INSIDER

TRADING
Introduction
What is Insider Trading ?
Buying or Selling of Securities
By any person
On the basis of Undisclosed price-sensitive information

a breach of fiduciary duties of officers of a company or

connected” persons as defined under the SEBI regulations,1992,
towards the shareholders.
Case:

Not all insider trading is ILLEGAL

Price Sensitive Information
Meaning
Examples

Periodical Issue or
Dividend
Declaration of buyback of
Declaration
financial results securities

Expansion Mergers and Takeover or

Plans Acquisition disposal

Changes in
Significant
operations of
policy changes
the company
Who are Insiders?
Corporate Officers

Directors

Employees

Friends

Business Associates

In short, any connected person or

deemed connected person
Connected person
"Connected Persons" means any person who is:
 Director of the Company;
An Officer or Designated Employee of the Company;
Has a professional or business relationship with the
Company
Deemed Connected person
"Deemed Connected Persons" means and includes:
Dependent family members of Connected Persons;
Any group Company, Company under the same management or
subsidiary of the Company;
Bankers of the Company;
Merchant banker, share transfer agent, registrar to an issue,
debenture trustee, broker, portfolio manager, investment advisor,
sub-broker or any employee thereof having a fiduciary relationship
with the Company;
Trustees of any trust the beneficiaries of which include any of the
Connected Persons;
Any person who was a Connected Person, whether temporary or
permanent six months prior to an act of insider trading;.
Connected & Deemed Connected person
Wockhardt: November 2006
Rajiv B Gandhi (CFO), wife Sandhya Gandhi & sister Amishi
Gandhi were involved
Martha Stewart: December 2001
Sold 4000 shares of ImClone; the day following her sale,
stock price fell by 16%
Infosys: August 2006
Srinath Batni (Executive Director) sold 10,000 equity shares
violating the insider trading rules
Only a company’s officers The law applies to anyone
or directors can commit who knows material non-
insider trading. public information.
You need to trade and be It applies to stock of
caught in the act. customers, suppliers,
merger partners.
Tipping, even if the tipper
doesn’t trade, is illegal.
Most cases are based on
circumstantial evidence.
Applies to any type of
security, such as call
options.
Insider Trading Regulation in India
• History
• Insider trading was unhindered till 1970.
• In 1979 the Sachar committee recommended amendments to the
companies Act, 1956 to prohibit the dealings of employees.
• In 1986 the Patel committee recommended that the securities contracts
Act, 1956 may be amended to make exchange curb insider trading and
unfair stock deals.
• In 1989 the Abid Hussain committee recommended that the insider
trading activities may be penalized by civil and criminal proceedings and
also suggested the SEBI formulate the regulations and governing codes to
prevent unfair dealings.
• India through SEBI (Insider Trading) Regulations 1992 amended in 2002
has prohibited this fraudulent practice.
• 39 cases of insider trading in the last 2 years.
Insider Trading Regulation in India
• SEBI (Prohibition of Insider Trading)
Regulations, 1992
• The Regulations are divided into 4 parts:
• Preliminary
• Prohibition on Dealing, Communicating or
Counselling
• Investigation
• Policy on Disclosures and Internal Procedure for
Prevention of Insider Trading
 Prohibition on Dealing,
Communicating or Counselling
• Regulation 3
• No insider shall
• deal in securities of a company listed on any stock exchange when in
possession of any unpublished price sensitive information, or
• communicate, counsel or procure directly or indirectly such information to
any person

• Regulation 3A
• No company shall deal in the securities of another company or associate of
that other company while in possession of any unpublished price sensitive
information.

• Regulation 3B
• There should be “Chinese Wall” within the company & one department
should be unaware of operations of another department.
Investigation
• Regulation 4A
• If the SEBI suspects that any person has violated any provision of these
regulations, it may make inquiries with such persons.
• The SEBI may appoint officers to inspect the books and records of
insider(s) for the purpose of inspection.

• Regulation 5
• The SEBI can investigate and inspect the books of account, either records
and documents of an insider on prima facie.
• SEBI can investigate into the complaints received from investors,
intermediaries or any other person on any matter having a bearing on the
allegations of insider trading.

• Regulation 6
• Before undertaking any investigation under regulation (5) SEBI shall give a
reasonable notice to insider for required purpose.
Penalties
• 6 months ban on publicly listed company directors and
other connected persons – such as officers and
designated employees

• A fine of `250 million or three times the profit accrued –

whichever is greater.

