LLM DISSERTATION PROPOSAL

TOPIC: A COMPARATIVE ANALYSIS OF INSIDER

TRADING REGULATIONS IN INDIA AND USA

Submitted to: Submitted by:

Dr. Sonika Bhardwaj Harsh Bhardwaj
Faculty, School of Law, LLM (CCL)
Christ (Deemed to be University) Reg.No: 2357118

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 TABLE OF CONTENTS

CHAPTER - 1
1.1 INTRODUCTION 3
1.2 STATEMENT OF THE PROBLEM 4
1.3 RESEARCH QUESTIONS 4
1.4 RESEARCH OBJECTIVES 5
1.5 RESEARCH METHODOLOGY 5
CHAPTER – 2
2.1 LITERATURE REVIEW 6-11
CHAPTER - 3
3.1 HISTORY AND DEVELOPMENT OF INSIDER TRADING
3.2 MECHANISM OF INSIDER TRADING
3.3 RATIONALE BEHIND PROHIBITION OF INSIDER TRADING
3.4 INSIDER TRADING – A MENACE TO CORPORATE GOVERNANCE
CHAPTER - 4
4.1 THE ANALYSIS OF USA REGULATION ON INSIDER TRADING
4.2 SECURITIES EXCHANGE ACT, 1934
4.3 IMPORTANT PROVISIONS RELATED TO INSIDER TRADING
4.4 LAND MARK CASES OF USA
4.5 INSIDER TRADING REGULATION, 2015
4.6 SNAPSHOT OF THE REGULATIONS OF INDIA
4.7 POWERS OF SEBI ON THE OCCURRENCE OF INSIDER TRADING
4.8 LAND MARK CASES OF INDIA
CHAPTER - 5
5.1 COMPARATIVE ANALYSIS OF LAW ON INSIDER TRADING IN
INDIA AND USA
5.2 INVESTIGATIVE POWERS PRESCRIBED IN INDIA AND USA
5.3 CONCLUSION AND SUGGESTIONS
BIBLIOGRAPHY

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 CHAPTER - 1

1.1 INTRODUCTION

It is essential to keep in mind that the two regimes are in such different stages of their growth,
the regime of the United States having evolved considerable over the eight decades, whereas in
India, the regulatory regime is only about two decades old. Firstly, the regulatory mechanism to
curb insider trading in India is under the supervision of the SEBI. The counterpart of SEBI in the
United States of America is the Securities and Exchange Commission [‘SEC’]. The SEBI and the
SEC both have supervisory and regulatory roles in the mechanisms of both legal systems. In
India, there is no separate legislation to govern insider trading, which is governed by the SEBI
(Prohibition of Insider Trading) Regulations, 1992 and certain provisions of the SEBI Act, 1992,
whereas in the United States of America, the law governing insider trading is predominantly
governed by the provisions of the Securities Exchange Act, 1934 which provides the substantive
provisions the violation of which would give rise to penalty.

In India, it would appear that the SEBI has infect even gone beyond the parameters of the insider
trading theories laid down in the United States of America, especially in view of the 2008
amendments. By creating Regulation 2(e)(ii), the SEBI has expanded the liability under
Regulation 3 to any person who may have been in receipt of unpublished price sensitive
information. Thus, in India, it appears to not merely a person who is alleged to have
misappropriated information in violation of any duty or confidence, business or personal, may be
liable, but any person who has ‘received’ unpublished price sensitive information. Thus, on a
conjoint reading of Regulations 2(e)(ii), SEBI identified that 92 percent of listed companies have
incorrectly classified unpublished price-sensitive information. SEBI conducted an analysis in
2014 of 1,100 press releases and discovered that in 227 cases, the information disclosed resulted
in a 2 percent price fluctuation after accounting for the index adjustments. Reg. 2(1)(n) the SEBI
(Prohibition of Insider Trading) Regulations, 2015 (“PIT Regulations”) defines UPSI which is an
inclusive definition and includes certain information such as financial results, dividends, change
in capital structure, mergers, de-mergers, acquisitions, delisting’s, disposals and expansion of
business.

