ABSTRACT:
The integrity, transparency, and equity of the securities markets can be compromised by insider trading, which occurs when a person transacts with the use of any non-public (or unpublished) information which affects the value of a security, thus providing that person an advantage over the remaining investors. The loss of trust in the investing public creates obstacles in the flowing of capital in a free and equitable manner through securities markets. In India, the Securities and Exchange Board of India (SEBI) is responsible for implementing rules and regulations prohibiting insider trading in order to provide a level playing field for all market participants. SEBI has updated their rules and regulations over the period of time with the introduction of the SEBI (Prohibition Continued to Page 2 of Insider Trading) Regulations, 2015, thereby replacing the previous 1992 Regulations.
This article defines what constitutes insider trading under securities market law as regulated by SEBI (Securities Exchange Board of India). It will describe how each of the laws regulating insider trading is designed to protect the integrity of the securities markets, protect an investor’s interest and ensure there is a level playing field in the marketplace. It will also detail issues faced in enforcing laws prohibiting insider trading, including the need for regulators (e.g., SEBI) to continually revise their regulations due to the ever-evolving behaviour within the markets.
KEYWORDS: INSIDER TRADING, SEBI, CHALLENGES, HARSHAD MEHTA CASE
INTRODUCTION:
Through their support of the economy via their ability to mobilize capital, encourage investment, and grow businesses, the securities markets function as one critical support system in any modern economy. Furthermore, all market participants need to utilize available material information in an equal and timely manner to ensure fairness and efficiency in how these markets operate. The failure to provide all market participants access to pure material information will result in a disruption of the market’s equilibrium and will create an unfair or uneven playing field. Insider trading is one such example of a failure in providing equal access which threatens the credibility of the financial marketplace.
The ability of an insider to use their knowledge of undisclosed (non-public) material information will enable them to usurp profits that rightfully belong to all investors (that traded on equal information) through the improper use of their undisclosed information. This creates an extremely large disparity between an insider’s returns compared against the returns being earned by regular investors, thereby eroding the confidence of regular investors in the capital markets and ultimately affecting the willingness of those investors to invest in public companies for the long-term and, by extension, negatively affecting long-term economic growth.
With the rapid development of India’s capital market, the increase in foreign direct investment, and continuing technological advances, insider trading has become riskier and more complex. The SEBI (Securities and Exchange Board of India) has put together an expanded regulatory structure that attempts to prevent the abuse of non-public information. In addition to that, the SEBI (Prohibition of Insider Trading) Regulations, 2015 create a transition from a “reactive” enforcement of laws to a “proactive” compliance-based enforcement approach to managing insider trading issues.
CONCEPT OF INSIDER TRADING:
Insider trading is defined as buying, selling, or trading securities with regard to unreleased price-sensitive information related to a business enterprise. Releasing such information to outside parties will likely have a substantial effect on the value of the securities involved. The key characteristic of insider trading is the use of confidential information for either your own personal gain or the gain of someone else.
According to the SEBI Regulation the term “Insider” includes not only those who are directors, KMPs, employees or promoters of the company, but anyone who has a relationship to the company in any way and has knowledge of UPSI. There are many different ways in which an individual could qualify as an Insider; for example, an auditor; legal advisor; consultant; banker, and a family member or associate that may receive such information directly or indirectly from an Insider. Accordingly, the definition of “Insider” includes persons who provide a fiduciary or professional service to the Company and therefore includes all persons who have access to insider information through their fiduciary or professional relationships.
SEBI:
The Securities and Exchange Board of India (SEBI) is a regulator of India’s securities markets. SEBI was established in 1988 and subsequently gained its statutory authority through the SEBI Act of 1992 to achieve its goals of protecting the interests of investors, regulating the securities markets, and fostering the development of the securities markets.
SEBI’s function in the Indian securities marketplace is to serve as the watchdog over the Indian stock markets through ensuring fair, transparent, and accountable operations in all areas related to the Indian securities market. SEBI regulates all aspects of the Indian stock market — stock exchanges; brokers and other intermediaries; corporate issuers; mutual funds; and other market participants.
SEBI Objectives SEBI has three primary objectives:
1) Protecting Investors
- Provides that companies provide accurate and complete information to the public to investors in a timely manner.
- Prohibits fraudulent and/or dishonest trading practices such as insider trading and market manipulation.
2) Regulating & Promoting Market Development
- Preserves the integrity of the Indian securities markets.
- Encourages investment and capital raising for companies to create a safe and efficient market.
3) Preventing Market Misconduct
- Oversees and regulates the activities of stock brokerages, sub-brokerages, and other intermediaries.
- Enforces compliance with all applicable laws, codes of conduct and other regulatory requirements.
Functions and Powers of SEBI
SEBI carries out several different functions, which are
- Approving by-laws, monitoring operations and ensuring the stock exchange is functioning in a transparent environment.
- Broker service providers, commercial banks, and registrar service providers must work within SEBI guidelines to perform their duties.
- Companies are required to make public their financial statements, shareholding patterns and any price-sensitive information.
- SEBI monitors the trading of corporate insiders and punishes offenders.
PENALTIES AND ENFORCEMENT FOR SEBI REGULATIONS OF INSIDER TRADING
Civil Penalties
- An insider found guilty of insider trading will be assessed a fine of either up to INR 25,00,00,000, or three times the total amount of profit derived from all illegal transactions (whichever is higher).
- The company will also be subject to a civil penalty if it does not implement or follow compliance measures related to insider trading.
Criminal Penalties
A person found guilty of insider trading may be sentenced to imprisonment for up to seven years, depending on the specific offence.
CHALLENGES:
- The ability to detect and prosecute those committing insider trading
- the globalization of the market.
SUGGESTIONS:
- To improve upon prevention and enforcement of insider trading, SEBI needs to invest in additional AI-based surveillance systems that can more quickly identify unique trades.
- More trade audits of employees, trading in their company’s stock, should be done in real-time in order to prevent any type of manipulation of the market.
CONCLUSION:
The act of insider trading has eroded investor confidence in the securities markets by undermining the fairness, transparency, and integrity of the markets, thereby impairing the long-term economic growth of the country. SEBI is tasked with regulating and monitoring the Indian capital market through comprehensive statutory requirements and a proactive approach to enforcement through the SEBI (Prohibition of Insider Trading) Regulations of 2015. While SEBI is doing everything it can to combat insider trading, the agency still faces challenges such as difficulties with insider trading detection and the globalization of the market. SEBI can leverage artificial intelligence technology for surveillance and conduct real-time audits to enhance the prevention of and enforcement against insider trading and thereby level the playing field for all investors and maintain trust in the financial marketplace.