• Insider trading can also warrant up to 10 years of

imprisonment.
 M&A and Insider Trading
•Buyers paying significant premium over market price

•Trading spikes in stock and call options in days leading upto

deal announcements

•There is more suspicious pre-deal trading with private equity

buyouts than with corporate M&A.

•Complex deals with more players have more “leakage

potential.”
Case..
• GTB - UTI Merger
 Planning to become largest private sector bank (UTI-Global bank)
 Swap Ratio of 2.25:1
 Shares of UTI bank and GTB witnessed huge volumes (two upper
circuit)
 Questioning the swap ratio
 Second valuation due to controversy
 SEBI Probe
 A new share swap ratio of 2:1
 Both decided to call off the merger simultaneously with different
reasons
Disclosures for prohibition of Insider
Trading
• Initial Disclosure
1 Like buying the stake greater than the 5% of the paid up capital of the
company the acquiring company should inform the Stock Exchange with in 2
days of acquiring the stake.
2 The new director should disclose all its trade position in Equity or derivatives
with in 2 days of its appointment.

• Continuous Disclosure
1 If the director changes its holding by 2% .
2 Investment of Rs 5 Lacs or 25000 shares or buying the 1% stake of the paid

up capital which ever is the least should be disclosed.

3 All holdings in securities of that company
4 Periodic statements of all transactions
5 Annual statement of all holdings
6 Any other disclosure of the company to stock exchanges.
Model Code of Conduct for Prohibition
• A compliance officer is required to be appointed by the company.

• There should be pre-clearance of trade by the officer of designated

employees. Designated employees includes :

i. Employees from top 3 layers of Mgmt.

ii. All Employees in finance department irrespective of any designation
& grade.
iii. Employee designated by BOD from time to time to whom the trading
restriction shall be a applicable.

• Trading window ,is closed 7 days prior & 24 hours post event for the
“connected persons” during the UPPSI activities like
RESULTS,IPO,CAPEX,BUY BACK , etc.

CASE – TATA FINANCE (Mr. Dilip Pendse)

Abs Industries Case
SEBI charges ABS Industries MD Rakesh Agrawal for allegedly
purchasing his own company’s shares from the market prior to the
takeover deal between ABS and Bayer

Sebi directs Agrawal to deposit Rs 34 lakh to compensate ABS

investors, besides initiating adjudication proceedings against the former
promoter

Agrawal challenged the Sebi order before SAT.SAT partially turned down
the Sebi ruling of imposing penalty on Agrawal and declined to issue any
order related to adjudication

Sebi later contested the SAT order in SC

The case is settled through consent order with Agrawal paying a

monetary penalty.
Samir Arora Case
• Sameer Arora was star fund manager and head of Asian
Emerging Markets of Alliance Capital Management
• In April 2003, there were talks about the consolidation of
Digital Global Soft Ltd. with the Hewlett Packard Indian
Software Operations, a 100% subsidiary of HP.

From July 2002 March 2003 May 2003 June 2003

January • Alliance’s • Alliance • Alliance's • Digital
2002 peaked and seemed to be holding come announces
• Alliance's then dipped a dumping the down to zero the swap ratio
bit, just before stock which is
holdings in
the not-so- perceived to
Digital kept
good second be
creeping up
quarter results unfavorable
were by the market
announced by • Digital Stocks
the company falls by 26%
Samir Arora Case
• In August 2003, SEBI charged Samir Arora of insider
trading under Section 11B and 11(4)(B) of the SEBI Act
for:
A. Trading DGL shares on the basis of unpublished price
sensitive information.
B. Non-disclosure after crossing 5% limit in several
companies
C. Causing panic in the market by making public his
decision to quit Alliance Capital, leading to the
redemption of Rs 1300 Crore.
Insider trading law and stock plans: Grant
Date timing
• There are concerns about making stock grants when the company
has material nonpublic information. Watchdogs look for actions
arising as a result of:
• Issuing options and setting the grant date prior to the actual
Back-dating of Shares issue date so that it falls on the date where the company's
stock was at the lowest point in some recent interval

Bullet Dodging  • Delaying an options grant until just after bad news

Spring-loading  • Timing an options grant to precede good news

Symmetric spring- • Where members of the board who approve the grant are
loading  aware of the forthcoming good news
Approaches companies take
• Written policy
• Model code of Conduct
• Blackout periods before earnings announcements
• Special blackout periods for other confidential
information, such as acquisitions .These can vary by
level in company and by who knows the information.
• For stock options sale various methods like regular
schedule dates, trading window can be adopted
• Pre-clearance of trades by executives and directors.
• Compliance, legal, corporate secretary staff reviews all
trades for any problems.