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Another significant area of controversy in both the legal regimes of India and the United States is
the ‘possession v. use’ i.e., whether liability for insider trading may be affixed if there is a trade
while the insider was in possession of the relevant information or whether it is essential to prove
that the relevant information was actually used in the trade. In the United States, it was held that
it was not necessary to prove a causal relationship between the misappropriated information and
the dealing in securities. The dealing in securities ‘on the basis of’ material non-public
information has been interpreted to mean trading while being ‘aware’. In the United States of
America, the criminal liability is envisaged in Section 32(a) of the Securities Exchange Act,
1934. Under Section 32(a) it is provided that if a person is convicted of a ‘willful’ violation he
shall be fined up to $5,000,000, or imprisoned not more than 20 years, or both, except that if not
a natural person, a fine up to $25,000,000 may be imposed. Which now brings us to the
landmark case of Raj Rajaratnam, a New York hedge fund manager, In October 2009, the Justice
Department charged him with fourteen counts of securities fraud and conspiracy. Rajaratnam,
who was found guilty on all fourteen counts on May 11, 2011, had allegedly cultivated a network
of executives at, Intel, McKinsey, IBM, and Goldman Sachs.

1.2 STATEMENT OF THE PROBLEM

To what extent do the differences in insider trading regulations between India and the United
States impact the effectiveness of these regulations in deterring and preventing insider trading,
and what implications do these variations have on market integrity, investor protection, and
overall market efficiency in both countries and this paper also attempts to study that why there is
no criminal liability imposed upon the offenders of these regulations.

1.3 RESEARCH QUESTIONS

a) What are the key differences and similarities between insider trading regulations in India
and the United States?
b) How do the enforcement mechanisms in the two countries differ, and what impact do these
mechanisms have on the prevention of insider trading?
c) What is the historical context and evolution of insider trading regulations in both countries,
and how have these regulations adapted to changing market conditions?

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d) What are the challenges and limitations of the existing regulations in both countries, and
what are potential areas for improvement?

1.4 RESEARCH OBJECTIVES

a) To examine and compare the legal framework of insider trading regulations in India and
USA, including relevant legislation, rules, and regulatory bodies.
b) To analyze the enforcement mechanisms employed in both countries, investigating the roles
of regulatory agencies, courts, and other relevant authorities.
c) To assess the effectiveness of these regulations in deterring insider trading, protecting
investors, and maintaining market integrity.
d) To identify the challenges and shortcomings in the existing insider trading regulations in
both countries and propose potential improvements or reforms.

1.5 RESEARCH METHODOLOGY

This Dissertation will adopt a comparative approach, relying on primary and secondary
sources of information. Primary sources include the Companies Act 1956, the Securities and
Exchange Board of India (Prohibition of Insider Trading) Regulation, 1992, Securities Exchange
Act of 1934, Sarbanes-Oxley Act of 2002, Insider Trading and Securities Fraud Enforcement Act
of 1988, relevant regulations, official reports, and decisions of SEBI. Secondary sources
encompass academic journals, books, scholarly articles, and reputable online databases. The
research methodology involves a qualitative analysis of the collected data to present a coherent
and comprehensive review of the legal framework for insider trading regulations in India and the
United States, focusing on the relevant statutes, rules, and regulatory bodies.

