Insider trading is quite rampant not in today’s times but for many years. This malpractice has been increasing year by year. Insider trading in India is regulated by SEBI which is the Securities Exchange Board of India Act, 1992. According to SEBI it scrutinized and investigated 70 companies in the year 2019 accused of insider trading. This statistics has been increased with a great margin from the previous year. Can you believe it? SEBI has also revealed the use of the word ‘Insider trading’ has been frequent from the last three years’ reports. This is quite shocking.
What is insider trading
As this term suggests, the literal definition of ‘Insider trading’ is the illegal trading of a company’s bonds, stocks and securities to other places and countries and the information which is secret and hidden from the general public. It is defined in Section 2(e) of the SEBI Prohibition of Insider Trading Regulations Act, 1992 There is no section in Company law Act that defines illegal trading. Through insider trading, the investors who have access to secret information can make millions of money and this eventually can affect the company’s reputation and other regular investors who do not have access to secret information. Insider trading means illegal trading which is happening under the garb of the corporate veil of a company. A person who illegally trades any closed or secret information is guilty of insider trading. It holds a broad perspective and its definition varies from country to country. In this article, we will deal with insider trading regulations in India.
Insider trading regulations in India
Insider trading in India is generally regulated by the SEBI Regulations on Prohibition of Insider Trading, 1992. Insider trading is defined in Section 2(e) of the act. However, the term insider trading is not defined anywhere in the Company’s Act, 1956. But, Section 195 of the Company’s Act of 2013 prohibits insider trading by the director or the key managerial person. Section 458 of the Company’s Act, 2013 delegates or confers the power to SEBI to prosecute both the listed and companies which are deemed to be listed of insider trading which is going on illegally inside any of these companies.
According to SEBI Prohibition of Insider Trading regulation 1992 which consists of IV chapters. There are the following provisions that are given under it:
Section 2(c) of the Act defines ‘connected person’.
- Who is the director of a company which is defined in Section 2(13) of the company’s activities or deemed to be a company?
- Either the employee or the officer of a company or any person or insider who has access to secret, unpublished information regarding the company’s securities or bonds.
So basically, a connected person can be any person who is directly or indirectly related to the affairs of the company.
Section 2(h) defines the deemed to be a connected person. According to it, a ‘person deemed to be a connected’ can be any person who is directly or indirectly related to either an insider or a connected person.
Section 2(e) of this act defined the ‘insider’.An Insider can be any person who is connected to the company or has access to secret information that has not been publicly disclosed yet or any information related to the affairs of the company. Here, ‘price sensitive information’ is any kind of secret information that should be kept secret in order to protect the reputation of the company and by disclosing such information be likely to affect the price or securities of the company.
According to Section 3 of SEBI regulations of Insider trading 1992, it is given that no insider or a connected person has the right to publicly disclose or display any secret information related to the affairs of the company if the made public can affect the price or securities of the company.
According to the Section 12 of the Act, all the listed companies with the SEBI, intermediaries, self-regulatory organizations, recognized stock exchanges, public finance institutions, corporate or professional firms should form the internal procedure code and moral ethics on the lines of rules given in the Schedule 1 of the act and should strictly adhere to them to prevent illegal insider trading in their companies.
One crucial thing to be noticed that according to this act, price-sensitive information must be disclosed to only those persons who need it in order to discharge their duties on the ‘need to know’ basis.
It’s the responsibility of the director or employee of the company to maintain the confidentiality of the price-sensitive information. Any person who is related to the company trades or discloses any secret information will be held liable in a criminal manner and strict action would be taken against them. Any person or employee/director/worker of the company who violates any rules or guidelines of code of conduct will be held liable for planetary action such as wage freeze, suspension of future participation in the company’s affairs, etc. These actions and guidelines and penalties are the same whether for listed companies or for corporate or professional firms.
Rules and penalties are strict and mandatory to prevent illegal insider trading that has been going on in companies.