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Insider Trading Examples
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Insider trading! We’ve been noticing it mentioned in the news a lot lately and still many are unaware of the concept. So, we’ll try to solve the mystery around the concept by providing you with Insider Trading examples.
Let’s first brief the concept of insider trading.
Insider Trading is the act when an employee trades in their own company’s shares. An “Insider”, as the name suggests is an individual closely associated with the company and who by virtue of their work possesses material information specific to that company.
Before going any further, we should learn the insider trading types – Legal and Illegal. Legal Insider trading is where an insider trades a company’s securities and later reports the transactions to the concerned authorities.
However, the traders under no circumstances place trades on the basis of some kind of insider information, news but rather information that is out in the public domain.
Illegal insider trading, on the other hand, refers to the trade carried out by insiders on the basis of insider information. Here the traders make use of the insider information that isn’t available to the public.
Now, the concept looks easier on paper but has some intricacies as well. Plus, there can be certain scenarios with various factors and players featuring in the act that needs to be looked at.
So, let us understand the concepts of Insider trading with examples.
Insider Trading Example India
A recent report states that SEBI probed into over 70 cases of insider trading in fiscal – 2019. This is a clear indication of the sudden rise in the popularity of the ill practice.
The same trend can be detected in more developed stock markets of the world. Quite a number of investors take up the opportunity to purchase or sell the shares of their own company which leads to disturbing the market sentiment.
When certain heavyweight trade in their own company shares, many retail investors tend to follow in their footsteps as they see it to be indicating a piece of positive news related to the company.
Thus, the people in key positions of a company can easily manipulate the investors’ sentiment about a company. They can either attract or repel investors with these kinds of transactions.
Depending upon the fact if these transactions are made while abiding by the rules of share market, these can be classified as legal or illegal insider trading.
For understanding the part better we should look at some of the instances of both types.
There have been a number of infamous incidents of some of the biggest names in the industry registering huge profits by abusing their power and access to information that is not available in the public domain.
Since, the authorities all around the world have different definitions for the term “insider” and “insider trading”, and even “insider information” for that matter. In India, SEBI has an official name for insider trading as “Unpublished Price Sensitive Information” or UPSI.
Below are some of the insider trading cases in India that have shocked the market and will live long in the memory.
Despite SEBI’s persistent calls to investors to stray away from practicing insider trading, yet there have been breaches of the rules and regulations set by the regulator.
Here, we look at some of the real-life examples of Insider trading in India.
Saurabh Mukherjea – Former CEO of Ambit Capital
Saurabh Mukherjea, the former CEO of Ambit Capital recently paid a penalty fee of about Rs 1.38 crore for settling an insider trading case with SEBI.
The case was in relation to the broker relaying unpublished price sensitive information about Manappuram Finance in the form of research reports to its clients.
Mukherjea through his meeting with senior executives of the finance company got to know about the financial loss for the quarter ending in March 2013.
The probe found Mukherjea had access to the nonpublic information which he further distributed among its clients as research reports.
SEBI, in its verdict on the case, found Mukherjea guilty of violating the Code of Conduct for Prevention of Insider Trading (PIT Regulations). Post the case verdict, Mr. Mukherjea had to pay the penalty fee for settling the case.
Shreejesh Harindranath – SpiceJet GM
Shreejesh Harindranath, General Manager at SpiceJet was found to be guilty of violating the PIT (Prohibition of Insider Trading) Regulations in a case that dates back to 2016.
Mr. Harindranath had bought about 3100 shares of SpiceJet scrips on the basis of unpublished price sensitive information regarding the company’s earnings.
SEBI found Mr. Harindrantha’s actions to be violative of PIT Regulations as he profited from having access to the price sensitive information which was available to him by virtue of his position at the company.
Further, the market regulator found Mr. Harindranath guilty of violating another count of insider trading norms as he transmitted the information to his brother, Sandeep A C who then made a purchase of 800 shares.
Subsequently, both have been fined Rs 23 Lakh and Rs 12 Lakh as a penalty for adopting the ill practice of insider trading.
General Insurance Corporation of India (GIC)
SEBI had found the state-owned insurance company General Insurance Corporation of India (GIC) violating the PIT Regulations and has thereafter collected settlement charges of over Rs 1.23 crore.
The stock market regulator conducted an investigation and found the insurance company guilty of a delay in disclosing the change in shareholding of the company.