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 CHAPTER – 2

2.1 LITERATURE REVIEW

1. Litigating Insider Trading: Decoding Evidences in Cases Under SEBI (Prohibition of
Insider Trading) Regulations, 20151

This paper scrutinizes the evidence presented by both the prosecution and the defense in their
efforts to prove or disprove each aspect of the insider trading charge. Additionally, it briefly
touches upon significant discussions and debates. Insider trading constitutes a serious offense as
it poses a threat to investor interests and erodes trust within the securities market. Conversely,
given the gravity of the charge, especially when it involves criminal liability, individuals accused
of insider trading must receive adequate safeguards against wrongful conviction. Therefore, it
becomes crucial for there to exist substantial and compelling evidence to support an accusation
of insider trading. This accusation comprises multiple components, each necessitating evidence
for its establishment or refutation. Finally, it examines the evidence that challenges the
presumption that insider trading with access to unpublished price-sensitive information
conducted their trades based on such information.

2. Prevention of Insider Trading and Corporate Good Governance2

This article discusses the need for corporate good governance and regulatory enforcement to
prevent fraudulent activities like insider trading in the stock markets. It criticizes the Indian
government's overregulation and micromanagement, highlighting that good governance cannot
be enforced simply through statutory provisions. Instead, this article recommends effective
enforcement of laws prohibiting clear illegalities. The author proposes an approach where the
standards of corporate governance are managed by company leaders, with regulatory bodies
providing a list of optional procedures to limit insider trading possibilities. It emphasizes the
need for companies to disclose their compliance level with these standards in their annual reports
and suggests introducing corporate governance ratings to pressure management into compliance.

1
Gayatri Puthran, Litigating Insider Trading: Decoding Evidences in Cases Under SEBI (Prohibition of Insider
Trading) Regulations, 2015, 14 NUJS L. Rev. 389 (2021)
2
Parekh, Sandeep, Prevention of Insider Trading and Corporate Good Governance (January 2003). Indian Institute
of Management, Ahmedabad Working Paper No. 2003-01-03, Available at SSRN: https://ssrn.com/abstract=653741
or http://dx.doi.org/10.2139/ssrn.653741

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3. Insider Trading Regulations: An Empirical Analysis3

This paper provides a deep dive into the insider trading regulations within India, managed by the
Securities and Exchange Board of India, and compares them to those in the United States,
overseen by the Securities and Exchange Commission. It points out that India's regulatory
regime is still developing, while the U.S regime is more mature and aggressive. The paper
further explores certain key aspects of both jurisdictions, such as fiduciary duty and culpability
for utilizing privileged information to trade securities. It highlights the evolution of these
requirements and the divergence between the two countries in their handling of insider trading.
In the US, the focus has shifted away from needing a breach of fiduciary duty to assign
culpability, whereas in India, such a trend has been observed but at a slower rate. The conclusion
of the article asserts that present rules in India are insufficient to combat insider trading given the
pace of economic and corporate structure advances. The laws in the U.S. are deemed more
equipped to handle and punish insider trading. Various strategic reform recommendations for the
Indian system include controlling the overextension of the term "insider," linking regulations
more clearly, and recognizing the significance of mental intent in the legal framework.

4. Insider Trading: A Comparative Perspective4

The author discusses how other developed markets, unlike the U.S., have enacted specific laws
that define the parameters of insider trading. Key statutory terms like inside information and
insider are well-defined in countries such as the United Kingdom, Germany, and others. The
majority of these jurisdictions adhere to the "access" standard, where insider trading is primarily
determined by access to non-public information. This paper also discusses the tipping liability,
penalties for insider crimes, and the role of the self-regulatory organizations. It explores the
nuances of various counties' legal approaches in tackling insider trading and suggests that a
universal statutory blueprint may not be achievable due to the diverse nature of global securities
markets. Steinberg lays emphasis on the implementation and enforcement of regulations,
required resources, and various educational initiatives for effective compliance.

