insider trading (sebi)
DESCRIPTION
presentation on insider trading realted to SEBI.TRANSCRIPT
INSIDER TRADINGINSIDER TRADING
What is Insider Trading?What is Insider Trading?
Securities trading by Securities trading by insidersinsiders based on based on material non material non publicpublic informationinformation in violation of a fiduciary in violation of a fiduciary or or similar similar duty of trustduty of trust and confidence to the company and confidence to the company issuing the security, to the company’s shareholders or issuing the security, to the company’s shareholders or to the source of informationto the source of information
Benefits of Insider Trading to Benefits of Insider Trading to InsidersInsiders
Make ProfitsMake Profits
- - James O’Hagan made a profit of more than James O’Hagan made a profit of more than $4.3 million $4.3 million
Avoid LossesAvoid Losses
- - Martha Stewart Martha Stewart avoided a loss of $45, 673avoided a loss of $45, 673
Who are Insiders?Who are Insiders?
Types of InsidersTypes of Insiders
Primary InsidersPrimary Insiders Secondary InsidersSecondary Insiders
Classic Constructive Classic Constructive TipeeTipeeAccidentalAccidental
Corporate InsiderCorporate Insider InsiderInsider
InsiderInsider
PRIMARY INSIDERSPRIMARY INSIDERS
Classic Corporate insidersClassic Corporate insiders DirectorsDirectors OfficersOfficers Shareholders holding substantial no. of shares Shareholders holding substantial no. of shares
(10%)(10%)
PRIMARY INSIDERS…contd.PRIMARY INSIDERS…contd.
Constructive insiders Constructive insiders
Persons who are not employed by the Persons who are not employed by the corporation but receive confidential corporation but receive confidential information from a corporation while information from a corporation while providing services to the corporation.providing services to the corporation.
e.g. professional advisers, lawyers, investment e.g. professional advisers, lawyers, investment bankersbankers
SECONDARY INSIDERSSECONDARY INSIDERS
Accidental InsidersAccidental InsidersNot liable for insider trading unless their Not liable for insider trading unless their behavior proves otherwisebehavior proves otherwise
SECONDARY INSIDERSSECONDARY INSIDERSTippeeTippee
TipperTipper TippeeTippee material price sensitive informationmaterial price sensitive information
No direct fiduciary relationship to the company or its No direct fiduciary relationship to the company or its shareholdersshareholders
Tippee assumes a fiduciary duty to the shareholders of a Tippee assumes a fiduciary duty to the shareholders of a corporation not to trade in securities if the tippee knows or corporation not to trade in securities if the tippee knows or should have known that the tipper has breached a fiduciary should have known that the tipper has breached a fiduciary dutyduty
Dirks v. SECDirks v. SEC
Who are Insiders?Who are Insiders?
SEBI Defn.SEBI Defn.
A person who is or was connected to a A person who is or was connected to a company or deemed to have been connected company or deemed to have been connected with the company, and is reasonably expected with the company, and is reasonably expected to have access to unpublished price sensitive to have access to unpublished price sensitive information in respect of securities or who has information in respect of securities or who has received or has had access to such unpublished received or has had access to such unpublished price sensitive information.price sensitive information.
Insider - SEBI DefnInsider - SEBI DefnConnected PersonConnected Person Deemed to be Connected PersonDeemed to be Connected Person
DirectorDirector Companies under the same managementCompanies under the same management
OfficerOfficer Specified IntermediariesSpecified Intermediaries
Professional relationship with Professional relationship with the companythe company
Director/employee of public financial Director/employee of public financial institutioninstitution
Official/employee of an SROOfficial/employee of an SRO
Relative of the aboveRelative of the above
Banker to the companyBanker to the company
Relatives of connected personsRelatives of connected persons
Entities where connected persons/deemed Entities where connected persons/deemed to be connected persons have > 10% to be connected persons have > 10% interestinterest
Who are Insiders?Who are Insiders?
