Insider Trading in

India
 Table of contents

• Stock exchange – Meaning and its functions.

• Introduction of Insider Trading

• Evolution of Insider Trading in India

• Sachar Committee, 1977

• Patel Committee, 1986

• Abid Hussain Committee, 1989

• Intricacies involved in Insider Trading

• Case laws on Insider Trading

• Expert views on Insider Trading

• Conclusion
 What is a Stock Exchange?
• A stock market, equity market, or share market is the aggregation
of buyers and sellers of stocks (also called shares), which
represent ownership claims on businesses.
•In India, there are currently eight stock exchanges operating
throughout the country with the major exchanges being the
National Stock Exchange (NSE) and the Bombay Stock Exchange
(BSE) both located in Mumbai.
•The stock exchanges of a nation are the key segment of its capital
market. A healthy capital market can be created if the stock
exchanges are well regulated.
•In India, Securities Exchange Board of India is the apex body
who monitors the stock exchanges in India.
 What Stock exchanges do?

• A stock exchange helps companies raise

capital or money by issuing equity shares to
be sold to investors.
• The companies invest those funds back into
their business, and investors, ideally, earn a
profit from their investment in those
companies.
• However, people usually trade in the shares of
the companies for the purpose of arriving at
monetary benefits in the least amount of time.
• In order to maximize the profits, few
investors may resort to insider trading.
• The concept of insider trading is discussed in
the next slide.
 Insider Trading

• Insider Trading refers to the purchasing or selling of a security by

someone who has access to material, non-public information
about the security.

• Whenever a person trades in a stock when having the material

information which is still non-public, he shall gain an undue
advantage over other investors who do not have access to such
knowledge/information, thereby having a greater probability of
making abnormal profits or avoiding losses.

• It also includes tipping others when you have any sort of non-
public information
 Evolution of Insider Trading

• Insider Trading came into existence when the very concept

of trading in stocks of a company became widespread
among the investors worldwide and has been present
throughout the history of financial markets which has now
become a formidable challenge for investors all over the
world.

• Insider trading is common in countries like India, where it

is practiced by a wide range of market participants who also
include corporate employees and regulative authorities.

• Insiders can access to information by dint of their position,

employment or responsibility in the company. They include
controlling shareholders, company executives and officers,
as well as market professionals who compile information
on a firm’s operations
 Evolution of Insider Trading

•The history of Insider Trading in India goes back to the

timeline of independence with the formation of Thomas
Committee of 1948, which evaluated the regulations in the
US on short swing profits under Securities Exchange Act,
1934.

•Provisions relating to Insider Trading were also incorporated

in the Companies Act, 1956 under Sections 307 and 308,
which required mandatory disclosure of shareholding by the
directors and managers of a company.

•SEBI formulated a framework of SEBI (Prohibition of

Insider Trading) Regulations, 1992 with an objective to
protect the interest and maintain the confidence of investors
in the stock market and provide a healthy environment for
them, preventing malpractices and orderly functioning of the
capital markets by monitoring the activities of the financial
intermediaries such as brokers, agents, etc.
 Sachar Committee 1977

• In 1977, Sachar Committee was formed in order to provide recommendations to curb the practice of
insider trading.

• Led by Rajindar Sachar, who was a member of United Nations Sub-Commission on the promotion and
protection of human rights and a former CJI of Delhi High Court, the committee recommended a
detailed disclosure of transactions made by utilising such price sensitive information in the financial
statements.

• The committee was of the opinion that the regulations contained in the companies act, 1956 were
inadequate to curb the practice of insider trading.
 Patel Committee 1986

• Patel committee recommended that Insider trading should be considered and declared as a punishable
offence.

• It is of the opinion that stock exchange authorities should be authorized, by law, to take disciplinary
action by themselves and to initiate civil and criminal proceedings against offenders so that they are
bound by the law.

• It also recommended that people misusing such potential information also be compelled by law to
surrender to the stock exchanges, the profit that they may have made or the amount equivalent to the
losses that they have averted.
 Abid Hussain Committee 1989

• Led by Abid Hussain who served as Indian Ambassador to the United States of America, the committee
believed Insider Trading could be tackled to large extent by appropriate regulatory measures and thus
proposed that insider trading be made an offence with both civil and criminal penalties.

• It stated that the Securities and Exchange Board of India should formulate necessary legislation wherein
it is empowered with the authority to enforce the provision.
 Intricacies surrounding Insider Trading

Although SEBI has formulated SEBI (PIT), 1992 which were regularly amended by considering new
events happening around the market, proving Insider Trading is a difficult task due to the lack of
concrete evidence in most of the cases.

Insider Trading cannot be proved beyond any doubt unless there is substantial material evidence
supporting it or when the person himself confesses to have indulged in the dealing of confidential
information for personal gains, which is exceedingly rare and is not expected to happen practically.

The next slide follows the case laws which took place in the Indian Stock market history which
correlates with the above-mentioned point.
 Case Laws on Insider Trading

Dilip Pendse vs SEBI Rakesh Jhunjhunwala Rakesh Agarwal vs SEBI

Nishkalpa is a subsidiary of He is considered as the Warren Bayer group (Germany) was
Tata Finance Ltd. Buffet of Indian Stock Market. considering the takeover of
ABS industries.
As of March 31, 2001, it made a He was brought into inquiry by Rakesh Agarwal (MD) through
loss of 80 crores which was to SEBI in 2020, on the allegations his relatives, purchased shares
be made available to public on of Insider Trading in an IT firm of ABS and sold them in market
April 30, 2001. Aptech. before the information became
public.
Dilip Pendse having access to SEBI also questioned his wife, He made a substantial amount
the information sold 90000 brother and in-laws relating to of profit within such period.
shares to avoid the losses. the trades made by them.
Consequently, he was found However, there was no concrete Due to lack of proof, he was
guilty of Insider Trading. evidence and he was acquitted. acquitted of Insider Trading
allegations.
 Experts on Insider Trading
C A B H AV I K S TAN I S L AV ANIL KUMAR ARI GABINET
M E HTA DOLGOPOLOV

Insider trading is an unfair Insider trading is quite Corporate insiders are A person making an
practice, as the other different from market allowed to trade in their own abnormal profits through
stockholders are at a manipulation, disclosure of company's stock but are trade may or may not be
disadvantage due to lack of false or misleading required to disclose the same having price sensitive
potential non-public information to the market. to avoid the misuse of any information.
information. non-public price sensitive
information

In case the information has The transactions based on SEBI has framed numerous There might be a tiny bit of
been made public, in a way unequally distributed regulations in order to coincidence which comes
that all concerned investors information are common and protect the interest and into play.
are able to access, that will often legal in commodities, confidence of the Investors.
not be a case of illegal and real estate markets.
insider trading.

Insider trading is not It violates the fiduciary The aim of these regulations Also, good research may
considered illegal were duties that corporate is to create an equal playing involve "non-public"
the insider has no direct employees, as agents, owe to field for all the investors. information and trading
advantage over other their principals, the awhile in possession of such
investors. shareholders. information may be perfectly
legal.
 Conclusion

The integrity of securities markets is critical to the economy of a country, and it is necessary for
regulators to enforce laws, prohibiting market abuse to protect market integrity. As a result of these
changes, markets are becoming truly global, thereby, allowing traders to trade almost instantly across a
wide variety of products and in markets around the world.
Publicized cases of insider trading are remarkably rare in India. However, tougher laws work better in
reducing the incidence of illegal insider trading and delayed disclosures to the regulating bodies. SEBI
must impose huge penalties on those who violate the law.
Thank you