INTRODUCTION
The word “insider trading,” which has a strong connotation in the financial world, raises grave questions about the integrity of these markets. Henry G. Manne defines Insider Trading as: “Insider trading generally refers to the practice of corporate agents buying or selling their corporation securities without disclosing to the public significant information which is known by them but which has not affected the price of the security.[1]
Understanding Insider Trading:
When someone purchases or sells shares based on significant, confidential information, it is known as insider trading. Insider trading involves buying or selling a security in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security. It’s illegal and can lead to severe penalties. Corporate insiders and other individuals with close ties to a company frequently have access to this privileged knowledge, which gives them an unfair advantage and skews the playing field for investors.[2]
WHAT ARE THE GROUNDS FOR ALLEGING INSIDER TRADING:
There are several reasons on which accusations of insider trading may be made, including: Trading based on non-public information that has been revealed without the required authorization is known as “unauthorized disclosure. “Relationships between Tipper and Tippee: When an insider provides knowledge to others (tipper), and those individuals then trade on the information (tippee). Abuse of Position: Trading by firm insiders or related persons who misuse their position for personal benefit. Front running: Using insider knowledge about a huge order to execute trades ahead of it. Misuse of Corporate Information: Utilizing confidential firm information for trading. Connected Persons: Trading by individuals with ties to the company, such as directors, workers, or close family members. Unusual Trading Patterns: Keep an eye out for any oddities in trading behaviour that might point to insider trading. To maintain equitable and transparent financial markets, compliance with the guidelines provided by the Securities and Exchange Board of India (SEBI) and other pertinent authorities is essential. [3]
REGULATORY FRAMEWORK:
The regulatory body in charge of the Indian securities markets is called the Securities and Exchange Board of India, or SEBI. The cornerstone of insider trading laws is the SEBI (Prohibition of Insider Trading) Regulations, 2015, which offer a strong framework to prohibit and punish such actions. Insider trading provisions define insiders and provide strict guidelines to stop trading on unpublished price-sensitive information (UPSI). Directors, officers, staff members, and people with varying levels of affiliation with the company are considered insiders. Under the regulations, organisations must develop an internal code of conduct and provide a formal framework for the prevention of insider trading. Procedures for managing UPSI, pre-clearance of trades, and insider trading disclosure are described in this code. Regulations against insider trading have harsh consequences that might include financial fines and bans from the securities markets. In addition, violations of the Companies Act of 2013 may result in criminal penalties for insider trading. In general, India’s legal viewpoint on insider trading highlights the dedication to upholding investor confidence, preserving market fairness, and discouraging illegal activity. Tight compliance with laws and strong enforcement strategies support the nation’s transparent and reliable securities market environment.[4]
Reliance Petro investments Ltd. v. SEBI (2004)[5]: Significant for interpreting the term “connected person” and broadening the scope of insider trading regulations.
Rajat Gupta Case (2012[6]): Involving a former director of Goldman Sachs and McKinsey, this case highlighted the importance of prosecuting high-profile individuals for insider trading.
CHALLENGES TO REGULATE INSIDER TRADING:
A recurring problem is defining “insiders” and figuring out how much access they really have to confidential information. For regulatory authorities, identifying people who possess confidential information and pursuing legal action against them is an ongoing difficulty. Furthermore, maintaining efficient monitoring and surveillance systems is a significant challenge. Regulators find it challenging to identify and stop insider trading in real time due to the vast volume of market transactions and the quick transmission of information. This calls for highly developed technology solutions as well as ongoing adjustment to changing market conditions. Regulatory efforts are made more difficult by cross-border transactions and the interconnection of the world economy. Addressing situations where insider trading involves businesses operating across national borders requires coordination with international regulatory bodies and seamless information flow. India’s regulations pertaining to insider trading face a variety of obstacles, including those related to technology, global market dynamics, legislative complexity, the necessity of efficient enforcement, and public awareness. the integrity of the securities markets, a comprehensive and flexible regulatory framework is needed. To meet these difficulties and preserve the integrity of the securities markets, a comprehensive and flexible regulatory framework is needed.[7]
HOW INSIDER TEADING PRACTISES CAN BE PREVENTED?
