INSIDER TRADING Regulations

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INSIDER TRADING Regulations Practices
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Agenda for Presentation

• Introduction
• History behind insider trading
• Regulatory Aspect of Insider Trading
• Cases

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Introduction
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Introduction

• Insider trading essentially denotes dealing in
  a company s securities on the basis of
  confidential information relating to the company
  which is not published or not known to the public
  used to make profit or loss. It is fairly a
  breach of fiduciary duties of officers of a
  company or connected persons as
  defined under the SEBI regulations,1992, towards
  the shareholders.

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Contd

• Insider terms actually includes both legal and
  illegal conduct.
• The legal version is when corporate insider
  officer, directors , and employees buy and sell
  stock in their own companies. when corporate
  insiders trade in their own securities , they
  must report their trades to SEBI.
• Illegal insider trading refers generally to
  buying or selling a security , in breach of
  fiduciary duty or other relationship of trust and
  confidence, while in possession of material ,
  non public information about the security.

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Who are insider traders?

• Corporate officers, directors , and employees who
  traded the corporations securities after learning
  of significant , confidential corporate
  developments.
• Friends , business associates, family members ,
  and other types of such officers , directors ,
  and employees, who traded the securities after
  receiving such information.

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Contd

• Employees of law, banking , brokerage and
  printing firms who were given such information to
  provide services to the corporation whose
  securities they traded.
• Govt employees who learned of such information
  because of their employment by the govt .
• Other persons who misappropriated ,and took
  advantage of, confidential information from their
  employers.

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Why forbid insider trading?

• The prevention of insider trading is widely
  treated as an important function of securities
  regulation.
• In order to make sense of insider trading , we
  must have basic understanding of markets, prices
  and role of markets in the economy.
• Insider trading appears unfair, especially to
  speculators outside a company who face difficult
  competition in the form of insider trading.

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History behind Insider Trading
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History behind Insider Trading Regulation in India

• Insider trading in India was unhindered in its
  130 year old stock market till about 1970.
• In 1979 , the Sachar committee recommended
  amendments to the companies Act,1956 to restrict
  prohibit the dealings of employees . Penalties
  were also suggested to prevent the insider
  trading.
• In 1986 the Patel committee recommended that the
  securities contracts Act ,1956 may be amended to
  make exchange curb insider trading and unfair
  stock deals.

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Contd

• In 1989 the Abid Hussain committee recommended
  that the insider trading activities may be
  penalized by civil and criminal proceedings and
  also suggested the SEBI formulate the regulations
  and governing codes to prevent unfair dealings.
• India through SEBI regulations 1992 has
  prohibited this fraudulent practice .
• These regulations were drastically amended in
  2002 and renamed as SEBI regulations 1992.

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In India.

• Only 14 cases taken up by SEBI for insider
  trading in 2003-04 , which went down to only 7 in
  2004-05.
• In terms of cases completed, the no was only 9
  and 5 respectively.
• So does India has fewer incidence of insider
  trading or our systems/laws not geared enough to
  detect such cases?

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Regulatory aspect of Insider Trading
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Regulatory aspects of prohibition of Insider
Trading

• SEBI prohibition of Insider Trading regulation
  1995.
• Section 11(2) E of companies act 1956 prohibits
  the Insider Trading
• What is Insider Trading is not defined in the
  companies act -1956

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Why there is need for the Prohibition of Insider
Trading???

• As per SEBI the Prohibition of Insider Trading is
  required to make Securities Market
• Fair Transparent
• To have a level playing field for all the
  participants in the market
• For free flow of information avoid information
  asymmetry

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Who is Insider???

• Who is Insider is defined under the SEBI
  Prohibition of Insider Trading regulation 2 (e)
• Insider is the person who is connected with
  the company , who could have the Unpublished
  price sensitive information or receive the
  information from somebody in the company .
• For the purpose this definition, words
  connected person shall any person who is a
  connected person six months prior to an act of
  insider trading

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Who Can be a connected person???

