Finance is the backbone of an economy. Without finance, no economy can even think of its growth and development. Finance is such a factor that stimulates all the activities starting from production of goods till its consumption. Every developmental and growth- perspective projects require Finance. These necessities the smooth and proper functioning of the financial sector of an economy because it is the major regulator of finance in any economy. But there exists some faults and malpractices in our financial sector that leads to the failure of our objectives. Insider Trading is one of such practices that is followed by some people to derive an unfair advantage. This practice is the result of unequality in the availability of information. The person indulging in Insider Trading gets benefitted and earns unfair profits, but a lot of other persons are negatively impacted by his act. In today’s era, there is a dire need on the part of regulatory authority to have a proper check on this malpractice and provide such a mechanism that can eliminate such bad practice from the economy completely.
When the insiders of a company use unpublished price sensitive information for their own undue benefit or disseminate the same to any other person who uses it for taking unfair advantage, this malpractice is termed as Insider Trading. Now, Who are Insiders? What is unpublished Price sensitive Information? What kind of unfair advantage can be taken from this UPSI? Is this practice legal or illegal? What are its effects? and many more questions that can be answered by understanding the entire concept of Insider Trading in Financial Sector.
WHO IS AN INSIDER ?
According to the securities Exchange Board of India Regulations Ac, an Insider is defined as “Any person who is connected to the company or is having possession of or having access to the unpublished price sensitive information (UPSI)”.
This definition leads to consider any person as an Insider of a company only if-
(a) He is connected to that company
(b) He is in possession of or having access to unpublished Price Sensitive Information (UPSI) of the company.
Under the ambit of connected people, top executives, directors, employees, etc are included who have direct access to the UPSI the company. They are in possession of such information because of their position in the company. They directly get the information through company. The term ‘Insider’ does not include only these directly connected persons to the company, but such people also who can acquire and get access to UPSI of the company from their sources. Hence, all such persons who are having UPSI of the company, are treated as ‘Insider’ of company.
Now, the question arises to define UPSI. UPSI stands for Unpublished Price-Sensitive Information. Unpublished information denotes that information which is not in public domain i.e. the information is not available to all the persons concerned, but only to some selective persons. It is hence, Non- public information, information that has not been made available to the public till now. Price-Sensitive Information includes any information that relates directly or indirectly to a company which if published is likely to materially or financially affect the price of the securities of company. Hence, any unpublished information which is of such significance that a reasonable investor will consider it while trading in securities of a company, such information is termed as unpublished Price Sensitive Information of any company.
WHAT IS INSIDER TRADING ?
Insider trading is the practice in which the corporate insiders including employees, directors or other related officers trade in securities i.e. buy or sell the stocks in their own companies.
Legal and Illegal Insider Trading
The term ‘Insider Trading’ includes both- Legal and Illegal conduct. Hence, not every insider trading is illegal. There are such cases also where it is legal.
Legal Insider Trading - When the corporate insiders including directors, employees, etc. trade in the securities of own company, but reports regarding their trade in the disclosure forms to the regulatory authority i.e. SEBI (Securities and exchange board of India), this kind of Insider Trading is treated as legal.
Example- A CEO of a company bought 50,000 shares of stock of the own company and reported about his trade to SEBI.
Illegal Insider Trading - Insider Trading is treated as an illegal practice when “Any person uses the unpublished Price Sensitive Informative to deal in the securities of the company for his own benefit”.
When insiders i.e. top executive and employees who have access to the UPSI of the company, uses such information to earn undue profits by trading in securities or provides such information to any other person who earns profits using that, such Insider Trading is illegal in the eyes of Law.
REGULATION OF ILLEGAL INSIDER TRADING
In India, Insider Trading was earlier governed under Securities Exchange Board of India (Prohibition of Insider Trading) Regulations Act, 1992. SEBI issued new regulations in Nov. 2014 by passing SEBI (prohibition of Insider Trading) Regulations Act, 2015. After that, some amendments were introduced in 2019 also. The new provisions and regulations have been aiming to make the Indian Financial Market more transparent and provide a level-playing field to all traders and investors.
SEBI has laid down the significant penalties for the person guilty of Insider Trading which is as follows :
(i) SEBI may impose a penalty of Rs.25 crores or three times the amount of profit made out Insider Trading, which ever is higher,
(ii) SEBI may initiate the criminal prosecution or
(iii) SEBI may issue order declaring the transactions in securities based on Unpublished Price Sensitive Information or
(iv) SEBI may issue orders rest raining an insider or prohibiting an insider from dealing in the securities of company.
CASE-ANALYSIS ON INSIDER TRADING
“Rajat Gupta and Raj Rajaratnam Case”
Rajat Gupta is an Indian and a former director at Goldman Sachs and head of Mickinsey Consultancy. Raj Rajaratnam is a Sri- Lankan Tamil and a former hedge fund manager in the Galleon Group, a New York based hedge fund management firm founded by Raj himself. Mr. Raj was having abroad network of tipsters inside large companies who used to provide him unpublished price sensitive information of companies in return of some fees. He had managed to convince the