By Tanishka Tiwari
Published on: January 25, 2024 at 15:40 IST
With the rise of the corporate world in global markets, the trading of bonds, stocks, derivatives, and other products continues to increase. Insider trading has been a popular kind of trading in recent years.
It occurs when an individual can access non-public information about a firm and purchases or sells shares or stock in that company. Insider trading has gained popularity in the financial markets during the past two to three decades. However, trading without taking advantage of non-public information is generally permissible.
Insider trading, a prevalent fraudulent malpractice employed by numerous corporate entities listed in established stock exchanges, warrants immediate and imperative scrutiny. This global phenomenon necessitates diligent oversight; if left unchecked, it may engender various economic predicaments. Such predicaments encompass the widening wealth disparity, the destabilisation of stock markets, and economic downturns.
This nefarious conduct perpetuates the enrichment of the affluent while concurrently exacerbating the impoverishment of the underprivileged, posing detrimental consequences for any given economy. The majority of countries have enacted laws outlawing or regulating insider trading. According to published figures, approximately 87 countries had established insider trading laws by the end of the twentieth century.
A functional and efficient stock market is required to provide favourable investment and economic growth conditions. Over the previous two decades, the Indian stock market has grown tremendously.
Despite its phenomenal growth, India’s stock market is plagued by many distorting forces, including price-rigging, insider trading, a lack of transparency in company accounts, high transaction costs, excessive speculation, administrative lapses in stock exchanges, faulty primary markets, and a variety of other issues such as cornering, wash sales, curb market dealing, and so on.
Among the entire range of issues, insider trading has emerged as the most challenging problem primarily due to the absence of circumstantial evidence, a regulatory prerequisite for prosecuting the perpetrators. Insider trading is an exceedingly intricate matter, and its eradication is nearly unattainable as it stems from a fundamental human instinct, namely, greed.
Individuals possessing insider information who make decisions regarding future profits or minimising losses based on such information find it more challenging to refrain from trading using that privileged knowledge.
The current endeavor aims to comprehend the magnitude of this predicament and the regulatory measures in place to combat it.
The stock market is companies’ and society’s benefitting resources from surplus to deficit units. The market determines the ‘correct’ valuation of a security. The battle for external capital among small, developing, and emerging financial markets has raised awareness of the necessity of investor protection regulations in ensuring market competitiveness. The law aims to regulate insiders who engage in unlawful trading.
Meaning of Insider Trading
Insider trading involves individuals with a direct or indirect relationship with a corporation. These individuals utilise their position to obtain price-sensitive information that is not released, such as share value.
This occurs when individuals directly relate with a firm or corporate body. These individuals utilise their privileged position (for example, as a director, professional consultant, or employee of that company) to obtain price-sensitive knowledge about the value of securities, which is not released.
Insider trading is getting knowledge from private sources, such as acquaintances, colleagues, and friends, to gain a financial advantage. Fraudulent practices may occur when someone who knows has a fiduciary duty to share it with clients but does not fulfil it.
Employees and directors must keep all price-sensitive information secret. Price Sensitive Information must be managed on a “need to know” basis and released only to those inside the organisation who require the information to perform their duties. Individuals are prohibited from recommending the purchase or sale of securities based on such information, either directly or indirectly.
By taking employment, the corporate insider has assumed a legal commitment to the shareholders to prioritise the shareholders’ interests over their own in business activities. When an insider buys or sells shares based on company-owned information, he violates his duty to shareholders. Insiders that use material non-public knowledge to trade the company’s stock are considered fraudulent as they break their fiduciary duty to shareholders.
For instance, illegal insider trading would manifest when the director, chief executive officer, or key executive with access to the undisclosed strategic information about the company employs said information to trade the company’s stocks or securities. This practice is commonly referred to as insider trading, and it is vehemently discouraged by the Securities and Exchange Board of India (SEBI) to foster equitable and transparent trading in the market, ultimately benefiting the ordinary investor.