• It could be director of the company ,or is deemed
  to be a director of the by virtue of
  sub-clause(10) of section 307 of the companies
  act 1956
• He /She could be officer or professional of the
  company or holding a business relationship with
  the company.
• Any person having UPPI from the any subsidiary or
  group company is also stated to be the connected
  person.
• Connected person can also be from intermediarys
  like stock exchange , Merchant Bank , Transfer
  agent, debenture trustee, Bankers relatives of
  promoter or of BOD.

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Relatives are defined very extensively in the
companies act 1956

• 11.Sons sons wife
• 12.Sons daughter
• 13.Sons daughters husband
• 14.Daughters husband
• 15.Daughters son
• 16.Daughters sons wife
• 17.Daughters daughter
• 18.Daughters daughters husband
• 19.Brother
• 20.Brothers wife
• 21.Sister
• 22.Sisters husband

• 1. Father
• 2. Mother
• 3. Son
• 4. Sons wife
• 5. Daughter
• 6. Fathers father
• 7. Fathers mother
• 8. Mothers mother
• 9. Mothers father
• 10.Sons son
• 11.Sons sons wife
• 12.Sons daughter

But several close relatives are excluded Like
all in-laws (Brother-in-law, Father-in-law
etc.)-Brothers wifes brother etc.
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What is price sensitive information???

• The Price sensitive information is defined in
  Regulation 2(h)(a) of the prohibition of Insider
  Trading.
• It means any information which relates
  directly or indirectly with the company which
  if published is likely to materially affect the
  prices of the securitys of the company.

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The information which is deemed to be price
sensitive are like.

• Periodical financial results
• Intended declaration of the dividends(both
  Interim Final)
• Issue of securities or buy back of securities
• Any major expansion plans or execution of new
  projects.
• Amalgamation mergers or takeovers.
• Disposal of the whole or substantial part of the
  undertaking
• Any significant changes in policies , plans or
  operations of the company.

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Regulation 3 of the Prohibition of Insider trading

• No Insider should deal insecurity , while in
  possession of UPPI.
• He / She should not communicate or procure the
  UPPSI to others.

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Regulation 3(B)

• This regulation states that there should be
  Chinese Wall With in the company one
  department should not know about what other
  departments are doing.

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Disclosures for prohibition of Insider Trading

• Initial Disclosure
• Like buying the stake greater than the 5 of
  the paid up capital of the company ,the acquiring
  company should inform the Stock Exchange with in
  2 days of acquiring the stake.
• The new director should disclose all its trade
  position in Equity or derivatives with in 2 days
  of its appointment.
• Continuous Disclosure
• If the director changes its holding by 2 .
• Investment of Rs 5 Lacs or 25000 shares or buying
  the 1 stake of the paid up capital which ever is
  the least should be disclosed.
• 3 All holdings in securities of that
  company
• 4 Periodic statements of all transactions
• 5 Annual statement of all holdings
• 6 Any other disclosure of the company to
  stock exchanges.

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Model Code of Conduct for Prohibition

• A compliance officer is required to be appointed
  by the company.
• There should be pre-clearance of trade by the
  officer of designated employees. Designated
  employees includes
• Employees from top 3 layers of Mgmt.
• All Employees in finance department irrespective
  of any designation grade.
• Employee designated by BOD from time to time to
  whom the trading restriction shall be a
  applicable.
• Trading window ,is closed 7 days prior 24 hours
  post event for the connected persons during the
  UPPSI activities like RESULTS,IPO,CAPEX,BUY BACK
  , etc.
• There are several forms in accordance with
  disclosures code of conduct.
• Insider_Trading_Code_of_Conduct.pdf

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Investigation of Insider Trading

• Regulation 4(a) deals with the request for the
  enquiries.
• SEBI can also appoint the outsider auditor for
  the enquiry auditor would have the same power
  as the SEBI possess.
• Before undertaking any investigation under
  regulation (5) SEBI shall give a reasonable
  notice to insider for that purpose.
• Where SEBI is satisfied that in the interest of
  investors or in public interest no such notice
  should be given, it may by an order in writing
  direct that the investigation be taken up without
  such notice.