To safeguard investors and preserve the integrity of the financial markets, insider trading must be prevented. To prevent insider trading and ensure honest and open trading procedures, a number of precautions have been put in place. Such as: First and foremost, the Securities and Exchange Board of India (SEBI) is essential to the management and control of the securities industry. Insider trading is prohibited by extensive standards and restrictions established by SEBI. These rules specify the definition of an insider, require the development of a formal code of conduct, and set up procedures for documenting and looking into possible infractions. Companies listed on Indian stock exchanges must create and implement a strict code of conduct to guard against insider trading. Typically, this code requires pre-clearance of trades to ensure regulatory compliance, bans trading during specific “blackout” periods, and requires insiders to declare their trading activities. Regular training sessions are crucial for informing staff members about the consequences of insider trading and the significance of following rules and regulations. This promotes understanding and an ethical behavior culture within the organization. In order to monitor and enforce adherence to insider trading restrictions, SEBI encourages the formation of internal systems within businesses, such as Compliance Officers and Compliance Committees. These officers are essential in making sure that workers understand their duties and take the appropriate precautions to avoid insider trading. Stock exchanges also have strong surveillance systems in place to keep an eye on trade trends and spot any odd activity that would point to possible insider trading. These monitoring tools serve as a disincentive and aid in locating and prosecuting insider traders.
RECOMMENDATIONS
A more comprehensive and forward-looking perspective on addressing the challenges associated with insider trading in India can include: Encourage international collaboration and information-sharing among regulatory bodies to effectively address insider trading cases involving multinational corporations, Invest in and adopt cutting-edge surveillance technologies to monitor market transactions in real-time, Implement comprehensive awareness programs to educate the public, investors, and corporate insiders about the consequences of insider trading, Strengthen whistleblower protection mechanisms to encourage individuals with knowledge of insider trading practices to come forward, Periodically review and update insider trading regulations to adapt to evolving market dynamics and technological advancements, Introduce incentives for companies that demonstrate a commitment to ethical corporate cultures and compliance with insider trading regulations.
CONCLUSION:
Insider trading is a serious danger to the integrity of the financial markets, casting doubt on investor trust and fairness. Strong regulatory frameworks are necessary because to the covert nature of trading on privileged information, and in India, the Securities and Exchange Board of India (SEBI) is crucial in establishing and implementing these laws. Notwithstanding these endeavors, several obstacles endure, such as identifying insiders, keeping an eye on instantaneous transactions, and managing intricate cross-border issues. It will take constant technical innovation, global cooperation, and adaptable regulations to overcome these challenges. Proactive measures, such as SEBI laws, stringent firm codes of conduct, and strong internal compliance processes, are essential to preventing insider trading. Organizations can cultivate an ethical culture by implementing consistent training and awareness initiatives. Furthermore, watchful monitoring instruments implemented by stock exchanges serve as disincentives and facilitate the detection and legal action against insider traders. To protect the integrity of the securities markets and increase investor trust in the face of the ever-changing problems posed by insider trading tactics, a multifaceted strategy that includes technology solutions, legal measures, and international cooperation is fundamental.[8]
-By Komal Goswami
REFERENCES:
- https://www.legalserviceindia.com/legal/article-4407-insider-trading-in-india.html
- Sandeep Parekh, “Prevention of Insider Trading and Corporate Good Governance”, http://www.iimahd.ernet.in/publications/data/2003- 01-03SandeepParekh.pdf
- “INSIDER TRADING IN INDIA”, available at: http://www.riskpro.in/download/insider_wp.pdf
- https://www.livemint.com/market/stock-market-news/how-india-cracks-down-on-insider-trading-11580199120367.html
[1] Henry G. Manne, “Definition of Insider Trading” in Fred S. McChesney (ed.) The Collected Works of Henry G. Manne 364 (2009).
[2] http://www.riskpro.in/services/prevention-insider-trading-training
[3] An Analysis of Insider Trading in India, by : Sakshi Rewaria, International Journal of Research Publication and Reviews Vol. (2) Issue (7) (2021) Page 815-821 , ISSN 2582-7421
[4] Ibid 3
[5] (2004) 55SCL81 (SAT)
[6] 747 F.3d 111 (2d Cir.2014)
[7] CRITICAL ANALYSIS ON ILLEGAL INSIDER TRADING AND IT’S IMPACT ACTIONS TO CURB INSIDER TRADING IN INDIA, by: V.R. Maheswarararao. Paleti, Dr. Sapna Bansal and Prof. Anu Solanki Available at: https://s3-ap-southeast-1.amazonaws.com/ijmer/pdf/volume10/volume10-issue8(1)/4.pdf
[8] Ibid 5
