A COMPARATIVE STUDY OF INSIDER TRADING

LAWS

ABSTRACT

Market incapability are exacerbated by insider trading. Insider trading is the market's weaker
side,inwhichselectindividualsgainaccesstocrucialinformationandutiliseittoearnmoney. This
important non-public information is generally known by the company's upper
management,includingdirectors,topexecutives,andemployees,butitmayalsobeknownby others.
As a results of this illicit market manipulation, there'll be no fair balance. Because the market
is inefficient and there is no fair play between supply and demand for stocks, it harms both
small and large investors, As a consequence, individuals' interest in the stock market has
decreased.

In this study report, all we know about insider trading is that it occurs. Insider trading is
described as an insider collecting substantial non-public knowledge and trading on it in order
to profit. An insider might be a director, an employee, a boss, or anybody else with ties to the
organisation. Some scholars suggest that insider trading should be legalised since market
information is utilised to judge if it is material non-public knowledge. Then we'll assess if it's
legal or illegal, and if it is, we'll follow the numerous regulations and standards for insider
trading, especially in India.

INTRODUCTION

Corporate Insiders, such as employees, directors, their relatives, and other persons associated
with the Company, trading in the Company's stocks while in possession of unpublished price
sensitive information, as well as the purchase or distribution of unpublished price sensitive
information, is defined by Indian law as "Insider Trading."

So is insider trading extremely unethical, and it's also illegal; it is also illegal as it promotes
unlicensed stock market speculation. Insider profiteering, in which insiders profit from
concealed information made available to them as a result of their position or relationship with
thecompany,erodesinvestors'trustinmanagementandhasanegativeinfluenceonthecapital
markets.

Insider trading is defined as trading in the shares of a publicly traded firm by individuals who
haveaccesstonon-publicinformationaboutthecompany.Insidertradingisprohibitedbecause
itisusedsoskilfullybyinsidersthatotherinvestorslosefaithinthem.Themarketwillbecome
inefficient if insider trading is legalised, resulting in fewer marketparticipants.

Insider trading is paradoxical, since some writers say that this sort of unlawful trading boosts
the cost of securities issuers and hence affects total economic growth.

Insider trading is permitted in several nations. Insider trading by directors or employees ofthe
corporation is immediately reported to theSEC.

Insider trading benefits stock market participants because when an insider trader acquires a
stock, it has a favourable influence on the market, and other investors begin to purchase that
stock as a result of the insider trader's knowledge of the firm.

ConsiderWarrenBuffet,who,althoughnotaninsidertrader,actslikeone.Heisknownasthe "God of
the Stock Exchange." People believe he knows something about the company, so when he
buys a stock, its valueskyrockets.

There is no explanation of "insider trading" under the Securities and Exchange Board of India
(Prohibition of Insider Trading) Regulations 1992. On the contrary, the terms "insider,"
"connected person," and "price sensitive information" are defined.

Insider trading is the trading of a company's securities by an insider utilising non-public,price

sensitive information, resulting in losses for the company or profits for theinsider.

Insider

"Anypersonwhoisorwasinvolvedwiththecorporationorisdeemedtohavebeenconnected with the

firm and who is anticipated to have exposure, respect to previously revealed highly sensitive
information of that company," according to theRegulations.

Individual who is well-connected (connected person)

AspertheRegulation,a"connectedperson"issomeonewhoisacompanydirectorasdefined in
clause (13) of section 2 of the Companies Act, 1956, or is considered to be a company
director under sub-clause (10) of section 307 of theAct.
(ii) holds a position as a corporate officer or employee, or a position with a professional or
businesslinkwiththefirm,whocouldfairlybeanticipatedtohaveexposuretothefirm'ssecret,
sensitive information, either temporary orpermanent.

Price Sensitive Information

It refers to any information connected directly or indirectly to a corporation that, if made

public, has the potential to significantly affect the firm's stock price.

