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Insights of
INSIDER TRADING
Pavan Kumar Vijay
What IsINSIDER TRADING?
INSIDER TRADINGIt is dealing in the securities
by a Insider,
who has the knowledge of
material “inside” information
which is not known
to the general public
How BAD It Is ???
How BAD It Is ???
Used to make profit at the expense of other
investors
Leads to loss of confidence of investor in stock
market
The process corrupts the ‘Level Playing Field’
It is easier to identify the beneficiaries of insider
dealing. But the extent of losses occurred is
impossible to calculate.
SEBI (Insider Trading) Regulations, 1992
Governing Regulations
SEBI (Insider Trading) (Amendment) Regulations, 2002
SEBI ( Prohibition of Insider Trading) (Second Amendment) Regulations, 2002
19.11.1992
20.02.2002
29 .11.2002
Who IsINSIDER ???
Reg 2 (e) ANY PERSON
WASIS
CONNECTED WITH THE COMPANY
WHO
OR
OR
DEEMED TO HAVE BEEN CONNECTED
AND
WHO IS REASONABLY EXPECTED TO HAVE
ACCESS HAS RECEIVED HAS HAD ACCESS OR OR
TO
UNPUBLISHED PRICE SENSITIVE INFORMATION
INSIDER
Connected Person??Who Is
Reg 2 (c)ANY PERSON
Deemed to be a directorU/s 307(10) of Co. Act
Is a director U/s 2(13) of Co Act
WHO
OR
OR
HOLDS A POSITION INVOLVING
AND
WHO MAY REASONABLY EXPECTED TO HAVE ACCESS TO UPSI
OR EmployeeOfficer
Business RelationshipProfessional Relationship OR
WhetherTemporary PermanentOR
Connected Person
Connected Person Explanation :
WHO IS CONNECTED PERSON
ANY PERSONSHALL MEAN
THE WORD “CONNECTED PERSON”
SIX MONTHS
PRIOR TO AN ACT OF
INSIDER TRADING
“Person Deemed
to be
Connected” ?
Who Is
Company under Same Management / Group / Subsidiary
Reg 2 (h)Person Deemed to be Connected
All Intermediaries, Their Employees & Directors
Investment / Trustee / Asset Management Company,their Employees & Directors
Officials of Stock Exchange / Clearing House / Corporation
Board of Trustee Members & Directors of Mutual Fund
Public Financial Institution, Its Employees & Directors
Relative of any of the aforementioned Persons
Bankers of the company
Reg 2 (h)Person Deemed to be Connected Contd.
Relatives of the Connected Persons
Any Concern / Firm / trust / HUF/ Company / AOP
In which
Directors or Deemed Directors / Relatives of Connected /Deemed Connected Persons or company banker
Have More than 10% of the holding or Interest
Price Sensitive Information
Reg 2 (ha)
ANY INFORMATION
OR
AND
TO A COMPANY
LIKELY TO MATERIALLY AFFECT THE PRICE OF SECURITIES OF THE COMPANY
INDIRECTLYDIRECTLY
Price Sensitive Information
WHICH RELATES
WHICH IF PUBLISHED
Deemed Price Sensitive Information Reg 2 (ha)
Periodical Financial Results of the company;
Intended declaration of dividends;
Issue of securities or buy-back of securities;
Expansion Plans / New projects;
Amalgamation, mergers or takeovers;
Disposal of undertaking;
Changes in policies of the company
Price Sensitive Information Listing
Change in the general character or nature of business
Disruption of operations due to natural calamity.
Commencement of Commercial Production/ Commercial Operations
Litigations/ dispute with a material Impact.
Revisions in Ratings
As per Clause 36 Listing Agreement Contd.
Any other information having bearing on the operation/ performance of the Company as well as price sensitive information which includes but not restricted to;
Change in market lot / sub-division ;
Voluntary delisting by the company ;
Forfeiture of shares;
Alteration in terms of any securities ;
Information regarding securities issued abroad ;
Cancellation of dividend/ rights/ bonus etc.
Price Sensitive Information Listing As per Clause 36 Listing Agreement Contd.
Un - Published
Un - PublishedReg 2 (k)
Information, which is not published
by the company or its agents and
is not specific in nature.
