is what forms the basic gist of Insider Trading. When certain individuals have access to key inside (non public) information about a company, they can use it to their own advantage for making the right trading, investment decisions.
There have been multiple cases in the market, where traders have benefitted from obtaining sensitive information from reliable sources.
The act is quite fascinating, to say the least, and there are certain regulations and rules of share market that are in place to keep a check on traders.
Here in this article, we turn our entire focus on covering each and every detail about the concept of Insider Trading. We will be learning about the various types, examples, the laws around the ill practice.
Also, we will be looking at some of the most popular cases in India to uncover the mystery around the concept.
Insider Trading Meaning
By definition, Insider Trading refers to the act where someone has access to crucial insider information about a company’s listed securities trades based on that information to secure profits or safeguard themselves against losses.
Trading using this “insider information” or as mentioned by SEBI as “Unpublished Price Sensitive Information (UPSI)” is an illegal act.
Trading on the basis of information that hasn’t been disclosed to the public gives insiders an unfair advantage.
Insider trading is pretty much like playing a game where the trader is bound to win every time. The trader or an investor can then dictate their own luck.
When you have knowledge of how things work on the stock market, you can use its irregularities to your advantage to make money. In that scenario, nothing can be more thrilling.
While on the other hand, traders who transact on the stock market based on the fundamental or technical analysis won’t be registering such profits in comparison.
Therefore, the act is deemed illegal in many countries across the globe, including India.
Insider Trading Types
Insider Trading is strictly prohibited in India. The stock market regulatory body – SEBI has time and again discouraged individuals in key positions such as CEOs, Directors, etc. from indulging in insider trading as it impacts the market and a normal trader’s sentiment.
In all, there are 2 types of Insider Trading –
- Legal Insider Trading
- Illegal Insider Trading
Legal Insider Trading
Legal Insider Trading is mainly done by insiders or individuals closely associated with a company. Here, the insiders trade in their own company’s stock and shares based on common information that is available to the public.
The insiders enjoy no particular advantage over other traders, and every such transaction is reported to authorities. Trading on public information is considered legal and is allowed in various countries across the world.
Illegal Insider Trading
Illegal Insider Trading is the one where a trader has access to insider information that isn’t made public yet, and which can potentially offer the individual an advantage over the rest of the traders.
Trading on “non public”, “material information” such as news of an acquisition or merger, that can have a significant impact on a company’s share price is illegal insider trading.
Men in power or Stakeholders of a company can easily leverage such instances to their own benefit. Thus, restricting chances for a normal investor who doesn’t have access to such information.
Insider Trading Examples
The stock market is full of insider trading examples as the practice has gained attention from a huge number of investors recently.
A recent report suggested that SEBI had to investigate a record number of around 70 cases during 2019 fiscal.
Since Insider trading is of two types, we will provide an example of both types which will help you draw the differences between the two better.
Legal Insider Trading Example
Legal insider trading as mentioned above is the type where trading is done on the basis of information that is available to the public.
Traders benefitting from material information, in that case, do so on the backing of their knowledge.
Another way to look at Legal Insider Trading would be, that insiders trade in their own company’s stock and then report the trading activity to the corporation and the concerned authorities.
There can be instances where traders purchase or sell their own company’s stock. In those cases, they should report the transactions to SEBI within the space of two days.
For Example – A company is soon to launch a new product in the market that is bound to be a hit among customers that significantly increases its revenue.
The company’s CEO then buys 10,000 shares of his own company priced at ₹500 based on this information.
The CEO invested = 10,000 shares ✕ ₹500 = ₹5,000,000
The product as predicted turned out to be a success for the company thus skyrocketing the share prices to ₹700.
The significant growth of ₹200 per share that was bought for ₹500, resulting in an overall increase in the value of the investment to 10,000 shares ✕ ₹700 = ₹7,000,000.
Thus the CEO enjoyed a profit of ₹2,000,000 through the transaction. The CEO benefitting heavily from insider information regarding the product launch and the pricing etc.
The information made it possible for him to strategize his trade accordingly. The CEO was able to purchase the shares at a lower price just before the product launch which later showed a steep rise in value.
In this case, the CEO acted on the information that was available to the public and thus had no advantage over other traders. However, the CEO will have to report the transactions to the authorities.