GIC was found to have delayed intimating SEBI about the shares of Axis Bank scrips.
GIC was issued a notice in regards to settling the case by paying a fee of over Rs 1.23 crore. The insurance company thereafter agreed to pay the case settlement fee.
Legal Insider Trading Examples
Whenever we think of Insider trading, we seem to only think of it in a negative light. However, there does exist a thing such as legal insider trading, where no ill practices form a part of the process.
Traders purchase or sell their own company’s shares on the basis of information that is available to the public. Hence, have no advantage over other traders in the stock market.
Further, traders notify every such transaction to the authorities, i.e. company as well as SEBI.
Here, we have mentioned a couple of legal insider trading example that will help you understand the core of it :
Example 1 – A company is about to float its IPO (Initial Public Offering) in order to generate funds as it has plans of expanding its manufacturing facility and repayment of loans to investors.
One of the CEOs of the company is selling 3000 of his shares of the company during the IPO. However, the CEO has disclosed this transaction to the SEBI in the DRHP papers filed by the company.
Thus, this is totally legal on the CEO’s part to sell his shares after he has disclosed the plans to SEBI.
Example 2 – Raman is an employee at a highly reputed stockbroking firm in Mumbai. Raman is nearing completing his year at the company and is expecting a pay hike.
The company operating in the stock market has a policy of offering their employees incentives either in the form of fixed salary growth or 100 company shares. Raman just like many of his colleagues chooses to purchase shares in the company.
This again is totally legal, since here the trader, Raman purchased shares in his company as part of their remunerations from his employer company.
The transaction will be reported to the stock market regulator, SEBI by the broking firm. Thus, adhering to the Insider trading regulations prescribed by SEBI.
Illegal Insider Trading Examples
We know the concept well. Here, the trader or “insider” trades on the “Unpublished Price Sensitive Information”. This trade practice is illegal as insider traders have an unfair advantage over others who don’t have access to that specific information.
The insider can be a person currently working with the company or has been an employee in the past who is believed to have access to such critical information about the company.
Here are a couple of Illegal Insider trading examples that will help clear the picture in your mind regarding the topic.
Example 1 – Aditya is a lawyer to Devansh who owns a digital marketing company. In one of the meetings, Aditya hears Devansh mention that the company is going through a bad spell and the board members are recommending that the company files for bankruptcy.
Aditya who is an active trader as well looks to seize upon the material information and instantly sells his shares in Devansh’s company to earn a profit before the market value of the company’s shares falls further downwards.
Here, Aditya who by virtue of his association with the marketing company had access to unpublished information that could have had an impact on the company’s share prices gave him an unfair advantage.
Thus, this is illegal insider trading.
Example 2 – Dilip was at a restaurant where certain entrepreneurs had gathered to discuss the financial standings of their respective companies.
During the conversation, one of the investors suggests that his company was in talks of a business association with another MNC.
Thus, the company’s share prices were about to skyrocket in the coming weeks once the official announcement is made.
Dilip overhears the conversation and instantly purchases 100 shares of the company. As expected, the official announcement of the company’s merger attracted numerous investors.
Owing to the heavy demand the company’s shares prices surged high and Dilip made heavy profits from selling those shares which he bought for a price much lower than the current asking price.
Firstly, Dilip traded on the UPSI he acquired even though by chance. Further, his failure to report those transactions to SEBI makes it a classic illegal insider trading example.
Insider trading is a growing concern all around the world. For that matter, you can find multiple insider trading examples in India as the stock market is full of it.
Conclusion
Insider Trading, although has been around in the stock market as a dark practice known to a select few traders, has lately seen significant growth in traders adopting the measure for their own gains.
As per a recent report, SEBI investigated over 70 cases of insider trading amid the increase in the number of PIT violations. So, this naturally attracts the attention of the traders who are just starting out in the stock market.
It is not that hard to find insider trading examples around in the stock market. There have been numerous cases of an individual as well as institutional investors turning to insider trading as a means to book larger profits.
Since there are two types of insider trading, the first up is legal insider trading, where an insider trades in the company’s securities and later discloses those transactions to the concerned authorities.
Then, there’s illegal insider trading, where the insider makes use of some sort of insider information that is not available to the general public.
This is illegal as per SEBI’s PIT Regulations as the insider holds an unjust advantage over other traders because of access to the material information which has an impact on the company’s share.
The concept can get tricky and can be understood better with the means of insider trading examples.
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