The following forms contain price sensitive information:

1. The financial results of thefirm

2. It is likely that dividends would bedeclared.

3. Public rights, incentives, and other advantages are used to distributeshares.

4. Are there any major expansion plans or new projects on thehorizon?

5. Consolidation, mergers, andacquisitions

6. Disposal of the entire/significant section of theproject.

Objective :-

1. Insider trading, legal orillegal.

2. What is the process of insidertrading?

3. Case Laws, as well as policies, norms, andstandards.

Research Issue- Is it legal or illegal to trade with insiders?

Research Hypothesis

If insider trading is illegal than SEBI need a more efficient and robust investigation procedure
so that the insiders could not escape from the law.
Methodology

Theresearchtechniqueusedinthecurrentstudy,"ANALYSISOFINSIDERTRADINGIN
INDIA," is doctrinal and analytical in nature. The data for this study was gathered from both
primary and secondary sources. The study is based on a review of pertinent case law, statutes,
and analytical publications, among other sources. Various books, commentaries, law journals,
newspapers, and magazines, as well as the large amount of information available on the
SupremeCourtofIndiaandtheHighCourts'websites,wereusedtoconductthisinquiry.Aside from
them, the investigator consulted prominent persons' writings, documents from governmental
and non-governmental organisations, relevant case laws, and extensive internet archives
sources that give the most up-to-date onlineideas.

Background on Insider Trading

Trading securities based on significant non-public knowledge is typically prohibited by

insider trading legislation if indeed the trader was aware that he or she has breached an
obligation of trust or confidence owed to a company, the issuer's shareholders, or the originof
the material1.The prohibition on insider trading, as the name indicates, forbids actual stock
trading when in possession of substantial non-public information. However, the legislation
does not make it unlawful to abstain from trading while in receipt of suchknowledge2.

Anycaseofmarketmanipulationrequiresalargeamountofnon-publicinformation.Ingeneral,
"public" information cannot be used to support an allegation of insider trading. This includes
information generated by an investor through independent observation of the public domain,
as well as publicly dispersed knowledge. Monitoring trucks on a public road as they depart a
warehouse (to help evaluate the degree of demand for a product, for example) cannot be used
to prove insider trading. Similarly, in order to sufficiently define a cause of action for insider
trading, the knowledge in question must be"substantial."

As per the Highest Court, information is vital if "a reasonable stakeholder would deem it
important" in making an investment option. This test requires proof that the incident "would

1
See 17 C.F.R. § 240.10b5-1, -2 (2010). If trading relates to a planned or existing tender offer, Rule 14e-3 makes trading unlawful without
regard to whether any fiduciary duty exists. See 17 C.F.R. § 240.14e-3 (2010).
2
f. Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975) (holding only purchasers and sellers of securities have standing to sue for
damages under 10b-5).
have been interpreted by a reasonable investor as materially affecting the 'whole mix' of
information made accessible by the reasonable investor3".

In an insider trading case involving an institutional investor, the materiality of specific

information is frequently a critical factor. In general, whether the information collected was
public or non-public4, Insider trading restrictions have not been broken by an investor who
assembles a huge amount of non-material information to reach a material judgement.
Institutionalinvestors,suchashedgefunds,oftencombinepublicandnon-public,non-material
information to assess a company's overall position. The "mosaic" method to investing can be
used to defend against insider trading charges, especially if the SEC claims that an investor
traded on information gained accidentally from a tipster who exceeded his fiduciary
obligation.5

Evolution of Insider trading regulation in India

The legislative framework controlling insider trading is just 17 years old, despite the fact that
India's stock markets have been in operation for over 134 years. India has no restrictions on
market manipulation all through the duration of those 134 years. The first attempt to curb
insider trading in India was to force business directors to reveal their shareholdings. On the
basis of a recommendation from the Company Law Committee 6, Sections 307 and 308 of the
Companies Act 1956 were amended to contain provisions. Insider trading was only formally
recognised as a bad behaviour for the first time in the late 1970s. A succession of committee
studies urged stringent control, and as a result, a regulatory authority was established in 1992.