Explanation: Speculative reports in print or electronic media
shall not be considered as published information
Dealing in Securities
Dealing in SecuritiesReg 2 (d)
"Dealing in Securities" means an act of
subscribing buying, selling
or agreeing subscribe to buy, sell or deal in any securities
by any person either
as principal or agent;
Prohibition on Dealing,
Communicating or Counseling
Reg 3 Prohibition On Insider
NO INSIDER
On Other’s behalf Either on his own behalf
DEAL IN SECURITIES OF THE COMPANY
SHALL
OR
WHEN
IN POSSESSION OF ANY UPSI
OR
COMMUNICATE / COUNSEL / PROCURE
Directly IndirectlyOR
ANY UPSI TO ANY PERSON
Reg 3 Exemption to Prohibition For Insider
For any communication which is required in the
ordinary course of business or profession or employment
or under any law.
Reg 3A Prohibition On Company
NO COMPANY
Deal in Securities of
SHALL
WHEN
IN POSSESSION OF ANY
Other companyAssociate of that other company OR
UNPUBLISHED PRICE SENSITIVE INFORMATION
Reg 3B Exemption to Prohibition
The decision of transaction or agreement was not taken by officer or employee of the company who is in possession of UPSI; AND
Adequate Procedures in place to demarcate the persons having UPSI & persons dealing in securities; AND
Proper arrangement in place to block the dissemination of UPSI; AND
The information was not so communicated and no such advice was so given; OR.
The acquisition was in line with SEBI SAST Regulations
Exemption to Prohibition For Company
Violations
of Provisions Relating to
Insider Trading
Reg 4 Violation
Any insider, who
deals in securities in contravention of the
provisions of Regulation 3 or 3A shall be
guilty of Insider trading.
Power of SEBI To Make Inquiries &
Inspections
Reg 4A Power to make Inquiries & inspection
If the Board suspects that any person has violated any provision of these regulations, it may make inquiries OR appoint persons to inspect books & recordsof such persons OR any Stock Exchange / Mutual Fund / Intermediaries/ Any other personas deemed fit, to form a prima facie opinion as to whether there is any violation of these regulations.
Right of SEBI
To
Investigate
Reg 5 Right to Investigate
The Board may appoint investigating authority to investigate
into the complaints received from investors, intermediaries or any other person
on any matter having a bearing on the allegations of insider trading;
AND To investigate suo-moto
upon its own knowledge or information in its possession
to protect the interest of investors in securities against breach of these regulations.
Procedure
for
Investigation
On Complaints/ Suo-moto
On ConclusionReport to Board
Board will Issue directions
Investigation Started
Appointment of Invtg. Auth.
Notice Issued
To provide all assistance
Shall Reply within 21 days
Findings to suspected person
Procedure for InvestigationReg 6 - 9
Directions
By
SEBI
Reg 11 Directions by Board
INDEPENDENTof right to Initiate Criminal proceedings
OR any action under Chapter VIA of the Act (Penalties & Adjudication) ,
May Direct• Not to deal in securities • Prohibition on Disposal
• Restraining to Communicate or Counsel• Declare transaction as null & void
• To deliver securities back to the seller• Or market price equivalent be paid to the seller
• To transfer the proceeds to the Investor Protection Fund of Stock Exchange
Disclosures
To be
Made
Reg 13(1)
PARTICULARS
TO BE SUBMITTED
To PERIOD
Initial disclosure by person who holds
more than 5% shares/ voting rights in any
listed company
Company
within 4 working days of receipt of
information of allotment or the acquisition of
shares/voting right
Disclosures To be Made
To Intimate The number of shares held by such persons
Reg 13(2)
PARTICULARS
TO BE SUBMITTED
To PERIOD
Initial disclosure by person who is
either director or officer
of listed company
Company
within 4 working days of becoming the
director or officer of company
Disclosures To be Made
To Intimate The number of shares held by such persons
Reg 13(3 & 5)
PARTICULARS
TO BE SUBMITTED
To PERIOD
Continual disclosure by
person who holds more than 5% shares/ voting
rights in any listed company
Company
within 4 working days of receipt of
information of allotment or the acquisition of
shares/voting right
Disclosures To be Made
To Intimate The number of shares held & any Change
exceeding 2%
Reg 13(4 & 5)
PARTICULARS
TO BE SUBMITTED
To PERIOD
Continual disclosure by person who is
either director or officer
of listed company
Company
within 4 working days of receipt of
information of allotment or the acquisition of
shares/voting right
Disclosures To be Made
To Intimate The number of shares held & any Change exceeding
Rs. 5 Lakh OR 25000 Shares OR 1% whichever is Lower
Modal
Code
of Conduct
Code of Conduct
To be Abide By
Reg 12
All Listed Companies Organizations Associated with Securities Markets including: All intermediaries AMC and trustees of mutual funds; The Self Regulatory Organizations; The Stock Exchanges / Clearing House / Corporations; The Public Financial Institutions The Professional Firms
Such as Auditors, Accountancy Firms, Law Firms, Analysts, Consultants, etc.,
Assisting or Advising Listed Companies
Model Code of Conduct Schedules
SCHEDULE I
MODEL CODE OF CONDUCT FOR PREVENTION OF INSIDER TRADING
PART A - FOR LISTED COMPANIESPART B – FOR OTHER ENTITIES
SCHEDULE II CODE OF CORPORATE DISCLOSURE PRACTICES
FOR PREVENTION OF INSIDER TRADING
Important Terms
In
Code of Conduct
PSI should be disclosed only to those within the company who need the information to discharge their duty.