Types of Insider Trading
Insider trading is a long-standing issue in equity markets. In mature markets worldwide, it is considered a significant violation of business ethics and a threat to public trust in stock exchanges. As a result, it requires legal regulation. Insider trading is not necessarily considered unlawful.
- Insiders can legally acquire and sell stock in their company. Thousands of insider trading reports are filed every day. As long as the insider trades on knowledge commonly available to the public, no laws are breached.
- Illegal insider trading is based on non-public information, which may include ‘tipping’ such information. For example, if the CEO knows the company will not receive a large contract and sells before informing the public, that is prohibited. However, unlawful insider trading is challenging to prove.
The error information processing capabilities. Investors must be allowed to engage in transactions with minimal transaction costs to be productive and efficient. The consensus is that companies and society benefit from precise securities valuation.
The market determines a security’s ‘correct’ valuation based on the entire disclosure of all relevant information. Precise securities valuation has societal advantages, such as the rational allocation of capital investment and reduced volatility in security prices. Moreover, accurate securities pricing decreases corruption by reducing investor uncertainty and enabling enhanced monitoring of management’s efficacy. Individuals closely affiliated with companies play a pivotal role in generating uncertainty within the market.
The differentiation between trading that is legally authorized and trading that is considered illegal insider trading necessitates careful comprehension. It is inherently natural for an individual with insider knowledge employed within a company to come across internal information.
Preventing insiders from engaging in personal trading would infringe upon their human rights and defy the rationale behind freely tradable securities. Such a restriction would be deemed unreasonable. Similarly, it would be illogical to prohibit company promoters from conducting transactions involving their securities.
Consequently, the limitation imposed upon corporate insiders is directly or indirectly related to their utilization of price-sensitive information, which they possess to exclude other shareholders in making trading decisions.
If insiders do not possess any price-sensitive information unknown to the public, there are no absolute restrictions on trading the company’s securities. Within a brief timeframe, promoters and insiders can exploit the information to their advantage by predicting the market’s reaction to news or information.
Historical Evolution of Insider Trading in India
The issue of insider trading dates back to the inception of trading on equity markets. In all established markets worldwide, it is regarded as a grave transgression against the ethical principles of business. It is also perceived as a potential underminer of public trust in the stock exchange.
The establishment of legal regulations for insider trading took numerous decades. Before the conclusion of World War II, it was not deemed extraordinary for company members – such as directors, officers, or employees – to purchase and sell shares and stocks based on unpublished information that was sensitive to price and unknown to the public.
This behavior was considered acceptable, customary, and widespread. However, in the aftermath of World War II, and continuing until the late 1950s, it began to be regarded as deceitful to derive personal profit at the expense of most shareholders. Surprisingly, during the 1960s and early 1970s, insider trading once again became widespread.
The issue of insider trading is a rapidly growing concern on a global scale. It pertains to the practice of company executives engaging in trading securities based on undisclosed privileged information, which has been consistently regarded as illicit throughout the history of the corporate sector. However, the measures taken against insider trading have gradually developed and refined over the years.
The notion of trade has existed for centuries and has always been an integral part of human society. Trade is a pivotal gathering place for humanity, known as the market. As time progressed, new business ventures emerged, leading to the exploration of innovative methods of conducting commerce. The security market, a worldwide business platform, facilitates trading shares and other financial instruments. The progression of insider trading throughout the years can be attributed to many legislative enactments and judicial rulings. Fundamentally, trade entails the exchange of goods, services, or both.
The East India Company issued loan securities in the 18th century, marking the beginning of securities trading in India. By the 1830s, there was both qualitative and quantitative boarding in the industry, and shares of banks such as Charted Bank, Oriental Bank, and Bank of Bombay, as well as cotton presses, began trading in Bombay.
In 1840, only six brokers for shares and stocks were recognised by banks and merchants in Mumbai. By 1887, there were local share and stock brokers. In 1875, the Association of Bombay, now known as the Bombay Stock Market, established India’s first stock market.