Thewholediscussionconcerninginsidertrading'scomplicationscenteredaroundtwoextreme
statements: one given in 1992 by a former president of the Bombay Stock Exchange, who
remarked, "There is no other kind of trading in India, with the exception of the insider kind,
"There is no other form of trading in India, save the insidervariety,"

3
TSC. Indus.., 426 U.S. at 449.
4
To be sure, if all the non-material information was obtained through improper means (i.e., with knowledge of the breach of a duty to the
source of the information)
5
See, e.g., State Teachers Ret. Bd. v. Fluor Corp., 654 F.2d 843, 854 (2d Cir. 1981) (citation omitted); see also Andrew Ross Sorkin,
Collecting Tidbits, and Trouble, N.Y. TIMES, Nov. 30, 2010, at B1 (discussing mosaic theory as a defense employed by Raj Rajaratnam,
founder of the Galleon Group).
6
Report of the Company Law Committee, 1952.
In 1998, Arthur Levitt, then-Chairman of the Securities and Exchange Commission
("SEC"), was elected President of the United States. "Insider trading has no place in any
law-abiding, fair, or equitable economy," says the author7."

Insiders had become an issue for India in the 1940s. The Thomas Commission Report from
1948citedexamplesofdirectors,dealers,executives,andauditorhavingstrategicinformation
regarding the company's financial situation, such as the quantity of upcoming dividends, the
distribution of bonus, shares, or the completion of a favorable transaction ahead to public
disclosure.

Sections307and308ofthe1956CompaniesActwereenactedinthisway.Section307obliged
businesses to retain a registry of their directors' stock ownership. Section 308 makes it
mandatory for directors and anybody suspected of being a director to disclose their ownership
in the company. After that, the Companies Amendment Act of 1960 broadened this need to
encompassacompany'smanagement'sshareholdingsaswell.Unfortunately,theserestrictions
were unable to prevent insider trading, letting directors or managing agents who used inside
informationimproperlytogofree.DespitetheThomasCommittee'srecommendations,thelack of
precise legislation in this area was a keyimpediment.

“Inits1979findings,theSacharCommissionrecommendsthatdirectors,auditors,corporate
officials, and others may possess price sensitive information that may be used to influence
stock prices, producing financial disaster for the investing public. The corporations proposed
revisions to the Companies Act of 1956 to limit or ban employees' transactions. This Sections
307and308oftheCompaniesAct,accordingtotheCommission,areinadequatetobaninsider
trading.8.”

ThePatelCommitteedefinedinsidertradingin1986as"tradinginafirm'ssharedbypersons working
in the company." company's management or close to them on the basis of concealed
pricesensitiveknowledgeaboutthefirmactivitiesthattheyhaveOthers,however,don'treally.
“According to the Patel Commission, the Securities Contracts (Regulation) Act ("SCRA") of
1956shouldbechangedtorequireexchangestoprohibitinsidertrading,unethicalinsider

7
Insider Trading Regulations – A Primer, Report by Nishith Desai Associates,
availableat http://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research%20Papers/Insider_Trading_Regulations_-_A_Primer.pdf
8
Mr. Karn Gupta, Insider Trading in Capital Markets: An Overview,available
at http://www.manupatrafast.com/articles/PopOpenArticle.aspx?ID=275878d3-e9c8-4de4-
9bd03f30b34db853&txtsearch=Subject:%20Capital%20Market/
trading, or unfair stock trades9. Section 21 of the SCRA required the firm and the stock
exchange to comply with the terms outlined in their listing agreement. Every exchange could
establish its own terms and conditions for listing agreements.”

Insider trading should be penalized under both civil and criminal laws, according to the Abid
Hussain Committee, which also recommended that SEBI adopt regulations and governing
procedures to prohibit unfair deals.

Therecommendationsofthedifferentcommittees,togetherwiththedemandsofafast-growing
securities market, culminated in the development of the SEBI (Insider Trading) Regulations,
SEBI ([Prohibition of] Insider Trading) Regulations, 1992, which made illegal deceptive
practices and made an individual who participated in insider trading liable for such
malfeasance. It was revised in 2002 to fix some gap that exists disclosed in the cases of
Hindustan Lever Ltd. v. SEBI. and Rakesh Agarwal v.SEBI.10

“In 2013, a committee led by former Chief Justice of India N. K. Sodhi of the Securities and
Exchange Board of India (SEBI) proposed that promoters, employees, directors, and their
respective families disclose their trades internally to the business. The Justice Sodhi Panel on
Insider Trading Regulatory requirements made a series of recommendations to India's legal
structure for insider trading prohibition, with the goal of creating this area of regulation more
comprehensible,byofferingacombinationofprinciples-basedregulationsandrulesbackedby
principles, we can be explicit and unambiguous. The Committee also recommended that each
provision of a rule be accompanied by a comment onit.11.”