Limited access to confidential information
Files containing confidential information shall be kept secure.
Computer files must have adequate security of login and pass word etc.
Model Code of Conduct
IMPORTANT TERMS
NEED TO KNOW
Model Code of Conduct
All D/O/E of the Co who intend to deal in the securities beyond a limit should pre-clear the transactions.
An application to the Compliance officer indicating
The estimated number of securities that the D/O/E intends to deal in, The details as to the depository with which he has a security account,
The details of securities in such depository mode.
Other details as may be required by any rule made by the company in this behalf.
IMPORTANT TERMS PRE CLEARANCE OF TRADES
Company shall specify a trading period, to be called "Trading Window", for trading in the company’s securities.
The trading window shall be closed during the time the Price Sensitive information is un-published.
When the trading window is closed, the D/ E /O shall not trade in the company's securities in such period.
The trading window shall be opened 24 hours after the Price Sensitive Information is made public.
Model Code of ConductIMPORTANT TERMS
TRADING WINDOW
To restrict trading in certain securities and designate such list as restricted / grey list.
Client Companies for which any assignment or appraisal report or credit rating assignments are going on.
Any security which is purchased or sold by the organisation / firm on behalf of its clients / schemes of mutual funds, etc. shall be put on the restricted / grey list.
As the restricted list itself is a highly confidential information, It shall be maintained by CO.
Model Code of ConductIMPORTANT TERMS
RESTRICTED /GREY LIST
Model Code of Conduct
"Chinese Wall" policy demarcates “inside areas” from "public areas".
Those areas having access to confidential information,
considered “inside areas” and areas which deal with sales / marketing / investment considered "public areas".
The employees in the inside area shall not communicate any PSI to anyone in public area.
In exceptional circumstances employees from the public areas may be brought "over the wall" and given confidential information on the basis of "need to know" criteria, under intimation to the CO
IMPORTANT TERMS CHINESE WALL
Compliance Officer ‘Senior Level Employee’ who shall report to the MD / CEO.
The CO shall be responsible for - setting forth policies, procedures - monitoring adherence to the rules for the preservation of “PSI”, - pre-clearing of designated employees’ and their dependents’ trades - monitoring of trades and the implementation of the code of conduct under the overall supervision of the Board of the listed company.
The CO shall maintain a record of the designated employees and any changes made in the list of designated employees. To Provide clarifications regarding the SEBI (Prohibition of Insider
Trading) Regulations, 1992 & the company's code of conduct to the Company’s employees..
Model Code of ConductIMPORTANT TERMS
COMPLIANCE OFFICER (CO)
Code provides Penalty and Appropriate action by the company for violations of code. Disciplinary action by the company, include wage freeze, suspension, ineligible for future participation in ESOP etc The action by the company shall not preclude SEBI from taking any action incase of violation of SEBI (Prohibition of Insider Trading), Regulations, 1992.
