Insider trading complete PPT (SEBI and Case Studies)

this powerpoint presentation includes complete information about Insider Trading, its regulation in INDIA and what are its penalties. It is fully made with all the matter available till date for the topic. It also includes some minor case studies for explaining further. The matter so prepared includes all relevant updates from Slideshare, SEBI website and Google major websites.
I personally prepared this file for my College Internal Examination and scored 10/10

1. Insider Trading Auditing and corporate Governance 

2. CONCEPT OF INSIDER TRADING

3. INSIDER & CONNECTED PERSON Insider is the person who is “connected” with the company , who could have the unpublished price sensitive information or receive the information from somebody in the company. Connected Person is  Any person who is or has been associated with company, in any manner, during the six months prior to the concerned act: An immediate relative to the connected person. A banker of the company. An official of stock Exchange or of clearing corporation. A holding/associate/subsidiary company.

4. 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 employees of law, banking and brokerage firms who were given such information to provide services to the corporation whose securities they traded.

5. Insider Trading: Privileged Information Privileged Information is defined as:  “ Information of a precise nature which has not been made public, relating, directly or indirectly, to one or more issuers of financial instruments or to one or more financial instruments and which, if it were made public, would be likely to have a significant effect on the prices of those financial instruments or on the price of related derivative financial instruments”. Same concept applies to every type of financial instrument. A clearer definition of privileged information helps companies to know what has to be publicly disclosed and therefore prevents risk of insider trading.

6. Insider Trading & Corporate Governance Insider trading has many governance implications, affecting:    The organization of companies;    The duties of directors of managing boards and supervisory boards and other corporate insiders;    The permitted flow of information within companies;    The disclosure duties imposed to companies. The main problem in insider trading is conflict of interests and the misuse of power –in this case it relates to the power over privileged information. Therefore, there is a strong connection between corporate governance and insider trading.

7. Insider Trading: Timely & Sufficient Disclosure

8. ADVANTAGES OF INSIDER TRADING Mass security transaction could well be done by big institutional traders without impacting price movements. Tiny investors to benefit immensely from this sort of trading activities yet this has been an issue of huge debate. Benefits the institutional buyers to purchase securities at a fixed floor price or even sell the same as the fixed price on that date rather than get stuck in the unpredictability of the market.

9. DISADVANTAGES OF INSIDER TRADING Stockbrokers, informers and frauds manipulate the security markets by leaking information. Spread out rumor about a insider transaction. Enhance the risk for stock market crash. Leads to a decrease in the overall trust in the market.

10. Evolution of Law

11. Rakesh Agrawal v. SEBI MANU/SB/0208/2003 Rakesh Agarwal, MD of ABS Industries Ltd. (ABS), was involved in negotiations with Bayer A.G (a company registered in Germany), regarding their intentions to takeover ABS. Insider trading transaction :- Rakesh Agarwal, through his brother in law, Mr. I. P. Kedia had purchased shares of ABS from the market and tendered the said shares in the open offer made by Bayer thereby making a substantial profit and thus was held for acting in violation of Regulation 3 and 4 of the Insider Trading Regulations Hon’ble SAT held that: Dealing in securities while possessing the unpublished price sensitive Information is not sufficient to hold the appellant guilty. The dealing should result in an advantage to him ,which according to the SEBI'S investigation did not. The law prohibits the gaining of the unfair advantage by the insider. The appellant has acted in the interest of the company and was not held guilty, as per the SEBI'S judgement.

12. DSQ Holdings Ltd. vs. SEBI (Decided on 15.10.2004 SAT) DSQB (earlier Usta Te Biotech Ltd.) was originally promoted by KND Engineering & Technologies Ltd., jointly with Tamil Nadu Industrial Development Corporation. The erstwhile management in DSQB entered into an agreement in April, 1994 with Square ‘D’ group promoted by Shri Dinesh Dalmia. Soon thereafter, the new management announced a rights issue which opened for subscription on 03/07/1995 and closed on 02/08/1995. Insider trading transaction :- The appellants were found to have traded in the securities of the DSQB during August, 1994 to September, 1994 and also after the closure of the Rights issue while possessing UPPSI . SAT held that the matters regarding the Rights issue of DSQB was first discussed in the Board Directors Meeting on 30/07/1994. Thus the period between 31/07/1994 to 30/09/1994 was the period under the price information on the Rights issue was "unpublished and price sensitive“.

13. Dilip S Pendse vs. SEBI (Decided on 20.11.2008 SAT) Mr. Dilip Pendse was director of Tata Finance Ltd and Niskalp Investments and Trading Co. Ltd. which is subsidiary of Tata Finance Ltd. Mr. Talaulikar was also director of the above companies. TFL came out with rights issue between 30-3-2001 and 30-4-2001. It was observed that Niskalp , a subsidiary of TFL, had suffered huge losses which was not disclosed in the Letter of Offer leading to failure of offer. Insider Trading Transaction: Mr. Talaulikar transferred his family shares on 4- 4-2001 at a higher price to TATA'S NITCL while possessing UPSI that Niskalp had suffered losses. It was alleged Mr. Pendse was guilty of Counseling and arranging transfer of shares while in possession of UPSI. SAT held that - - Mr. Pendse and Mr. Talaulikar are both professionals and were insiders therefore, Mr. Talaulikar required no advise from the Mr. Pendse as alleged. - Mr. Talaulikar is responsible as he was the director of Niskalp at the time when the funds were transferred.