The Bombay Stock Exchange (BSE) is the most considerable, fresh capital raised, secondary market volume, capitalization, listed firms, and paid-up capital. It is also the oldest market, with permanent accreditation, while the other exchanges have their recognition renewed every five years.
Before introducing the Bombay Securities Contracts Control Act 1925 on January 1, 1926, legislative legislation was needed to manage and oversee the stock market, even though stock exchanges were in operation. This needed to be improved in many ways. This led to unrecognised stock exchanges and individuals trading forward contracts. Investors experienced significant losses between 1928 and 1938. Following the passage of the Constitution on January 26, 1950, the Central government gained control of stock exchanges and forward markets. Insider trading in India dates back to the 1940s when government groups like the Thomas Committee in 1948 analysed US rules on short-swing profits under Section 16 of the Securities Exchange Act. Sections 307 and 308 of the Companies Act 1956 mandate shareholding statements by company directors and managers to address insider trading.
The government set up various committees to oversee securities and discourage insider trading. These committees played a vital role in establishing legal restrictions for insider trading. These Committees contribute to understanding the evolution of insider trading in India. The establishment of the Morrison Committee in 1936 was a response to the necessity of developing a comprehensive and authoritative legal framework to address contractual matters within the securities market. This initiative sought to rectify the deficiencies that existed within previous legislative measures. The Morrison Committee’s various recommendations ultimately led to introduction of the Defence of India Act in May 1943. Notably, this legislation included a provision for capital issues, introducing restrictions on such matters for the first time.
In addition to the development mentioned earlier, the Morrison Committee proposed that government approval should be obligatory for capital issues. This recommendation was subsequently incorporated into the Defence of India Act 1939. Consequently, the Office of Controller of Capital Issues was established per the suggestions made by the Morrison Committee. This Office held the authority to authorize the issuance of securities, determining the respective quantities, types, and prices of such securities. However, it is worth mentioning that the Capital Issue Act was abolished in 1992. Subsequently, the Office of Controller of Capital Issue (CCI) was dismantled as part of the liberalisation process in India.
The Thomas Committee, a notable committee, examined the law that already existed in various other nations, particularly the comprehensive legal framework in the United States. The United States has developed intricate laws about this subject matter. After achieving independence, there was a recognized necessity for an autonomous and authoritative legislative body to regulate stock market trading and establish a proficient governing body to administer the established laws. To fulfill these objectives, the Government of India convened a committee under the leadership of P.J. Thomas in 1948. At that time, Thomas served as the economic advisor to the finance ministry. In its report, the Committee recommended adopting the United States model of establishing a Commission akin to the Securities Exchange Commission (SEC). It proposed the establishment of the National Investment Commission.
The Bhaba Committee, in its report, observed the prevalence of fraudulent transactions conducted by company directors in the shares trading. According to the Committee, it is crucial to establish an obligation for directors and individuals considered as directors to inform the company of any matters regarding their holdings of shares and debentures. The Committee further emphasized that without a legal requirement for directors or individuals deemed as directors to disclose relevant information to the company, it would be impracticable for companies to maintain an accurate record of directors’ shareholdings. As a result, Sections 307 and 308 were included in the Companies Act of 1956.
Further, the Sachar Committee was formed to review sections 307 and 308 of the Companies Act and the Monopolies and Restrictive Trade Practices Act 1969. The Committee worked exhaustively and observed that Sections 307 and 308 of the Companies Act, 1956 were insufficient to curb insider trading. The committee emphasized the need for disclosures to the shareholders regarding the transaction in the sale and purchase of shares by the directors and other critical managerial persons.
