History of Insider Trading Laws
United States of America was the first country who introduced the laws on insider trading, immediately after their market crashed during the Great Depression. The Securities Act, 1933 prohibited fraud in the sale of securities. However, it was in 1934 when the Securities Exchange Act for the first time legally recognized ‘insider trading’ as an offence. It addressed the issue both directly and indirectly by prohibiting short swing profits made from any trading within a 6 month period by any insider (corporate directors, officers or stockholders owning more than 10% of a firm’s shares). It also contained provisions prohibiting fraud related to securities trading. However, insider trading laws were mostly built with the support of US courtroom decisions. Ultimately, two legislations were enacted which specifically addressed the issue of insider trading, firstly, by the Insider Trading Sanctions Act, 1984 and secondly, by the Insider Trading and Securities Fraud Enforcement Act, 1988. ‘Utpal Bhattacharya and H. Daouk, in their study on insider trading, state that the jurisprudence on insider trading saw a rise from the 1990s, and only 81 countries out of 103 countries reviewed and had insider trading laws, while prosecution took place only in 38 countries.’ In India, several committees were formed to check the applicability of the US regulations on Indian soil. The first committee which took the initiative to evaluate the regulations on short swing profit was PJ Thomas Committee, thereby introducing Sections 307 and 308 in the Companies Act, 1956. This basically requires the directors and managers of the company to make shareholding disclosures. However, such discloser requirements were still not enough to curb the nuisance and further deliberations were thought necessary over the matter. Hence, in 1979, Sachar Committee was formed, followed by the Patel Committee (1986) and finally Abid Hussain Committee (1989). All these three committees voiced out their opinion of having an immediate solution to the problem and advocated the need to have a separate law altogether on insider trading in stock market. Finally when the post liberalization period arrived, activities in the Indian stock market were at its peak and hence to acquire the necessary control over the domain, in 1992, the SEBI Act was introduced. The SEBI Act, 1992 in turn used its power to formulate a number of regulations and thus as one of those regulations, the SEBI (Insider Trading) Regulations was born. Later on, the said regulations were amended in 2002 and now it is known as the SEBI (Prohibition of Insider Trading) Regulations, 1992 (hereinafter “the insider regulations”). Since then, changes were made at least twice, one in 2002 and another in 2008. Jurisprudence behind Insider Trading Laws
‘Insider trading occurs when a corporate insider trades on information before it is disclosed to the general public.’ The fundamental legal principle behind barring such an activity is that anyone who has acquired any kind of material or special information about a security in his fiduciary capacity should not be allowed to trade with the same security for his own benefit. In stock market, trust and confidentiality are two sides of the same coin. Investors invest their money based on the integrity of the market. Hence, to develop a healthy market, both prospective and current investors must feel secured to invest. Law in matters of tracking insider trading, could be of help in two ways, firstly, it could penalize those who engage in insider trading and secondly, it could create an incentive based system which would encourage disclosure of such activities. In past also, there have been catastrophic consequences where innocent public were robbed off their money because of few people who due to their greed jeaopardised the functioning of entire stock market. Stock market is a place where people expect simple demand and supply to influence...
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