insider trading laws in India

I want to know about Insider trading in India. How it has been developed and contribution of US Laws towards insider trading regulations in India?

Asked on June 24, 2013 in indian law.
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     Please find your answer. I have taken this answer from Sekhar’s Guide to Sebi, 2003 edition and Article on History of Insider Trading by Manthan Saksena, available on a public domain ( google) . I have also referred to the sebi website for procuring such information on Insider Trading.



Securities market in India came into existence in 1875 with establishment of Bombay Stock exchange. In 1979, the Sachar committee said in its report that directors, auditors, company secretaries etc. may have some price sensitive information that could be used to manipulate stock prices which may cause financial misfortunes to the investing public. The companies recommended amendments to Companies act 1956 to restrict or prohibit the dealings of the employees.

The Patel Committee in 1986 in India defined Insider Trading as,

“Insider trading generally means trading in the shares of a company by the person who are in the management of the company or are close to them on the basis of undisclosed price sensitive information regarding the working of the company, which they possess but which is not available to others” .

The Patel Committee also recommended that the securities contract (Regulation) Act, 1956 may be amended to make exchanges curb insider trading and unfair insider trading and unfair stock deals.

The Abid Hussain Committee recommended that insider trading to be convicted under civil and criminal laws and also that SEBI formulate the regulation and governing codes to prevent unfair deals.

Through the coming of SEBI (Prohibition of Insider Trading) Regulation 1992 and its subsequent amendment in 2002 which prohibited fraudulent practice and a person involved in insider trading to be held guilty for such malpractice.

2) Development of the Law

The Hindustan Level Limited v. Securities Exchange Board of India in 1998 was perhaps the first under the regulation wherein SEBI’s findings on insider trading were set aside by Securities Appellate Tribunal, which held that there was no trade involved, based on inside information not being price sensitive as it was available to public domain.

Section 2(ha) of SEBI(Prohibition of Insider Trading) Regulation,1992 defines ‘Unpublished price sensitive information’ as any information which relates directly or indirectly to a company and which if published is likely to materially affect the price of securities of company”.

The prohibition contained in regulation 3 applies only when an insider trades or deals in securities on the basis of any unpublished price sensitive information and not otherwise. Although when an insider trades or deals in securities of a listed company, it may be presumed that he traded on the basis of unpublished price sensitive information in his procession, the contrary can be established for which burden of proving contrary to presumption lies on the insider. Where the insider shows that he did not trade on the basis of unpublished price sensitive information but on some other basis he cannot be said to have violated the provision of regulation 3.

Any information which is price sensitive should be announced quickly after it becomes know to management of issue. Such sort of information should be kept confidential until any public announcement is made by the issuer. If the degree of security cannot be maintained an announcement to the public should be made.

3) Laws in USA

The rules regarding insider trading are contained in Securities Exchange Act 1934. There are other laws to prevent insider trading like Insider trading Sanction act 1984, the insider trading and securities Fraud Enforcement Act, 1988. The Insider Trading Sanctions Act of 1984 and the Insider Trading and Securities Fraud Enforcement Act of 1988 provide for penalties for illegal insider trading. The penalties are indeed burdensome and stringent in nature. It may be as high as three times the profit gained or the loss avoided from the illegal trading.

The laws in United States regarding insider trading mainly depends upon the mental element of the insider, as per the case of Chiaralla v. United States it was held that in order to show the violation under the Securities Exchange act it is necessary to prove that insider breached his fiduciary duty fraudulently.

The laws in USA relating to Insider Trading are primarily contained in section 16(b) of the Securities Exchange Act, 1934 which states as follows in the relevant part:

For the purpose of preventing the unfair use of information which may have been obtained by such beneficial owner, director, or officer by reason of his relationship to the issuer, any profit realised by him from any purchase and sale, or any sale and purchase, of any equity security of such issuer (other than an exempted security) or a security-based swap agreement , involving any such equity security within any period of less than six months, unless such security or security-based swap agreement was acquired in good faith in connection with a debt previously contracted, shall inure to and be recoverable by the issuer, irrespective of any intention on the part of such beneficial owner, director, or officer in entering into such transaction of holding the security or security-based swap agreement purchased or of not repurchasing the security or security-based swap agreement sold for a period exceeding six months.

Section 16(b) of the Securities Exchange Act, 1934 prohibits the purchase and sale of the shares within 6 months period involving the directors, officer, stock holder owing more that 10% of the shares of the company. The rationale behind the incorporation of this provision is that it is only the substantial shareholder and the person concerned with the decision and management of the company who can have access to the price sensitive information and therefore there should be bar upon them to transact in securities. Section 10(b) of the Securities Act 1933, SEC rule 10b-5 prohibit fraud related to trading in securities

In 1984 with the case of Dirks v. SEC the Supreme Court of United States of America said that the tippers (person who is a receiver of second hand information) will be held liable if they had reason to believe that the tipper had breached fiduciary duty in disclosing confidential information and the tipper has received any personal benefit from the disclosure.

The concept of “Constructive insiders” came into existence with this case only where constructive insider who is lawyers, investment bankers and others who received confidential information from a corporation while providing service to the corporation. Constructive insiders are also liable for insiders trading violation if the corporation expects the information to remain confidential, since they acquire the fiduciary duties of the true insider.

The Rajat Gupta Scam had rocked the United States a year ago. There Rajat Gupta was proven guilty of having committed insider trading. He was convicted by the US Court , but instead of conviction he chose to do community service in Africa.

                                        Indian laws on Insider trading is very weak and dont have specific acts relating to insider trading. Only one SEBI regulation and Section 11A, 11AA of the SEBI Act, 1992. It doesnt impose any harsh penal measures in cases of insider trading. Now, Proving Insider Trading is to be bizarrely difficult task owing to the lack of material proof in majority of cases. Insider Trading cannot be proved beyond reasonable doubts unless there is substantial material proof supporting it or when the insider himself confesses in an admissible form, to have indulged in the dealing of confidential information for personal gains, which is very rare a possibility and is not expected to happen in practical world. Indulging in buying and selling of Securities is a legal practice. It is only what’s in the mind of the dealer that constitutes the basis of its legality.

Furthermore, it is advised that the SEBI should be provided downright assistance of the official government investigative agencies like Central Economic Intelligence Bureau (CEIB) to investigate into the matters relating to Insider Trading so as to improve the standards of investigation and hasten up the process of gathering proof against the insider. SEBI already has access to the CBI (Central Bureau of Investigation) whenever it seeks help in investigation and collection of evidence. But any additional help would prove to be useful and very much welcome by SEBI. Such a practice of official governmental assistance in investigation into Insider Trading matters has also proved to be extremely successful and efficient in the United States, where The Federal Bureau of Investigation (FBI) aids the Securities and Exchange Commission (SEC) in inspecting the cases of Insider Trading in a more comprehensive and yet expeditious way. It has, therefore, shown a higher rate of indictments in the recent past.

                                                       I hope this suffices.

Answered on June 24, 2013.
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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. It was the Sunday Times of UK that coined the classic phrase in 1973 to describe this sentiment – “the crime of being something in the city”, meaning that insider trading was believed as legitimate at one time and a law against insider trading was like a law against high achievement. “Insider trading” is a term subject to many definitions and connotations and it encompasses both legal and prohibited activity. 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. Almost eight years ago, India’s capital markets watchdog – the Securities and Exchange Board of India organised an international seminar on capital market regulations. Among others issues, it had invited senior officials of the Securities and Exchange Commission to tell us how it tackled the menace of insider trading.

Answered on June 25, 2013.
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