The Patel Committee, constituted by the government, played a pivotal role in conducting a comprehensive evaluation of the operations of the stock exchanges and providing its recommendations. In 1986, the Patel Committee defined Insider Trading as trading company shares by individuals who hold positions in the company’s management or have close ties to them based on undisclosed price-sensitive information on the company’s operations. While possessing such information, these individuals maintain exclusivity, denying others access to it. The Patel Committee extensively researched the operations of the stock exchanges and put forth numerous comprehensive suggestions. The committee proposed that malpractices like insider trading should be classified as a cognizable offense.
The Abid Hussain Committee was formed to assess the sufficiency of the current establishments, mechanisms, and configurations within the Indian capital market. The Committee observed that the dilemmas of insider trading and covert takeover attempts could be addressed significantly through appropriate regulatory measures. In its report, the Committee proposed that civil and criminal legal consequences should be imposed for insider trading. Throughout the tenure of the Abid Hussain Committee, the SEBI has commenced the process of incorporating a legal framework to oversee the behavior of all prominent participants in the market, namely the issuers, intermediaries, and exchanges.
The Kumar Magalam Birla Committee’s report emphasised the necessity of solid governance, including the prohibition of insider trading. The research also noted that the enforceability of existing legislation governing inside knowledge and insider trading is critical to strong corporate governance.
The rationale behind curbing Insider trading
India’s status as a global economic powerhouse necessitates establishing a robust regulatory framework for its securities market. This framework is essential to instill confidence in domestic and international investors, ensuring their investments are secure within a fair and transparent securities market.
Recently, the Indian securities market has been plagued by significant fluctuations in the share prices of public companies during mergers or acquisitions, as well as illegal trading based on undisclosed price-sensitive information. This has generated considerable apprehension within the Indian securities market.
When fiduciaries entrusted with running companies for the benefit of shareholders gain unjust enrichment at the company’s and its shareholders’ expense, it constitutes a reprehensible crime. While illegal insider trading is a global phenomenon, a study by the International Monetary Fund (IMF) reveals that it is particularly prevalent in countries such as Russia, China, and India, leading to heightened volatility in share prices.
The Cohen Committee in England, which focused on company reforms, acknowledged that while legislation may not wholly eradicate improper transactions, a high standard of conduct must be upheld. It should be widely recognized that any speculative profit attained through specialized knowledge not available to the general body of shareholders is illegitimate.
The primary concern for all countries that have implemented insider trading legislation has been ensuring equitable transactions in the securities market by requiring the disclosure of material information that affects trading in the market. In India, insider trading is observed among companies that belong to the same business group before merger announcements.
As a result, it is crucial to establish adequate regulations and an effective enforcement mechanism to prevent manipulators and fraudsters from exploiting the information asymmetry. Therefore, the primary purpose of regulation and policy is to promote market efficiency, and consequently, it is necessary to assess the impact of insider trading on market efficiency. Insider trading is biased, particularly towards speculators who invest in the market with the expectation of an increase in share value.
It is a widely recognised and acknowledged fact that the efficient and seamless functioning of the securities market, as well as its robust growth and development, are heavily reliant on the overall quality and integrity of the market. Only within such a market can investors genuinely find solace and trust.
As is commonly understood, insider trading refers to trading securities by individuals who possess knowledge of non-public, price-sensitive information due to their positions within a company or as a result of their professional activities. Consequently, these individuals purchase or sell securities based on this privileged information. Hence, they utilize such information to generate profits or avoid potential losses.
Insider trading can be defined as the more advantageous application of information. Concealing such information from the general shareholders compromises the efficacy of the market. Consequently, there will be reduced availability of information within the market, enabling insiders to utilize the information to their most significant advantage.
The capital market operation is predicated on a transparent dissemination of information; however, insider trading undermines investor confidence in the justness and integrity of the securities market. Thus, preventing such transactions is crucial for any capital market regulatory system.
The rationale behind insider trading prohibition is rooted in the apparent necessity and understandable concern regarding the potential harm to public confidence and the public treasury that such practices may cause. The clear intention is to deter insider trading as much as possible, which essentially amounts to deceit when individuals possessing undisclosed information utilize it to gain profits in their transactions with others.