3
Pathak, Ishani, INSIDER TRADING REGULATIONS: AN EMPIRICAL ANALYSIS, Journal of Legal Research
and Juridical Sciences, VOL. 1 ISSUE 4, ISSN (O): 2583-0066, www.jlrjs.com 596
4
MARC I., STEINBERG, Insider Trading: A Comparative Perspective, International Monetary Fund ISBN:
9781589063341, 29 Apr 2005 DOI: https://doi.org/10.5089/9781589063341.072, Pages: 1009

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5. Insider Trading in India: Comparative Analysis5

This paper provides an in-depth comparative analysis of insider trading regulations in India, the
United States, the European Union, and the United Kingdom. In the United States, insider
trading is governed by the Securities Exchange Act of 1934, with enforcement carried out by the
Securities and Exchange Commission. The SEC can issue severe penalties, carry out rulemaking,
and provide public education on the subject. In the European Union, the key piece of legislation
governing insider trading is the Market Abuse Regulation, introduced in 2016. The MAR forbids
insider trading and mandates efficient internal policies for the prevention of insider selling. The
European Securities and Markets Authority is the main regulatory body overseeing and enforcing
the MAR. In the United Kingdom, insider trading is governed by the Criminal Justice Act 1993
and supplemented by the Financial Services and Markets Act 2000 and Market Abuse
Regulation. Enforcement is mainly conducted by the Financial Conduct Authority, which can
impose severe penalties. The regulatory frameworks, enforcement mechanisms, and penalties for
insider trading vary across these jurisdictions, but all take insider trading violations seriously.
This paper recommends improvements to current regulations in India, such as introducing
criminal penalties for insider trading violations, currently punishable only by civil penalties in
India.

6. Understanding & Conceptualizing Insider Trading Laws of India & US6

This paper discusses and compares insider trading laws and regulations in the US and India.
Insider trading involves trading securities such as stocks, bonds, and stock options based on non-
public information. While it is considered a malpractice and a criminal offense, it doesn't directly
victimize individual investors but rather exploits available information for unfair gain. In India, a
notable law governing insider trading is the Companies Act 2013, which defines insider trading
and prohibits senior executives such as directors and managers from revealing sensitive
information for personal gain. The Securities and Exchange Board of India also introduced the
Prohibition of Insider Trading Regulation in 2015, which further restricts insider trading within a

5
AAYUSH GUPTA, INSIDER TRADING IN INDIA: COMPARATIVE ANALYSIS, Indian Journal of Legal
Review (IJLR), 3 (2) of 2023, Pg. 156-166, APIS – 3920 – 0001 & ISSN - 2583-2344
6
Abhijit D Vasmatkar, Kirti Bikram, Vaibhav Prakash, Understanding & Conceptualizing Insider Trading Laws of
India & US, Journal of Positive School Psychology, 2022, Vol. 6, No. 5, 7691–7696, http://journalppw.com

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firm. In the US, laws and regulations involved include Rule 10b-5 and Rule 14e-3, which
essentially identifies fraudulent activities and prohibits the use of confidential information for
personal gain. The Securities and Exchange Commission itself plays a crucial role in enforcing
these laws. This paper also critically reviews the effectiveness of these laws in preventing insider
trading. In India, it is noted that SEBI has been unable to secure convictions for insider trading
violations, often resulting in a mere penalty. In contrast, the US regulation system ensures stricter
penalties, including imprisonment and hefty fines.

7. An Analysis of Insider Trading in India7

This paper examines the concept of insider trading, its evolution in India, and the measures
implemented by the Securities and Exchange Board of India, the country's securities market
regulator, to mitigate this issue. The paper discusses three significant committees that have
contributed to the regulation of insider trading over the years: Sachar Committee, Patel
Committee, and Abid Hussein Committee. The author emphasizes that despite the regulations,
the situation can never be completely foolproof as insider information is necessary for the
efficient conduct of company affairs. Not all insider trading is unethical and certain types are
deemed beneficial to the greater investment community. The author also highlights the role of
SEBI in curbing insider trading through investigation and punishment. The system's goal to
reduce insider trading involves not just strict penalties but also the creation of an ethical standard
for key individuals in companies. Despite progress, the paper concludes that additional measures
should be taken, such as disqualifying those who engage in insider trading from platforms that
enable them to access inside information. The author also suggests that companies issuing IPOs
should ensure they do not engage in insider trading as it affects the IPO price and could damage
the company's reputation.

