It is defined as the trading which involves sale or purchase of securities by person who possess price sensitive information about the company, on account of their fiduciary capacity involving confidence or trust.
It is sought to be prohibited by the SEBI by Insider Trading Regulations, 1992.
Insider:
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with the company or is deemed to have been connected with the company and who is reasonably expected to have access to unpublished price sensitive information by virtue of his connections about the securities of the company.
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Price Sensitive Information:
ADVERTISEMENTS:
Any information which relates to
(i) Financial results of the company.
(ii) Intended declaration of dividend.
ADVERTISEMENTS:
(iii) Issue of shares by way of public rights and bonuses,
(iv) Any major expansion plans or execution of new projects.
(v) Amalgamations, mergers and takeovers.
(vi) Disposal of the whole or substantially the whole of the undertaking.
ADVERTISEMENTS:
(vii) Any information which may affect the earnings of the company,
(viii) Any changes in policies, plans or operations of the company.
Insider Dealing:
It is strictly prohibited by the SEBI Insider Regulations, 1992. Insider dealing involves.
(i) Communication of unpublished price sensitive information with or without request for such information.
(ii) Counselling or procurement of any person to deal in the securities of any company, on the basis of unpublished price sensitive information.
Insider trading how does it work:
A large amount of insider trading in India takes place through broker management nexus. Management employ the services of brokers close to them, to purchase and sell shares. Since the brokers gain knowledge of the likely trend in the scrip price, they buy and sell on their own account too. Many of the big brokers are also privy to major happening in companies.
Journalist, Government officials and Company Executives deal on the basis of insider information. The Financial Institutions and banks also trade on insider information. They regularly buy and sell shares and possess insider information about the company in which they invested either in equity or as term loans.
The mutual fund floated by them, can always get a feedback from the offer departments about the major happenings in the company. The brokers also ferret out the advance tax, paid by companies to get an idea of the trend in the earnings of the company.