Permitting a select few individuals with access to Unpublished Price Sensitive Information to exploit this information to the detriment of others will not only impact the company’s performance but also compromise the integrity of the financial market.
Investors will disapprove of widespread market manipulation and volatility and reduce investment inflow into such markets. Any market that lacks fairness in its transactions or fails to regulate unfair trading in companies effectively will not be an attractive destination for investors. Given that an absolute prohibition of share trading by insiders is not feasible, insider trading is controlled and monitored through a series of measures in various jurisdictions.
Therefore, it is imperative to suppress insider trading due to its deceptive nature concerning honest trading practices. The United States of America emerged as the pioneering nation in enacting legal measures to restrict insider trading. Subsequently, numerous other countries followed suit by implementing multiple legislations to combat the threat of insider trading. India, too, expeditiously acknowledged the presence of insider trading malpractice and established the SEBI (Prohibition of Insider Trading) Regulations in 1992 to curb and prevent such misconduct.
The Securities Exchange Board of India (SEBI) oversees securities trading and addresses activities within the market. SEBI functions as the governing body for all stock exchanges within India and is obligated to safeguard the interests of investors in the securities market while simultaneously regulating the stock market through appropriate regulations.
By undertaking various preventive measures, SEBI fulfills its role as the regulatory authority in the share market, thereby instilling confidence in investors who participate in the market. The 1992 regulations have undergone multiple amendments and were eventually replaced by new rules in 2015.
Ill Effects of Insider Trading
Insider trading is an inequitable practice whereby other shareholders are put at a significant disadvantage due to the absence of crucial non-public information available to insiders. Several other drawbacks of insider trading can be delineated.
- Insider Trading represents a prevailing malevolence within stock markets. It constitutes fraudulent and illicit activity as it engenders an unfair situation for those individuals who lack access to sensitive information about market prices. When an individual exploits such information for monetary gain, it exposes others to the peril of purchasing stocks at inflated prices or incurring substantial losses.
- Insider trading can undermine the confidence of familiar investors and the public. The occurrence of numerous insider trading scandals within a concentrated timeframe may leave investors disillusioned and pondering how they can generate profits from stock investments when they are persistently placed at a disadvantage by unscrupulous insiders.
- Corporations frequently encounter significant adverse publicity upon detecting and disclosing insider trading activities. The negative publicity and subsequent damage to their reputation can discourage informed trading. Furthermore, executives of companies with more significant reputational capital are more susceptible to negative publicity’s detrimental effects, potentially profiting less from insider trading. It is noteworthy to acknowledge that even individual conduct has the potential to inflict harm upon a firm’s reputation.
- Trading based on inside information, particularly illegal insider trading, can inflict substantial harm upon the fairness and efficiency of capital markets.
Laws Regarding Insider Trading in India
Article 19 (1) (g) of the Indian Constitution confers upon every citizen the fundamental right to engage in any profession or carry out any occupation, trade, or business.[1] However, it is essential to note that this fundamental right is subject to reasonable restrictions as stipulated in Article 19(6).[2] These reasonable restrictions empower the state to enact legislation to prevent unfair trade practices.
In M/S Eskay KNIT (India) Ltd and Ors v. Union of India and Ors, the High Court of Rajasthan emphasized that unlawful insider trading practices are deceitful. Hence, the state is authorised to enact laws to prevent such deceptive trade practices under clause (6) of Article 19. While the Indian Constitution may have a limited scope on unlawful insider trading, it is crucial to recognize that the aforementioned constitutional provisions vehemently discourage this unfair trade practice.
The formulation of the SEBI (Insider Trading) Regulations in 1992 was a response to the recommendations put forth by various committees and the pressing need to advance the securities market. These regulations marked a significant milestone in the control of insider trading and the enhancement of transparency in the securities market.