Should corporates be included as Insiders?Should corporates be included as Insiders?
- Some jurisdictions cover only individualsSome jurisdictions cover only individuals
- Subjecting corporates to sanctions motivates Subjecting corporates to sanctions motivates them to introduce higher standardsthem to introduce higher standards
Violation of fiduciary a dutyViolation of fiduciary a duty
The corporate insider by accepting employment has The corporate insider by accepting employment has made a contract with the shareholders to put the made a contract with the shareholders to put the shareholders interest before their own in matters shareholders interest before their own in matters related to the corporation.related to the corporation.
A duty to disclose inside information does not arise A duty to disclose inside information does not arise merely by possession of the information but by the merely by possession of the information but by the existence of a fiduciary dutyexistence of a fiduciary duty
What is material price sensitive What is material price sensitive information?information?
SEBI Defn.SEBI Defn. Periodical financial results of a companyPeriodical financial results of a company Intended declaration of dividends (both interim and Intended declaration of dividends (both interim and
finalfinal Issue of securities or buy back of securitiesIssue of securities or buy back of securities Any major expansion plans or execution of new Any major expansion plans or execution of new
projectsprojects Amalgamation, mergers or takeoversAmalgamation, mergers or takeovers Disposal of whole or substantial part of the businessDisposal of whole or substantial part of the business Any significant change in the policies, plans or Any significant change in the policies, plans or
operations of the Companyoperations of the Company
What is material price sensitive What is material price sensitive information?……….contd.information?……….contd.
In the USIn the US
Information of such a nature that someone who has Information of such a nature that someone who has inside knowledge of it could be expected to trade inside knowledge of it could be expected to trade successfully in the securities in question and make a successfully in the securities in question and make a profit or avoid lossesprofit or avoid losses
Malaysia/SingaporeMalaysia/Singapore
Information that a reasonable person would expect to Information that a reasonable person would expect to have a material effect on the price of securitieshave a material effect on the price of securities
Misappropriation TheoryMisappropriation Theory
Anyone who misappropriates (steals) information from their Anyone who misappropriates (steals) information from their employer and trades on that information in any stock (not just employer and trades on that information in any stock (not just their employers stock) is guilty of insider tradingtheir employers stock) is guilty of insider trading
Misappropriation theory is a part of US LawMisappropriation theory is a part of US Law
Can also be found in Indian Law Can also be found in Indian Law (Code for Prevention of Insider Trading by specified (Code for Prevention of Insider Trading by specified intermediaries)intermediaries)
US v. James O’HaganUS v. James O’Hagan
Methods of prevention of Insider Methods of prevention of Insider TradingTrading
Disclosure of interest by corporate insidersDisclosure of interest by corporate insiders
Listed companies Listed companies Persons holding more than 5% of the shares/voting rightsPersons holding more than 5% of the shares/voting rights
(if change exceeds 2% of total voting rights)(if change exceeds 2% of total voting rights)Directors and OfficersDirectors and Officers
(if change exceeds Rs. 5 lakhs/25000 shares/1% of capital (if change exceeds Rs. 5 lakhs/25000 shares/1% of capital
Other entitiesOther entities Initial statement of holdingInitial statement of holding Periodic statement of holdingPeriodic statement of holding
Methods of prevention of Insider Methods of prevention of Insider TradingTrading
Disclosure of Price Sensitive InformationDisclosure of Price Sensitive Information
-- Different jurisdictions – different methods Different jurisdictions – different methods
1. By transmission of the information to 1. By transmission of the information to a a news agencynews agency
2. By dissemination of the information 2. By dissemination of the information by by the stock exchangethe stock exchange
Methods of prevention of Insider Methods of prevention of Insider Trading……contd.Trading……contd.
