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INSIDER TRADING

Insider Trading is trading of a public company's stock or other


securities i.e. as bonds or stock options by individuals with access to
non-public information about the company. Normally, trading by
corporate insiders such as officers, key employees, directors, and large
shareholders is permitted, if this trading is done in a way that does not
take advantage of non-public information. But, the term insider trading
is frequently referred to a practice in which an insider or a related party
trades based on material non-public information obtained during the
performance of the insider's duties at the company, or otherwise in
breach of a fiduciary or other relationship of trust and confidence or
where the non-public information was misappropriated from the
company fraudulently.
Definition:
Insider Trading is the buying , selling or dealing in securities of a listed
company by a director , member of management , employee of the company
, or by any other person such as internal auditor , advisor , consultant ,
analyst etc., who has knowledge of material inside information which is not
available to general public.

Insider:
According to the Indian stock market regulator, SEBI, "insider" means
any person who, is or was connected with the company or is deemed
to have been connected with the company, and who is reasonably
expected to have access, connection, to unpublished price sensitive
information (UPSI) in respect of securities of a company, or who has
received or has had access to such unpublished price sensitive
information. Inside unpublished price sensitive fact is inside
information which only a select few persons know because of their
closeness to the company and which has not been publicly
circulated.
Categories of insider:
There are two categories of Insiders i.e.
(I)Primary Insiders who are directly connected to the company.
For e.g.: Director, office, employee, shareholders or any person who is
related to the company.

(ii) Secondary Insiders are those who deemed to be connected with the
company as they are expected to have access to unpublished price sensitive
information.
For e.g.: subsidiary company, sister concern, merchant bankers, advisors,
brokers etc.

PROHIBITION AGAINST INSIDER TRADING:


1. Prohibition of Dealing:
According to Regulation 3, No insider shall counselling on matters
relating to insider trading. Either on his own behalf or on behalf of any
other person, deal in securities of a company listed on any stock
exchange any unpublished price sensitive information.
2. Prohibition on communication:
Communicate or counsel or procure directly or indirectly any
unpublished price sensitive information to any person who while in
possession of such unpublished price sensitive
Information shall not deal in securities.
3. Prohibition on counselling :
Counselling is prohibited by any person to be its securities on the basis
of unpublished price sensitive information.

MODEL CODE OF CONDUCT FOR PREVENTION OF INSIDER TRADING FOR


LISTED COMPANIES:
1. Appointment of Compliance Officer:
The listed company shall appoint a Compliance Officer senior level
employee who shall report to the Managing Director/Chief Executive
Officer. The compliance officer shall be responsible for setting forth
policies, procedures, monitoring adherence to the rules for the
preservation of Price Sensitive Information, pre-clearing; of
designated employees and their dependents trades (directly or
through respective department heads as decided by the company),

monitoring of trades and the implementation of the code of conduct


under the overall supervision of the Board of the listed company.
2. Duty of employees and directors to preserve Price Sensitive
Information:
Employees/directors shall maintain the confidentiality of all Price
Sensitive Information.
Employees/Directors shall pass on such information to any person
directly or indirectly by way of making a recommendation for the
purchase or sale of securities.
3. Handling price sensitive information on Need to know basis:
Price Sensitive Information is to be handled on a need to know basis,
i.e., Price Sensitive Information should be disclosed only to those within
the company who need the information to discharge their duty.
4. Limited access to confidential information:
Files containing confidential information shall be kept secure.
Computer files must have
adequate security of login and password etc.
5. Prevention of misuse of Price Sensitive Information:
All directors/officers and designated employees of the company shall
be subject to trading restrictions as enumerated below.
(I) The company shall specify a trading period, to be called trading
window, for trading in the companys securities. The trading
window shall be closed during the time the information is
unpublished.
(II) The trading window shall be opened 24 hours after the
information is made public.
(III)
All directors/officers/designated employees of the company
shall conduct all their dealings in the securities of the Company
only in a valid trading window and shall not deal in any
transaction involving the purchase or sale of the companys
securities during the periods when trading window is closed, in or
during any other period as may be specified by the Company
from time to time.
6. Pre-clearance of trades:
All directors/officers/designated employees of the company who intend
to deal in the securities of the company should pre-clear the
transaction as per the pre-dealing procedure as described here under.
7. Reporting Requirements for transactions in securities:
All directors/officers/designated employees of the listed company shall
be required to forward following details of their securities transactions

including the statement of dependent family members (as defined by


the company) to the Compliance Officer:
(a) All holdings in securities of that company by
directors/officers/designated employees at the time of joining the
company;
(b) Periodic statement of any transactions in securities.
8. Penalty for contravention of code of conduct:
Any employee/officer/director that trades in securities or
communicates any information for trading in securities in
contravention of the code of conduct may be penalized and
appropriate action may be taken by the company under the Insider
Trading Regulation Act, 1992.

Case Study
Dilip pendse v. Sebi
This was perhaps the simplest case of Insider Trading which was handled by
SEBI and it had no difficulties in punishing the offenders. The facts were that
Nishkalpa was a wholly owned subsidiary of TATA Finance Ltd (TFL), which
was a listed company. D. P. was the MD of TFL. On 31/03/2001, Nishkalpa had
incurred a huge loss of Rs. 79.37 crore and this was bound to affect the
profits of TFL. This was basically the unpublished price sensitive information
of which Pendse was aware. This information was disclosed to the public only
on 30/04/2001. Thus any transaction by an Insider between the period
31/03/2001 to 30/04/2001 was bound to fall within the scope of Insider
Trading. DP assed o his information to his wife who sold 2, 90,000 shares of
TFL held in her own name as well as in the name of companies controlled by
her and her father-in-law. It was very easy for SEBI to prove Insider Trading in
this cake walk or vanilla case.