14. Samir C Arora vs. SEBI (decided by SAT on15-10-2004) The merger of Digital Globalsoft (DGL) and HP ISO (Hewlett Packard) was proposed. Digital appointed Bansi Mehta and Co. to recommend merger ratio. The merger ratio was discussed in the Board Meeting of DGL on May 12, 2003. The Board, however, did not announce the merger and decided to seek fairness opinion from a third party. Later on, on June 6, 2003 the merger ratio was announced. This resulted in fall of price of the DGL scrip from Rs. 500.50 to Rs. 371/-. Insider trading Transaction : The Appellant was alleged to have sold the entire holdings of Alliance Capital Mutual Fund & Alliance Capital Management LP between May 8, 2003 and May 12, 2003 while possessing UPPSI. The Hon’ble SAT held that Information accessed was not correct information. There was nothing to show how the information generated by Shri Bansi Mehta could have reached the Appellant, particularly when SEBI has nowhere doubted the credentials of Shri Bansi Mehta and Soonawala. Several other funds had also sold the same scrip in the same month in substantial numbers

15. Rajiv B. Gandhi, Sandhya R. Gandhi & Amishi B. Gandhi Vs. SEBI [2008] 84 SCL 192(SAT) Rajiv B. Gandhi (Gandhi) appellant No. 1 is the Company Secretary and Chief Financial Officer of Wockhardt Limited (for short the company). Sandhya Gandhi appellant No. 2 is his wife and Amishi Gandhi (appellant No. 3) is his sister. Insider trading transaction:- The appellants had sold 3600 shares on 21.1.1999 (before the board meeting held on April 22, 1999 at 11.30 a.m. called for demerger) and 22.1.1999 (in the first half hour before the market could react to the news) on the basis of unpublished price sensitive information. The Hon’ble SAT held that The words “ on the basis of ” are significant and mean that the trades executed should be motivated by the information in possession of the insider. Facts necessary to establish the contrary being especially within the knowledge of the insider, the burden of proving those facts is upon him.

16. HLL-BBLIL MERGER The case primarily involves 4 parties namely Unit Trust of India(UTI),Hindustan Lever Limited(HLL),Brooke Bond Lipton India Limited (BBLIL)and Securities &Exchange Board of India (SEBI). SEBI , suspecting insider trading, conducted enquiries. In August 1997 , SEBI charged HLL of insider trading by using Unpublished Price-Sensitive Information . HLL bought 8 lakh shares of BBLIL from UTI at Rs.350.35 per share (At a premium of 9.5% of ruling market price of Rs.320) just two weeks before the formal announcement knowing that the HLL and BBLIL were going to merge.

17. 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 country’s corporate order. SEBI penalized HLL with Rs. 34 million in compensation, and also initiated criminal proceedings against the five directors of HLL and BBLIL.

18. 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 the shares of BBLIL moved up from Rs.242 to 320 between January and March, before the transaction, indicating that the merger was “generally known information” .

19. HLL claimed that the purpose of the purchase of shares was to enable Unilever to acquire 51% shares of BBLIL. In July 1998, the Appellate Authority of the Finance Ministry dismissed the SEBI order. However, SEBI order was correctly based on a simple proposition of Law : what can not be done “directly” cannot be done “indirectly”.

20. Need for Regulating Insider Trading  Insider trading undermines investors confidence in the fairness and integrity of the stock market. This is known as market stability theory. If the insider uses the confidential information for personal gains, he or she would be misappropriating a public good for private gain. This is called the misappropriation theory. The insider should be prohibited from dealing in the markets with unsuspecting investors because he/she has an unfair advantage knowledge.

21. Penalties Monetary Penalty : Section 15G of the act imposes penalty of at least Rs.10lacs,which may extend to Rs.25 Crore or three times of profits made out of insider trading whichever is higher. Imprisonment : Section 24 of SEBI Act even goes to the extent of imprisonment upto 10 years or fine upto 25 Crore, or both, for any offences pertaining to contravention of the provisions of the Act. This Photo by Unknown author is licensed under CC BY-NC .

22. Conclusion INSIDER TRADING is the misuse of privileged position & breach of trust and hence can disturb whole structure of Securities Market. It can also be a big menace for small investors as they can lose their hard earned money in the hands of corporate insiders, hence its effective prevention is very significant. The importance of policing insider trading has assumed international significance as regulators attempt to boost the confidence of investors. Prevention of Insider trading is necessary to create a Level Playing Field for Investors in Capital Market Effective measures to prevent Insider Trading would create trust & confidence among the Investor Communities and help to develop securities market. 181148 – Anant Goyal 181153 – Guneet Singh