Insider trading

INSIDER.

Any person in power –

  • He could be a director or an officer or anyone connected to the company
  • Who has access to sensitive information relating to the company

PERSONS ‘CONNECTED’ WITH THE COMPANY

These includes directors, officers, employees who have access to such sensitive information, other professionals like Merchant banker, share transfer agent, registrar to an issue, debenture trustee, broker, portfolio manager, Investment Advisor, sub-broker, , employees of the Board of Trustees of the Mutual Fund etc who are people ‘connected’ with the company. It also includes ‘temporary insiders’ like lawyers and auditors. Relatives of these connected persons are also considered in the same category.

INSIDER TRADING

When an insider, using his position and power in the company, collects price sensitive unpublished information and passes it out to his friends, relatives or known persons for the purpose of making money from price changes, such an act is generally called insider trading.

‘price sensitive information’ includes proposed expansion plans of the company or major disposal of a part of business, main contracts that are negotiated, proposed changes in share holding pattern, senior management, dividend policy, financial results, amalgamations , potential litigations etc…

LEGAL OR ILLEGAL?

Generally the term is used in a negative sense. But not everything’s negative with insider trading. When corporate insiders buy and sell stock in their own companies and informs the same to the securities exchange board of India, the same becomes a legal transaction. Information on legal insider trading can be found on the websites of BSE and NSE. It perfectly legal for a company’s insider to sell or buy shares.

To an extent, such published information on insider trading may provide us with some hints on price movements. For example – If the management is increasing its stake in the business, it could mean that the management is bullish about the future prospects of the business.

It becomes illegal when the motive behind the insiders is to make money from secret informations that’s passed on to them by the insiders .For example – The CEO of a company knows that the company is not going to report high profits as expected in the year and passes this ‘tip’ to his friends who, in turn, sells off their investments in the company. That’s an illegal transaction all together. But how to find if a transaction is illegal insider trading is a very tough one. The line that separates between a legal and an illegal insider trade is quite thin.

WHO CONTROLS?

In India, The SEBI. The Securities Exchange Board of India has framed strict rules – The SEBI (Prohibition of Insider Trading) Regulations, 1992 amended from time to time sets stringent norms regarding illegal insider trading. It prohibits insiders who buy or sell any number of shares of the company from entering into an opposite transaction, i.e. sell or buy any number of shares during the next six months following the prior transaction. For example – if an insider has bought 1 lakh shares in company ‘x’, he shall not sell the same before 6 months.  If a connected person subscribes to an IPO, he cannot sell his holdings for 3 months.

All insiders are also prohibited from taking positions in derivative transactions in the shares of the company at any time.

Through the SEBI (Prohibition of Insider Trading) Regulations, 1992 the SEBI tries to ensure that the innocent investors are protected.

Here’s the link to information regarding insider trading on the BSE site.

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