Additionally, they empowered the SEBI with greater authority to regulate the market more effectively and efficiently. However, the regulations suffered from notable shortcomings such as insufficient resources and inadequate penal provisions, as well as a lack of proper training for staff and challenges in implementation, which often resulted in favorable outcomes for violators.
Most financial regulations necessitate continuous modifications to keep up with the ever-evolving market dynamics. Insider trading is no exception to this rule. The current regulations were officially announced in 1992.
Over the past two decades, the laws and comprehension of insider trading globally and in India have evolved significantly. Despite numerous amendments, specific provisions of the existing regulations unintentionally created obstacles in facilitating smooth transactions of listed securities.
For instance, the current regulations must address the regulation of due diligence. This becomes problematic because financial investors, such as private equity funds, typically conduct thorough legal and financial investigations of the target company before making investments. This often leads to these investors gaining access to insider information about the target company before purchasing shares, thereby resulting in the offense of insider trading. Similarly, without a precise definition, there is a lack of clarity regarding the meaning of ‘trading.’
In 2002, revisions were made to strengthen the regulations from 1992 and expand the list of individuals considered to be connected to the “insiders.” Companies listed and other entities must establish internal policies and adopt a code of conduct to prevent insider trading by directors, employees, and other individuals. It is challenging to determine the extent to which these codes are followed. While it is reported that insider trading is prevalent in India, only a few cases are brought to public attention due to the difficulties in identifying a trade as a potential instance of insider trading.
On February 20, 2002, the Securities and Exchange Board of India (SEBI) issued an Amendment to the SEBI (Insider Trading) Regulations 1992. These amended regulations will now be referred to as the SEBI (Prohibition of Insider Trading) Regulations 1992, replacing the previous SEBI (Insider Trading) Regulations 1992.
The amended regulations include the provision of a Model Code of Conduct for the Prevention of Insider Trading for Listed Companies and a Model Code of Corporate Disclosure Practices for the Prevention of Insider Trading. These amended regulations place the responsibility on companies to establish an internal code of conduct to prevent insider trading and the misuse of undisclosed price-sensitive information by the company’s directors, officers, and designated employees. All listed companies must appoint a senior employee as a “Compliance Officer.”
The modifications implemented by the SEBI (Prohibition of Insider Trading) (Amendment) Regulation, 2008 can be summarized as follows:
- The definition of an “Insider” has been modified, and its scope expanded. Now, any individual who has obtained or had access to undisclosed price-sensitive information will be deemed an “Insider.”
- This individual doesn’t need to be a connected person, as this is subject to interpretation. The “code of internal procedures and conduct” established by the intermediary must be similar to the Model Code specified in Schedule I of these Regulations and uphold its integrity without dilution. Furthermore, the concerned intermediary must ensure compliance with these regulations.
- Suppose any person holds over 5% of shares or voting rights in a listed company. In that case, they must disclose the number of shares or voting rights held to the company within two working days of receiving notification of the allotment of shares or the acquisition of shares or voting rights.
- Additionally, any individual who is a director or officer of a listed company must disclose the number of shares or voting rights held, as well as any positions taken in derivatives by themselves and their dependents (as defined by the company), to the company in Form B within two working days of assuming the role of a director or officer.
- Previously, disclosing such individuals’ positions in derivatives was not mandatory, and the time limit was four working days.
- Any individual who holds a position as a director or officer within a publicly listed company must disclose the total number of shares or voting rights they possess and any changes in their shareholding or voting rights. This disclosure must be made to the company and the relevant stock exchange where the securities are listed. The information should be provided in Form D.
- Furthermore, if there has been a change in the holdings of the individual and their dependents, as defined by the company, since the last disclosure made under sub-regulation (2) or under this sub-regulation.
- If the change exceeds the value of Rs. 5 lakh or 25,000 shares or 1% of the total shareholding or voting rights, whichever is lower, it must also be disclosed. It is important to note that previously, the person was not obligated to disclose the shares held by their dependents. In Regulations, 13 (5) and (6), the time limit for submitting the relevant documents has been reduced to 2 working days. Previously, the time limit was 4 and 5 days, respectively.