Model Code of ConductIMPORTANT TERMS
PENALTY FOR CONTRAVENTIONOF CODE OF CONDUCT
Action By SEBI
Against
Violations
Take actions to Prohibit Insider Trading – U/s 11. Issue directions in Interest of Investors & Securities
Market – U/s 11B Impose Penalty ( 25 Crore) / Imprisonment (10 Years)
U/s - 24
Reg 14GENERAL ACTION
AGAINST VIOLATIONS
Sec 15 G of SEBISPECIFIC ACTION
AGAINST VIOLATIONSAPPLICABILITY :
Any Insider Who
Deals in Securities based on any UPSI. Communicates any UPSI to any person, with or
without his request Counsels / procures to deal in Securities Based on
UPSI.
PENALTY : Rs. 25 Crore OR 3 times the amount of profit made Whichever is HIGHER
Interesting
Judgements on
Insider Trading
MATTER OF DEBATE
WHETHER AN ACTION UPON ANY PRICE SENSITIVE INFORMATION WHICH TURN OUT TO BE INCORRECTFALLS UNDER INSIDER TRADING
SAMEER ARORA VS. SEBI
HELD
INFORMATION WHICH FINALLY TURNS OUT TO BE FALSE OR AT LEAST UNCERTAIN CANNOT EVEN BE LABELED AS INFORMATION.
MATTER OF DEBATE
WHEN AN PRICE SENSITIVE INFORMATION WILL BE TREATED AS MADE PUBLIC
DSQ HOLDINGS VS. SEBI
HELD
THE DAY ON WHICH THE INFORMATION IS SENT TO THE STOCK EXCHANGE AS PER THE LISTING AGREEMENT.
2. DSQ HOLDINGS VS SECURITIES & EXCHANGE BOARD OF INDIA.
BRIEF ISSUES & DECISION The appellant was charged for indulging in the insider trading in theshares of the Company via DSQ Biotech Ltd.(DSQB). The Transaction Relates to the period from 1/08/1994 to 30/09/1994. The respondent hasheld that appellant is an insider and it had purchased shares on the basisOf UPPSI relating to RIGHT ISSUE. The appellant is found guiltyof violating regulation 3(I) of the Insider Regulations.
The impugned order states that the information on the right issue Becomes public only on 309/94 when the AGM was held. The notice of AGM was dispatched to the shareholding on 25/08/94.
The Appellant states that the right issue was first discussed in the Board Meeting of the Co. held on 30/7/94. The Company send the Information to the Stock exchange as per the Listing Agreement on the Very same day. The concerned public was aware of the company’s Proposal the very same day
Thus the ingredients of insider trading not found in the case and henceThe appeal was dismissed.
Disclosure of confidential information by son to his fatherconcerning adverse Corporate developments at the Companybecause of the a new drug jointly being developed by thecompany along with Other Company. Father used theinformation and purchased the Co’s “PUT” Options.
Father sold the put options on Co’s JV termination generating an overnight profit of more than $ 55,000.
S E C VS TIMOTHY J.POTTER & GEORGE R.POTTER
INTERNATIONAL JUDGEMENT
FACTS
HELD
Both Father & Son was charged of the GUILTY OF INSIDER TRADING
Alfred Teo a major shareholder of a company learned about the tender Offer for the company and then purchased the stock on the basis of this Information prior to the Company’s Public announcement of the Acquisition. Teo also tipped eight other defendants. Thereupon made illicit profits of approximately $22 Million.
It was proved that the defendants use the inside information and also Give tips to others and earned illicit profits.
S E C VS ALFRED S.TEO, SR, ET AL
INTERNATIONAL JUDGEMENT
FACTS
HELD
The exchange ordered for disgorgement of all illicit profits, Civil penalties, permanent injunctions also.
Arjun Sekhri, a former investment banking associate having An inside confidential information about the Company tipped Various other persons in advance of six major corporate Announcements
S E C VS ARUM SEKHRI, AMLOLAK SEHGAL, & PRATIMA RAJAN
INTERNATIONAL JUDGEMENT
FACTS
HELD
The offence of insider trading was proved against the defendants and they were sentenced for Imprisonment and were asked for disgorgement of the Trading profits.
It is easier to identify the beneficiaries of insider dealing.
But the extent of losses occurred to the
general investor is impossible to calculate.
Lastly…
Let’s we knowingly not involved in this practice
and put in place proper measures so would not get involved in
Insider Trading.
Thus…
Thanks…
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