Insider trading refers to purchase or sale of shares by a director, member of management, employee of the company, or by any other person such as the auditor, advisor, consultant or analysts on the basis of non-public price sensitive information and using confidential information to make a profit or avoid a loss at the expense of other co-investors. Although insider trading is a global phenomenon, it is relatively high in countries like India, China, Russia, Venezuela and Mexico, resulting in much higher volatility in share prices.
Insider trading is regulated in India by the SEBI (Prohibition of Insider Trading) Regulation, 1992, which criminalizes insider trading and abusive self-dealing. Anybody in possession of price sensitive information is considered an insider. Price sensitive information is required to be disclosed by the company to the exchange promptly.
In 2002, the regulations were amended to further fortify the 1992 regulations and to increase the list of persons that are deemed to be connected to the ‘insiders’. Listed companies and other entities are required to frame internal policies and adopt a code of conduct for prevention of insider trading by directors, employees, and others.
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Most of the companies in India, in fact have framed a code of conduct for prohibition of insider trading. To what extent these codes are adhered to is difficult to ascertain. Insider trading is reported to be rampant in India but a few cases come to the lime-light because many times it is difficult to flag a trade as a possible case of insider trading.
The difficulty in detecting insider trading is that a person with insider information can create fire-walls between himself and the buyer/seller, given the number of intermediaries who operate in the market. An additional factor making surveillance more difficult is multiple listings. Regulations against insider trading in India are perceived to be soft and wavering. The powers of SEBI to unearth insider trading are inadequate.
Since insider trading is extremely difficult to detect and prosecute, most countries have given sweeping powers to the regulators to catch the inside trader. For instance, the Securities and Exchange Commission of the US relied heavily on phone tapping and amnesty to informants to won a landmark insider trading case (in 2011) against hedge-fund manager Raj Rajaratnam.
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SEBI does not have the power of tapping the phone or presenting this as the evidence against the crime. Most of the orders passed by the SEBI have been set aside by higher authorities mainly on account of SEBI’s failure to prove the charges.
At present, insider trading is not defined under any legislation— Companies Act or SEBI Act or Securities Contract and Regulation Act. The details are contained in the SEBI (Prohibition of Insider Trading) Regulations, 1992.