Insider trading now is controlled by the SEBI Act as well as the Insider Trading Rules,
that were enacted by the regulatory agency.

Those who invest have the opportunity to transact at the lowest genuine cost. There is
widespread consensus that correct securities pricing benefits both businesses and society. The
'correct'valueofasecurityisthevaluethatwouldbeestablishedbythemarketifallfactsabout
theassetweremadeavailable.Accuratepricingbenefitssocietybyallowingforprudentcapital
allocationandreducingvolatilityinsecuritiesprices.Thelevelofcorruptionisalsolowered

9
https://blog.ipleaders.in/insider-trading-in-india-regulations-and-controlling-%20authority/)
10
Insider Trading, Legal India, available at, http://www.legalindia.in/insider-trading-2/
11
SEBI panel prescribes stricter norms for Insider Trading, The Hindu (11/12/2013), available at
/http://www.thehindu.com/business/Industry/sebi-panel-prescribes-stricter-norms-on-insider trading/article5448127.ece/
asaresultofcorrectpricingofitssecurities,whichreducesinvestoruncertaintyandallowsfor
bettermonitoringofmanagement'sefficacy.Individualswithclosetiestothecorporationhave a
significant influence in causing marketturbulence.

Insider trading strategies can be identified in two different ways. First, the insider is proven to
have a competitive advantage over those who do not have access to the same knowledge.
Second, the knowledge was created not for the inside trader's benefit, but rather for his
employer's profit motive.

Manypeoplewhoinvestthinkthatinsidertradingispunishable.Thismisunderstandingoccurs
becausecertaininsidertransactionsareunlawful,whilstothersareentirelylegal,i.e.withinthe
authorised limit. The law only forbids some forms of insider transactions, whereas the vast
majority of insider trading is lawful. Some onlookers make the mistake of assuming that if
insiders profit, it must be unlawful. These individuals also think that, in order to avoid
punishment,insidersonlyrecordunprofitabletransactionsandconcealanytransactionsdriven by
the use of non-publicinformation.

Insidertradingisnobetterthanotherformsofremunerationforacorporation.Ifinsidertrading is
allowed to continue unrestricted, shareholders will be unable to predict how much they will
pay for managerial services or make cost-effective decisions about how to run the company.
Insidertradingisclassifiedaccordingtothelaw.Insidertrading,accordingtosome,isunlawful and
unjust anytime it occurs. Insider trading has been supported by certain economists and
lawyers. Our current inquiry, however, is focused on illicit insidertrading.

Theories of Insider Trading

Section 10(b) of the Exchange Act lies at the heart of both criminal and civil insider trading
legislation (Although other crimes, like as conspiracy and aiding and abetting, are frequently
used by criminal authorities to pursue insider trading. Insider trading, according to case law,
breaches Section 10(b), which makes it illegal to "use or use any manipulative or deceptive
means or artifice in connection with the acquisition or sale of any security... in defiance of"
SEC rules.12. The Exchange Act's Rule 10b-5, which was published under the SEC's

12
15 U.S.C. § 78j(b) (2006).
jurisdictionunderSection10(b),makesitillegalto"engageinanyact,practise,orinthecourse of
business which act or would act as a fraud or deceit upon thepublic13."

TheSupremeCourthaslongrecognisedthreeprimarytheoriesofinsidertradingliabilitybased on
these criteria, known as the "classical," "tipper-tippee," and "misappropriation" theories.
Importantly, a person (who does not have to be the person trading) must have broken, inorder
to fall into one of these three categories, you must have a responsibility of trust or confidence.
Furthermore, the Second Circuit has recognised a fourth form of insider trading known as
"outsider trading" or "affirmative misrepresentation," which is based on an affirmative false
representation but it don’t require a breach ofduty.

