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The term insider dealing is also known as insider trading in India. Insider dealing or insider trading has been present since the twentieth century. Insider trading is understood as taking undue advantage of unpublished price sensitive information related to stocks, shares, and securities. Information is exploited by developing a friendly or privileged relationship with the individual or institution dealing with securities. This privileged agreement is called as insider dealing as the individual would have an unfair advantage when selling the securities in comparison to the public. The price of securities is altered due to the fact of the disclosure of information.
Thus insider dealing or insider trading is defined as the practice where corporate agents deal and act in buying and selling securities. Such securities are bought and sold without disclosing any form of price-sensitive information. Divulging information related to price-sensitive information would be prohibited.
The main regulatory authority dealing with insider dealing in the USA is the Securities Exchange Commission (SEC). USA was the first country to enact the law for insider trading. The Securities and Exchange Act, 1934 was enacted to regulate insider trading in the country. Strict penalties are enforced for insider dealing in the USA. During the 2001 global crisis, Enron one of the largest energy companies in the USA filed a bankruptcy petition for misleading investor’s money.
One of the issues which led to the downfall of the energy giant is insider dealing. Insider dealing was not only present between the employees, but also present in the senior management. The Securities Exchange Commission looked into this problem and imposed a heavy penalty. Due to this the Sarbanes Oxley Act, 2002 was enacted to have a framework for corporate governance and insider dealing.
The main regulation dealing with insider trading in the UK is the Financial Services and Markets Act 2000 (FSMA 2000) which regulates financial transactions in the country. Apart from this, the Criminal Justice Act, 1993 provides the legal framework for insider dealing in the UK. None of the acts provide a specific definition of insider trading.
The FSMA helps in preventing market abuse related to insider dealing of securities. The main regulatory authority for the securities market in the UK is the Financial Services Authority (FSA). The FSMA defined market abuse as committing any of the seven activities as per the act.
The following activities would come under the meaning of market abuse:
The above activities would be considered as market abuse. Therefore, if any of the above activities are conducted which leads to disclosure of information, then it would be considered as insider trading in the UK. USA and the UK have specific regulations dealing with insider trading. Non Compliance with the above regulations would attract strict penalties.
The securities market in India evolved after the 1990s. In 1992, the Securities and Exchange Board of India (SEBI) was formed to regulate the securities market in India. This regulator also looks into unlawful activities such as misleading the public about securities and insider trading activities. Apart from the SEBI rules on insider trading, the Companies Act 1956 also deals with provisions related to insider trading. With the enactment of the Companies Act 2013, the provision for insider trading has been included in section 195. Section 195 of the Companies Act 2013, speaks about insider trading by a shareholder, director, or key management personnel in the company.
The following is included in the section:
Contravention of the above provision would lead to imprisonment for a term which may extend to five years. Apart from this, the authority can impose a fine of Rs 5 lakh rupees. This may extend to Rs 25 Crore or three times the amount of money secured from insider trading. The authority has the right to impose either one of the penalties or both.
Apart from the Companies Act 2013, the Securities Exchange Board of India Act 1992 also regulates the law related to insider trading. The SEBI has brought out insider trading regulations during the formation of the securities exchange board of India. These regulations have been amended from time to time with the increase of insider trading in India.
Under the SEBI Act, the SEBI (Prohibition of Insider Trading) Regulations, 1992 (‘1992 Regulations’) have been brought out by the SEBI. This has been amended in the year 2015 with few amendments in 2019. However, the 2015 regulation is the current law that deals with insider dealing. There is a strict penalty for non-compliance with these provisions.
The 2015 regulations have brought about many changes in the working of the act.
The following are the changes related to insider trading:
Under Section 3, an individual is prohibited to communicate price sensitive information to the public. Price sensitive information would only relate to securities that are listed and traded in the stock exchange.
The information which is price sensitive must not be communicated to any other individual in the company. There is an exception to this. If the communication is made in furtherance of the business or made for a legitimate purpose, then such communication is allowed.
The regulations also state that no individual shall collect such information from an insider of the company. Such information will include any security that is proposed to be listed in a stock exchange or any other form of revelation regarding the security.
The following are the exceptions under the 2015 Regulations:
When entering into a takeover or an open offer, the board of directors of the company would require all employees to enter and execute confidentiality undertakings and non-disclosure agreements with the company for not divulging any form of price-sensitive information that affects the company. The confidentiality agreements would not include the above exceptions for disclosure of confidential information by the company.
According to the regulations, no insider is allowed to trade in securities upon possessing any form of price-sensitive information. However, there are various defences regarding the possession of price-sensitive information.
The following are the defences that can be used in insider dealing:
In case the insider has to take a defence under these regulations then the burden of proof would be on the connected persons for such insider information. In other such cases, the burden of proof would be on the directors of the company. The board has to maintain certain standards under the regulations for compliance.
An insider of the company must formulate a trading plan under the provisions related to the regulations. This trading plan has to be shared with the compliance officer of the company for approval.
The trading plan will have the following:
The compliance officer has to review and assess the plan whether it complies with the insider dealing regulations related to SEBI. Non Compliance with the insider dealing regulations would attract strict penalties to the individual and the company.
Insider Dealing is understood as taking advantage of unpublished market information related to the trading of securities. Information is extracted from the insider of the company to deal with securities. Insider dealing in the USA is regulated by the Securities Exchange Commission. In the UK, insider dealing regulated by the financial services authority. In India, insider dealing is regulated by the SEBI and Companies Act 2013. Both the laws impose strict penalties related to insider dealing. Specific defences can be used against insider dealing.