8. The Transplantation of Independent Directors in India: A Comparative Analysis of

India & USA8

7
SHRADHA RAJGIRI, AN ANALYSIS OF INSIDER TRADING IN INDIA, Pramana Research Journal, Volume 9,
Issue 3, 2019, ISSN NO: 2249-2976
8
A. Ramaiya, The Transplantation of Independent Directors in India: A Comparative Analysis of India & USA,
Guide to Companies Act’ (Box 1, 19th edn., Vol 2, LexisNexis India, 2020)

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This paper discusses the corporate governance landscape in India, particularly the concept of
independent directors. Independent directors, who are not related or affiliated with the company
or its officers in a pecuniary sense, were introduced in India in response to a series of corporate
scandals. These roles aim to increase transparency and balance power within companies. The
research compares corporate governance in India, the US, and the UK, noting that India follows
an 'insider model' where majority stakes in companies are often held by families or the
government, leading to conflicts between minority and majority shareholders, distinct from the
situations in the UK and US. The importance of aligning the legal framework with the business
culture of a country for successful policy implementation is highlighted, using the 'transplant
effect' of laws as a concept to illustrate potential mismatches and enforcement issues when one
country's legal norms are imposed on another. This paper suggests that there is a need to adapt
and reform the law pertaining to independent directors in the Indian context.

9. Insider Trading: A Brief Overview of Legal Regime in USA, UK, India and Nepal9

This paper provides an overview of the legal framework concerning insider trading in the United
States, United Kingdom, India, and Nepal. In the United States, insider trading is anchored on
the misappropriation theory and the disclose or abstain rule, under Section 10(b) of the Securities
Exchange Act of 1934 and Rule 10b-5. Penalties include up to three times the profit gained or
loss avoided, and fines or imprisonment up to 20 years. The UK's approach is defined under the
Criminal Justice Act 1993 and the Financial Services and Markets Act 2000. It imposes a
criminal offense punishable by seven years imprisonment and/or an unlimited fine, and also
includes a civil offense of ‘market abuse’ under the FSMA. In India, insider trading is not
explicitly defined but can be understood from the definitions of ‘insider’ and ‘dealing in
securities’ in the Securities and Exchange Board of India Act. Penalties include fines and
imprisonment under Sections 24 and 15G of the SEBI Act 1992.

9
Thapa, Rojina, Insider Trading: A Brief Overview of Legal Regime in USA, UK, India and Nepal (January 1,
2010). Mirmire-Economic Article Special Issue, Vol. 38, No. 293, January/February 2010, Available at SSRN:
https://ssrn.com/abstract=1599212

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10. Insider Trading: An Overview.10

This paper analyses the controversial topic of insider trading within securities regulation, which
involves trading securities while in possession of material nonpublic information. This paper
discusses different theoretical perspectives. One group of scholars contends that deregulation of
insider trading could promote market efficiency or serve as a fitting executive compensation
scheme. A contrary view, however, suggests that insider trading should be regulated to protect
the corporation's property rights to inside information. This paper also details the history of
insider trading laws in the United States, starting from an era of permitted undisclosed insider
trading to the modern federal prohibition due to fairness and equity arguments. The author
further delves into specific rules like the 'disclose or abstain' rule and theories such as the
misappropriation theory applied in insider trading laws. Other topics covered include
manipulation of stock prices, the duty of fiduciaries, and the impact of insider trading on a
company's reputation. This paper supports a property rights-based analysis for justifying the
prohibition of insider trading, arguing that it protects the economic incentive to produce socially
valuable information.

10
Bainbridge, Stephen Mark, Insider Trading: An Overview. Available at SSRN: https://ssrn.com/abstract=132529
or http://dx.doi.org/10.2139/ssrn.132529

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