1. “Classical”Theory.

When an insider breaches a fiduciary responsibility to his or her firm (or anothercompany
to whom the insider owed a duty) by trading in the company's stocks based on significant
non-public information gained as a consequence of the insider's position, the "classical"
notion of insider trading applies.14 As discussed further below, the SEC has construed the
phrase "on the basis of" by regulation to indicate that the individual was only aware of the
15
non-public information at the time of the trade. .When a corporate executive, board
member, or agent, such as an investment banker, trades in the firm's or a possible deal
partner'sstockspriortothepublicationofnewsaboutakeyevent,theclassicalideaapplies in
situations such as a tender offer, merger, or earningsrelease.

2. “Tipper-Tippee”Theory.

The "tipper-tippee" approach holds the tipper accountable were

(1) the tipper. "breached his fiduciary obligation to the shareholders by exposing the
[substantial non-public] information to the tip-pee,"

(2) The tippee. "knows or should know that a breach hasoccurred."

(3) the tippee. utilises the information in conjunction with a securities transaction,and

13
17 C.F.R. § 240.10b-5 (2010)
14
See Chiarella v. United States, 445 U.S. 222, 228 (1980).
15
See 17 C.F.R. § 240.10b5-1(b) (2010). For further discussion of the term “on the basis of,” see infra Section II.D
 (4) the person giving tip obtains some personal advantage in exchange. 16. The fourth
requirement is met when a tipster obtains "a direct or indirect personal advantage fromthe
disclosure, such as a monetary gain or a reputational benefit that will turn into profits in
future" or makes a "gift of information which is in secret form to a trading relative or
friend."17.

3. “Misappropriation”Theory.

The "misappropriation" idea applies to instances in which a non-insider legitimately

receives important non-public knowledge but subsequently breaches a duty because of the
source of the knowledge by trading on it or passing it on to another individual to trade 18.

To summarise, the legal structure that governs insider trading is complex and drawn from
a range of sources. In addition, some types of financial enterprises may be more likely to
beprosecutedonalternativetheories.Intheconventionalidea,anissuerorinvestmentbank
maybechargedmoreregularly,whileinthetipper-tippeemethod,aninstitutionalinvestor might
be charged more frequently. In any case, avoiding insider trading and considering legal
considerations in the event of an insider trading claim need a thorough and in-depth study
of the individualfacts.

4. “Outsider Trading” or the “Affirmative Misrepresentation”Theory.

The Second Circuit recognised a type of insider trading – called "outsider trading" or
"affirmativemisrepresentation"bycertaincommentators–in2009thatdoesnotconstitute a
breach of a fiduciary commitment. The Second Circuit held in SEC v. Dorozhko that
neither the Supreme Court nor previous Second Circuit authority imposed a fiduciary
responsibility requirement on the ordinary understanding of "deceptive" if the said fraud
contained an affirmative false representation rather than a falsestatement.19

18
United States v. O’Hagan, 521 U.S. 642, 652 (19
19
SEC v. Dorozhko, 574 F.3d 42, 49 (2d Cir. 2009).
 BIBLIOGRAPHY

1. The report of Bhattacharya and Daouk(2002).

2. Report of Veenman, D. (2010). Insider trading: the interrelation betweenaccounting
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3. “Impact of Insider Trading on Investment Decision byInvestors”.
4. “Nishith Desai Associates (NDA)2013”
5. “The Political Economy of Insider Trading Legislation and EnforcementInternational
Evidence” by Laura NyantungBeny.
6. “The Know-All of Insider Trading” – Decades of Corruptive Prevention(2015)
7. Prof Kamlesh M. Pandya and Arjun Nihal Singh: on the overview, preventionand
regulations on the insidertrading.
8. Himanshu Chahar, Insider Trading in India,
http://www.legalserviceindia.com/article/l199-Insider-Trading.html
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http://www.legalserviceindia.com/article/l147-Insider-Trading-And-its-Legal-
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