Limited access to price sensitive informationLimited access to price sensitive information
““Need to know basis”Need to know basis”
Chinese WallChinese Wall Separate inside areas from public areasSeparate inside areas from public areas Bringing over the wallBringing over the wall
Methods of prevention of Insider Methods of prevention of Insider Trading……contd.Trading……contd.
Trading window facilityTrading window facility Decided by the companyDecided by the company closed during the time price sensitive information is un closed during the time price sensitive information is un
publishedpublished Opened 24 hours after the information is made publicOpened 24 hours after the information is made public Exercise of ESOPs allowedExercise of ESOPs allowed
Methods of prevention of Insider Methods of prevention of Insider Trading……contd.Trading……contd.
Minimum holding periodMinimum holding period Securities to be held for minimum period Securities to be held for minimum period
of 30 days to be considered as investmentof 30 days to be considered as investment Also applies to IPO allotment (30 days Also applies to IPO allotment (30 days
from the date of allotment)from the date of allotment) Can be waived of only in the case of Can be waived of only in the case of
personal emergencypersonal emergency Issues in the case of derivativesIssues in the case of derivatives
Methods of prevention of Insider Methods of prevention of Insider Trading……contdTrading……contd
Restricted listedRestricted listed
only applicable to specified intermediariesonly applicable to specified intermediaries
Pre-clearance of tradesPre-clearance of trades
All directors / officers / designated employees to pre All directors / officers / designated employees to pre – clear their trades– clear their trades
Pre-clearance to be given by Compliance OfficerPre-clearance to be given by Compliance Officer
Valid for one weekValid for one week
Methods of prevention of Insider Methods of prevention of Insider Trading……contd.Trading……contd.
Pre-clearance of trades/RestrictedPre-clearance of trades/Restricted
Prevents Front RunningPrevents Front Running
Pre – clearance vis-a vis Research AnanlystsPre – clearance vis-a vis Research Ananlysts
Legal v/s Illegal Insider TradingLegal v/s Illegal Insider Trading
Legal Insider TradingLegal Insider Trading- Trading after due disclosures- Trading after due disclosures- Trading by accidental insiders- Trading by accidental insiders- Trading by tippees without a fiduciary duty- Trading by tippees without a fiduciary duty
Insider TradingInsider Trading- Trading in violation of the rules & regulations- Trading in violation of the rules & regulations- Trading by tippee knowing that the tipper is - Trading by tippee knowing that the tipper is violating a fiduciary dutyviolating a fiduciary duty
Why forbid Insider Trading?Why forbid Insider Trading?
A Company’s information is its own property- A Company’s information is its own property- others should not profit from itothers should not profit from it
It disrupts market efficiencyIt disrupts market efficiency Unfair competition to speculators outside the Unfair competition to speculators outside the
companycompany It undermines investor confidence in the It undermines investor confidence in the
fairness and integrity of the securities marketfairness and integrity of the securities market
PenaltiesPenalties USUS
Civil PenaltiesCivil Penalties1.1. 3 times profit made/loss avoided3 times profit made/loss avoided2.2. Controlling persons -3 times profit made/loss Controlling persons -3 times profit made/loss
avoided or $1 million (higher)avoided or $1 million (higher)3.3. InjunctionsInjunctions
Administrative PenaltiesAdministrative Penalties1.1. Cease and desist orderCease and desist order
PenaltiesPenalties
Criminal PenaltiesCriminal Penalties
Natural persons - Fine upto $5 million and/or Natural persons - Fine upto $5 million and/or 20 yrs imprisonment20 yrs imprisonment
Other entities – fine upto $25 millionOther entities – fine upto $25 million
PenaltiesPenalties
In India – for violation of code of conductIn India – for violation of code of conduct
By the organisationBy the organisation Disciplinary actionDisciplinary action Wage freezeWage freeze SuspensionSuspension Monetary penaltyMonetary penalty
By SEBIBy SEBI Unlimited Powers – ANY actionUnlimited Powers – ANY action
THANK YOUTHANK YOU