On August 16, 2011, SEBI (Prohibition of Insider Trading) (Amendment) Regulations were officially announced. These regulations have broadened the scope of disclosure requirements, previously limited to directors, officers, designated employees, and their dependents.
Now, even promoters and the promoter group of a company are subject to these requirements to ensure transparency and prevent insider trading. Consequently, the disclosure requirements outlined in Regulation 13 now encompass disclosures made by promoters and the promoter group.
The 2011 amendment regulation mandates that promoters and individuals who are part of a promoter group of a listed company must make disclosures under Regulation 13. These disclosures pertain to the initial declaration of their shareholding upon becoming a promoter or part of a promoter group, as well as continuous disclosures whenever there is a change in their holdings that exceeds a value of Rs. 5 lakh, 25,000 shares, or 1% of the total shareholding or voting rights, whichever is lower.
Currently, similar disclosures are also required to be made by the directors and officers of the company. Including promoters and the promoter group within the framework of disclosure requirements under Insider Trading appears to be intended to enhance transparency.
After implementing the 2013 Company Act in India, the scope of regulations on insider trading has expanded significantly. Including unlisted companies in these regulations is a notable development, as it safeguards the interests of shareholders at large. In light of this, several measures are proposed to curb insider trading.
- Firstly, establishing an insider trading policy is essential. It should clearly outline blackout periods and provide a comprehensive definition of insiders and insider information in easily understandable terms.
- Additionally, companies should employ an internal oversight mechanism to monitor stock trades within the organisation.
- Moreover, companies should engage third-party entities such as accounting firms to verify insiders’ holdings.
- Furthermore, the government must establish a dedicated department solely responsible for addressing complaints related to insider trading. Incentives should be offered to individuals who provide information regarding any insider trading or potential insider trading.
- Lastly, all private companies must fall under the purview of the Right to Information Act 2005.
The formation of the Hon‘ble Justice Sodhi Committee aimed to examine the current legal structure put in place to address the issue of insider trading. In its analysis, the Committee proposed a legal framework prohibiting insider trading in India. The focus of the recommendations was to enhance the predictability, precision, and clarity of the regulatory measures in this domain.
To achieve this, the Committee suggested a blend of principles-based regulations and rules supported by guiding principles. In December 2013, the Committee submitted a comprehensive report, which identified several modifications necessary within the existing legal framework. Consequently, the Insider Trading Regulations 2015 were derived from the Committee’s report.
These regulations are expected to strengthen the authority of the Securities and Exchange Board of India (SEBI) as the market regulator, thereby aiding in the more effective management of the pervasive issue of insider trading.
Conclusion
Insider trading, an aspect of securities regulation, has long been debated within the law and economics community. The act of insider trading is deemed deceptive due to various reasons. While numerous alternative paths to market inefficiency exist, the most prominent objection to insider trading is its inherent unfairness. Perhaps the most significant consequence of insider trading is its detrimental effect on market efficiency.
The enigmatic nature of insider trading makes its detection and conviction arduous, while the substantial sums involved make deterrence challenging. At the heart of the securities system lies the principle that all investors should enjoy equal access to the benefits of participating in securities transactions. In simpler terms, all members of the investing public should face identical market risks.
Inequities stemming from unequal access to information should not be dismissed as an inevitable aspect of our society. Therefore, it is crucial to establish markets that are free from all forms of fraud, particularly insider trading, which undermines the confidence of ordinary investors in the functioning of the markets, akin to being invited to partake in a game of chance with rigged dice.
References
- Critical-Analysis-on-Laws-Relating-to-Insider-Trading-in-India
- Insider-Trading-in-India
- An Analysis of Insider Trading in India
- Insider trading laws in India a comparative study with United States of America and United Kingdom