Insider Trading and its Legal Mechanism
Swati Jaiswal1 and Ankita Joshi2 -------------------------------------------------
This paper comprehensively deals with the different implications of the insider trading as well as the efficacy of the existing regulatory mechanism in the shape of SEBI (Prevention of Insider Trading) Regulation Act, 1992 to deal with this problem. The paper has mainly focused on insider trading from Indian perspective. It also explores the various duties/ obligations to be performed by the various companies registered under companies’ act, 1956 in order to prevent such malpractices.
Insider trading, price sensitive information, SEBI’s Regulations, obligations, penalties 1. Introduction
Insider trading refers to the practice of ``insiders’’ trading on shares of a company for which they have privileged ``material’’ information not available to the ``public’’, and for which they seek to gain pecuniary or other benefits. Insider trading occurs when a corporate insider trades on information before it is disclosed to the general public. It is generally thought that such trading gives a premium to the insider that comes from the losses of the general public. ``Insiders’’ refer to any person or group that is able to gain such privileged information about a company. Insiders can include directors, managers or employees of a company. Or they can refer to persons who gain privileged information indirectly from such managers or directors in a more intimate capacity, such as friends, family members, or close but external business associates. Or they can refer to persons who have a contractual or supply linkage to such a company, such as those who print annual reports or stockbrokers who may inadvertently gain an information advantage. Thus ``inside’’ information can be gained from a multitude of sources from which such private information can be exploited for financial or other gain. It was only about three decades back that insider trading was recognized in many developed countries as what it was - an injustice; in fact, a crime against shareholders and markets in general. At one time, not so far in the past, inside information and its use for personal profits was regarded as a perk of office and a benefit of having reached a high stage in life. Insider trading takes place legally every day, when corporate insiders – officers, directors or employees – buy or sell stock in their own companies within the confines of company policy and the regulations governing this trading. It is the trading that takes place when those privileged with confidential information about important events use the special advantage of that knowledge to reap profits or avoid losses on the stock market, to the detriment of the source of the information and to the typical investors who buy or sell their stock without the advantage of "inside" information. 2.1 Objectives
i) To develop an understanding over the phenomenon of Insider Trading. ii) To assess the legal mechanism dealing with insider trading in India. iii) To know the various duties and obligations to be performed by the companies in order to curb insider trading.
2. Research Methodology
The data for the purpose of study has been collected from various secondary sources like books, journals, news papers and websites.
Meaning of Insider & Insider Trading Defined
Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992, does not directly define “insider trading” but it defines the terms: * Insider or who is an insider?
* Who is a connected person?
* What is price sensitive information?
References: Bhole L.M., (2004),“Financial Institutes and Markets.” Tata McGraw, Hill, New Delhi
Fernando A.C., (2009), “Corporate Governance: Principles, Policies and Practices”, Pearson Education India
G. Ramesh Babu, (2005), “Financial Services in India.” Concept Publishing Company
Machiraju H.R., (2009), “The Working Of Stock Exchanges”, New Age International
Securities and exchange board of India (Prohibition of Insider Trading) Regulation1992
SEBI (Insider Trading) (Amendment) Regulations, 2002
SEBI (Prohibition of Insider Trading) (Second Amendment) Regulations, 2002,
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