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SEBIs Power to make inquiries and inspection

• Regulation 4A
• If the SEBI suspects that any person has
  violated any provision of these regulations, it
  may make inquiries with such persons.
• The SEBI may appoint officers to inspect the
  books and records of insider(s) for the purpose
  of inspection.
• The SEBI can investigate and inspect the books of
  account, either records and documents of an
  insider on prima facie.
• SEBI can investigate into the complaints received
  from investors, intermediaries or any other
  person on any matter having a bearing on the
  allegations of insider trading.

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Case Studies

• HLL-BBLIL MERGER
• RAKESH AGARWAL vs. SEBI
• SAMIR ARORA vs. SEBI

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HLL-BBLIL MERGER CASE
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HLLBROOKBOND LIPTON INDIA LTD

• Focus on legal controversy involving BBLILs
  merger with HLL.
• SEBI, suspecting insider trading, conducted
  enquiries.
• In August 1997, SEBI charged HLL of insider
  trading by using Unpublished Price-Sensitive
  Information.

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HLLBROOKBOND LIPTON INDIA LTD

• HLL bought 8 lakh shares of BBLIL from UTI at Rs
  350.35 per share (At a premium of 9.5 of the
  ruling market price of Rs 320) just two weeks
  before the formal announcement knowing that the
  HLL and BBLIL were going to merge.
• SEBI held that HLL was using unpublished,
  price-sensitive information to trade, and was
  therefore guilty of insider trading.
• In March 1998, SEBI passes an executive order,
  which sent shock waves through the countrys
  corporate sector.
• SEBI directed HLL to pay UTI Rs 3.4 Crore in
  compensation, and also initiated criminal
  proceedings against the five directors of HLL and
  BBLIL.

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HLLBROOKBOND LIPTON INDIA LTD

• HLL appealed against the SEBI verdict to the
  Union Ministry of Finance.
• HLL contended that before the transaction, the
  merger was the subject of wide speculation by the
  market and the media.
• After the formal announcement, press articles
  mentioned that the merger was no surprise to
  anyone.
• HLL pointed out that the share price of BBLIL
  moved up from Rs 242 to Rs 320 between January
  and March, before the transaction, indicating
  that the merger was generally known information.

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HLLBROOKBOND LIPTON INDIA LTD

• HLL contended that to be considered as an
  insider, it should have received information by
  virtue of such connection to the other company.
• According to HLL, it was an initiator and the
  transferee, and it was the primary party to the
  merger and no primary party to the merger can be
  considered an insider from the point of view of
  insider-trading.
• HLL argued that only the information about the
  swap ratio could be deemed to be price-sensitive
  and that this ratio was not known to HLL or its
  directors before the purchase of shares from UTI.
  
• HLL also argued that the news of merger was not
  price sensitive as it had already been announced
  by the media before the official announcement.

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HLLBROOKBOND LIPTON INDIA LTD

• HLL claimed that the purpose of the purchase of
  shares was to enable Uniliver to acquire 51
  shares of BBLIL.
• In July 1998, the Appellate Authority of the
  Finance Ministry dismissed the SEBI order.
• However, SEBI was correctly order was correctly
  based on a simple proposition of law what can
  not be done directly can not be done indirectly.

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RAKESH AGARWAL vs. SEBI
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RAKESH AGARWAL vs. SEBI

• One of the most famous case highlighting the
  vulnerability of the SEBIs 1992 regulations.
• Rakesh Agarwal, MD of ABS Industries Ltd was
  involed in negotiations with Bayer A.G, regarding
  their intention to takeover ABS.
• As per SEBI, Rakesh Agarwal had access to the
  Unpublished price-sensitive information.
• SEBI alleged that prior to the announcement of
  acquisition, Rakesh Agarwal, through his
  brother-in-law, had purchased shares of ABS and
  tendered the said shares in the open offer made
  by Bayer.

