Insider trading is defined as a malpractice wherein trade of
a company's securities is undertaken by people who by virtue of their work have
access to the otherwise non public information which can be crucial for making
investment decisions.
When insiders, e.g. key employees or executives who have
access to the strategic information about the company, use the same for trading
in the company's stocks or securities, it is called insider trading and is highly
discouraged by the Securities and Exchange Board of India to promote fair
trading in the market for the benefit of the common investor. To fill
Insider trading is an unfair practice, wherein the other
stock holders are at a great disadvantage due to lack of important insider
non-public information. However, in certain cases if the information has been
made public, in a way that all concerned investors have access to it, that will
not be a case of illegal insider trading.
Intimate knowledge or material non-public and privileged information on
the affairs, operations, financial position of a corporation that will affect
the market value of it shares is insider information. Unauthorized access to or
an attempt to benefit from this insider information is commonly a criminal
offense. There is absolutely no restriction on insiders in trading in
securities of the company if they do not hold any price sensitive information
that the public is not already aware of. Upon the price sensitive information
being disclosed to the market, the share prices would surge if the price
sensitive information is perceived to be positive and the share prices would
plummet if the price sensitive information is perceived to be negative. During
that short while, between insiders receiving the price sensitive information
and the public disclosure of that information, insiders attempt to deal in
securities such that they can take advantage of the market reaction that is
about to follow.
The trial of Rengan Rajaratnam in Manhattan federal court is
the latest in the American government’s year’s long crackdown on insider
trading. Rajaratnam may be a household
name at this point given the insider trading conviction of his older brother,
Raj, in 2011 but this trial presents prosecuters with new challenges. Daniel Gitner, Mr. Rajaratnam’s lawyer,
said that his client was completely unaware that the tips from his brother were
obtained in return for a personal benefit. At issue is whether a trader, to be
guilty of insider trading, must have known a tip was illegally disclosed in
exchange for a reward. The appeals court indicated in April that it may be
necessary for prosecutors to prove that.
In a country like India, when the stock soars or plunges for no apparent
reason, analysts and investors usually assume that the shares are moving on
information that is not yet public. Despite this widespread knowledge of
insider trading, there are hardly any persons who have been prosecuted due to
it.
Insider trading is particularly rampant in our country
because our laws do not provide us with the right tools to keep it in check.
India needs better investigation powers besides other tools to combat insider
trading. They have only recently been allowed to track phone records of the
investors under investigation. However, SEBI is still not allowed to use
wire-taps which can be crucial to exposing this crime. Unless there is no fear
of regulation in the market participants, the wrongdoers will always be hard to
catch and remain just out of reach of
the law.
The Insider Trading Regulations in entirety had not undergone any
systematic review ever since it was enacted in the year 1992. Independent and separate
amendments by SEBI to various provisions of the Insider Trading Regulations had
resulted in lacunae in the Insider Trading Regulations. Also, it was felt in
the industry circles that it was high time the Insider Trading Regulations were
modified in light of global best practices. Against this backdrop, SEBI has
recently constituted a High Level Committee to review the Insider Trading
Regulations and suggest suitable recommendations for amendments as it considers
necessary. The committee is expected to review and revamp the Insider Trading
Regulations in the same manner in which the Takeover Regulations Advisory
Committee had overhauled the takeover laws in India. Since, the High Level Committee
has already initiated the process of review of the Insider Trading Regulations;
it is only a matter of time for the Insider Trading Regulations to undergo a
crucial revision.
If Indian laws could become as tough as the laws of US, insider traders
could be looking forward to facing doom just like Raj Rajaratnam, elder brother
of Rengan, to whom the district judge ordered a 11 year old prison sentence,
with forfeiture of USD 53.8 million and a fine of USD 10 million along with a
separate case on his younger brother, which is expected to be concluded in the
next 2 weeks.
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