Illegal Insider Trading Example
Illegal Insider Trading is when the trader has access to crucial insider information and employs that information to trade or invest. Here, the trader may or may not be associated with the company that he/she buys the stocks of.
It is different from legal trading on the Share Market account opening that the trader has access to information that isn’t available to the public at large. The example will help better understand the concept :
For Example – There’s a certain Company X taking over another Company Y. The news of the merger isn’t yet made public. A trader learns about the news from someone closely associated with one of the companies.
The trader then decides to purchase the stocks of Company X which are bound to become high in demand because of the merger and thus expensive.
The trader purchased 5 Lots of the stock at ₹100 per share, just days before the merger took place.
The prices for the same stock went upwards of ₹150 after the merger. This way the trader made significant gains from decisions based on the information which wasn’t available to the public.
This is illegal insider trading because the trader had an unfair advantage over others and made profits which wouldn’t have been possible without the availability of such insider information.
Insider Trading Regulations
Having already declared Insider Trading – illegal, SEBI devised some regulations to keep a check on the malpractice. The insider trading laws around the act are governed by the SEBI (Prohibition of Insider Trading) Regulations, 2015.
According to the regulatory body, a trader can be guilty of insider trading on the basis of two grounds. The act further draws directions on the two grounds for insider trading which are –
- Communication or procurement of UPSI and
- Trading when in possession of Insider information.
Communication or Procurement of UPSI
While in the first case, SEBI clearly dissuades the insiders or connected person to communicate, provide, or allow access of any UPSI to any individual other than where they’re legally obliged to do so.
The same rule applies to the one procuring such information. No individual can obtain UPSI from an insider who has access to or possesses any sort of material information other than for legitimate purposes and when under legal obligation.
Trading When in Possession of UPSI
SEBI instructs that an insider when in possession of unpublished price-sensitive information shouldn’t trade in securities listed on a stock exchange or that are intended to be listed on stock exchanges.
Defenses Against Insider Trading Offences
The laws put in place by SEBI suggest a rigid stance against Insider trading, however, the same regulations also mentions some defenses against insider trading offenses.
Some of which are mentioned below :
For Individual Investors :
- When the traders in possession of the same UPSI make an off-market deal without breaching any of the regulations and the trade was not motivated by the availability of the UPSI.
- The transactions made were in accordance with a predefined trading plan.
For Non Individual investors :
- The individuals that possessed the material UPSI were different from the ones that take the trading, investment decisions.
- The company must ensure that appropriate measures are in place to prevent the communication of an individual possessing UPSI to an individual taking trading decisions.
Insider Trading Penalties
The stock market regulatory body, SEBI has made it clear through its well-defined rules for traders to stay away from taking up the malpractice. Any violations are likely to be handed huge insider trading penalties.
In the PIT Regulations, the watchdog, in addition to the guidelines has mentioned the list of penalties which the violators will have to face as a consequence of failing to adhere to the guidelines.
Lately, there has been a growing concern in regard to the increase of cases of violations. Thus, SEBI looks to take a stringent stance to deter traders by imposing huge monetary penalties, and in some cases even banning the traders from transacting on the stock market.
Talking about banning, RBI banned some of the illegal binary trading platforms in India under FEMA. We covered a story around one such platforms i.e. is Quotex legal in India and tried to understand the rationale behind this ban.
Insider Trading In India
Despite SEBI introducing stringent regulations to keep a check on traders, and imposing huge penalties to dissuade traders from indulging in the malpractice, there have been many Insider Trading cases in India.
The fact that proving the incidents of insider trading is way too difficult doesn’t help the cause either. This actually acts as an encouragement for the traders to resort to the ill practices.
Insider trading is slowly emerging to be the most violated regulations in the trading book, thus putting the onus back onto the market regulator to take notice of the incidents.
Subsequently, SEBI took over as many as 70 cases of Insider trading during the financial year 2019. The list consisted of a few of the most significant names across various sectors.
Below, we take a look at some of the most popular and recent cases in India.
Insider Trading Cases In India
SEBI took notice of the flagrant abuse of power by individuals in key positions and has substantially increased its watch to curb the number of cases of Insider Trading in India.