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RAKESH AGARWAL vs. SEBI

• Rakesh Agarwal contended that he did this in the
  interests of the company.
• Pursuant to Bayers condition to acquire at least
  51 shares of ABS, he, through his brother-in law
  bought the shares and later sold them to Bayer.
• The SEBI directed Rakesh agarwal to deposit Rs
  34,00,000 with Investor Education Protection
  Funds of Stock Exchange, Mumbai and NSE.
• SAT held that the SEBI order directing Agarwal to
  pay Rs 34 lakh couldnt be sustained, on the
  grounds that Rakesh Agarwal did that in the
  interests of the company.

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SAMIR ARORA vs. SEBI
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SAMIR ARORA vs. SEBI

• Sameer Arora was star fund manager of Alliance
  Capital Mutual Fund (ACM) and the poster boy of
  the Indian Mutual Fund Industry.
• He was managing Rs 2264 crores with ACAM invested
  in Indian equity and fixed income markets as of
  31st August 2003.
• Within a few years of its launch, ACMF became a
  darling among the investors.
• The fund which was launched in 1995, had been
  generating a return of 2.463 since inception
  under the growth option.
• The CIO, Asian operations, Samir Arora was
  applauded by everyone for a good show.

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SAMIR ARORA vs. SEBI

• In April 2003, there were talks about the
  consolidation of Digital Global Soft LTD(DGL)
  with the Hewlett Packard Indian Software
  Operations(HPISO), a 100 subsidiary of HP.
• On May 5, 2003 Arora, in an interview with
  Business Standard, proposed that merger was going
  to immensely help DGL due to the additional
  projects it is going to get from HP.
• On May 8, 2003 an internal analyst of Alliance
  recommended reducing position in the stock.
• ACMF sold 1.19 lakh shares and ACM sold 2.18
  lakh shares.
• On May 12, 2003 ACMF sold 3.35 lakh shares while
  ACM sold 2.5 lakh shares.

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SAMIR ARORA vs. SEBI

• Arora said, Even risk from tomorrows results
  is too high. Bipolar situation, but we do not
  like to take such risks post-very volatility in
  technology stocks around results/corporate
  issues.
• May 13, 2003 DGL announced Q4 results in line
  with the expectations of the market. ACM sold
  2.11 lakh shares.
• June 7, 2003 DGL announced demerger ratio which
  was perceived as unfavorable by the market. Stock
  fell 26.

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SAMIR ARORA vs. SEBI

• In August 2003, SEBI charged Samir Arora of
  insider trading under Section 11B and 11(4)(B) of
  the SEBI Act.
• SEBI indicted Arora on many serious charges i.e
  -
• A. Trading DGL shares on the basis of Unpublished
  price sensitive information.
• B. Non-disclosure after crossing 5 limit in
  several companies
• C. Causing panic in the market by making public
  his decision to quit Alliance Capital, leading to
  the redemption of Rs 1300 Crore.

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SAMIR ARORA vs. SEBI

• In April 2004, SEBI debarred Arora from dealing
  in securities directly or indirectly for five
  years.
• SEBI charged the penalty of Rs 15 Crore on ACM
  and two associated Alliance entities.
• October 2004, the Securities Appellate Tribunal
  set aside the order of SEBI on grounds of
  insufficient evidence to prove the charges of
  insider trading and professional misconduct
  against Mr. Arora.

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OBSERVATION

• Inability of SEBI in proving its cases.
• Wide definition of Insider Trader as defined in
  the 1992 Act.
• Proving Insider Trading a bizarrely difficult
  task.
• Lack of assistance from Central Economic
  Intelligence Bureau (CEIB) to investigate the
  cases.
• Absence of an adequate remedy available to the
  investors at large.

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Thank you