However, there have been many instances of breaches and violations of the norms set by SEBI. Here, we take this moment to take a look back at some of the most popular cases and the ones that have made the news in the recent past :
- Abhay Arvind Gandhi – Senior Executive of Sun Pharma
Abhay Arvind Gandhi is the current CEO of Sun Pharma’s North America operations. The case dates back to 2014 when Ranbaxy was about to be taken over by Sun Pharma.
Just days before the news of the acquisition was to be made public, Gandhi and his wife bought over 7,000 Ranbaxy shares.
The information of an imminent takeover was available to Gandhi by virtue of his job as chief at Sun Pharma, which he made use of the information to make significant profits.
Thereby, violating the insider trading rules defined by SEBI and were later found guilty in 2017. Both, then agreed to settle the case by paying a penalty of ₹35.06 Lakh each.
- Kiran Mazumdar Shaw – Independent Director at Infosys
Kiran Mazumdar Shaw, the chairman of Biocon and an Independent Director at Infosys were found to be guilty of Insider trading by Infosys’ audit committee in 2019.
Shaw sold over 1600 shares through her Portfolio Management Services without obtaining approval for the transaction and was found to be in breach of the company’s insider trading policy and the PIT (Prohibition of Insider Trading) norms.
The breach was ascertained by SEBI when examining the matter found Shaw guilty of delaying disclosure of her shareholding in the company. The transaction was said to be made by her portfolio manager without her knowledge.
Shaw later filed papers to settle the matter by paying a fine of over ₹3 Lakh.
- Religare Finvest
Religare Finvest had to pay a penalty fee of ₹13.80 Lakh to settle a case of an alleged violation of the takeover and prohibition of insider trading standards with market regulator SEBI. This was in relation to the Deccan Chronicle Holdings case that dates back to 2012,
The case is related to the unlawful act of SAST (Substantial Acquisition of Shares and Takeovers) as well as the PIT (Insider Trading Prohibition) Laws.
SEBI during the investigation found out that the promoters of the company at that time had promised 3 crore shares in Religare Finvest in July 2012.
The same happened on yet another occasion, however, the promoters failed to make disclosures to the concerned authorities.
Religare Finvest filed an application to settle the matter by paying the penalty fee of ₹13,80,591.
There have been plenty of such cases of insider trading in the Indian stock market in the recent past, and traders or organizations resorting to such ill practices must take a hint from the huge penalties imposed by SEBI.
The watchdog even has banned traders on some occasions to warn off others who tend to take the laws lightly.
Is Insider Trading Legal In India?
It is a yes and a no. For it depends on the type of insider trading, a trader chooses. Trading in one’s own company is all right as long as the investor discloses such transactions to the concerned authorities.
As discussed above, trading on the basis of insider information is considered illegal by SEBI. This is because of the unfair advantage that insiders have over other traders who don’t have access to such material information.
Whereas, in legal insider trading a trader or investor trades in a company’s stock on information that is available to the public, and later reports those transactions to SEBI and the public company.
Conclusion
Insider trading is a fascinating concept that seems to envelop everyone’s attention. The act can be defined as when some individuals have access to critical inside information about a business and can use the information to make investment, trading decisions.
The act that was once considered to be a perk of the business owners is considered illegal in many countries across the globe including India.
The reason for this is that the traders in possession of such material information have an unfair advantage over any other trader who didn’t have access to that specific piece of information.
Further, insider trading is of two types – legal and illegal.
One of the differences between the two is the part that insiders who possess some Unpublished Price Sensitive Information (UPSI) do not employ that information to make an investment, trading decisions.
The traders when trading their own company’s stock report the transactions to SEBI within the space of two days. Whereas, illegal insider trading is when a trader gets price-sensitive information from somewhere and then trades based on that information.
SEBI has been getting a lot of cases of traders indulging in malpractice lately and has revised its regulations surrounding the act. Subsequently, the watchdog investigated over 70 cases during 2019.
The list of violators of the PIT Regulations set by SEBI has few of the most renowned names in the country. To keep the violations in check, SEBI imposes huge penalties and in some cases even bans insiders from the stock market.
So, in all, beware of the traps and lures of the dark side of trading.
Willing to start investing in Stock Market? Refer to the form below
Know more about Share Market