INSIDERTRADING

Introduction What is Insider Trading ?

Buying or Selling of Securities By any person On the basis of Undisclosed price-sensitive information

a breach of fiduciary duties of officers of a company or connected” persons as defined under the SEBI regulations,1992, towards the shareholders. Case:

Not all insider trading is ILLEGAL

Price Sensitive Information

Meaning Examples

Periodical Declaration of

financial results

Dividend Declaration

Issue or buyback of securities

Expansion Plans

Mergers and Acquisition

Takeover or disposal

Significant policy changes

Changes in operations of the company

Who are Insiders?Corporate Officers

Directors

Employees

Friends

Business Associates

In short, any connected person or deemed connected person

Connected person

"Connected Persons" means any person who is: Director of the Company;An Officer or Designated Employee of the Company;Has a professional or business relationship with the Company

Deemed Connected person

"Deemed Connected Persons" means and includes:Dependent family members of Connected Persons;Any group Company, Company under the same management or subsidiary of the Company;Bankers of the Company;Merchant banker, share transfer agent, registrar to an issue, debenture trustee, broker, portfolio manager, investment advisor, sub-broker or any employee thereof having a fiduciary relationship with the Company;Trustees of any trust the beneficiaries of which include any of the Connected Persons;Any person who was a Connected Person, whether temporary or permanent six months prior to an act of insider trading;.

Connected & Deemed Connected person

Wockhardt: November 2006Rajiv B Gandhi (CFO), wife Sandhya Gandhi & sister Amishi Gandhi were involved

Martha Stewart: December 2001Sold 4000 shares of ImClone; the day following her sale, stock price fell by 16%

Infosys: August 2006Srinath Batni (Executive Director) sold 10,000 equity shares violating the insider trading rules

Only a company’s officers or directors can commit insider trading.

You need to trade and be caught in the act.

The law applies to anyone who knows material non-public information.

It applies to stock of customers, suppliers, merger partners.

Tipping, even if the tipper doesn’t trade, is illegal.

Most cases are based on circumstantial evidence.

Applies to any type of security, such as call options.

Insider Trading Regulation in India• History

• Insider trading was unhindered till 1970.

• In 1979 the Sachar committee recommended amendments to the

companies Act, 1956 to prohibit the dealings of employees.

• In 1986 the Patel committee recommended that the securities

contracts Act, 1956 may be amended to make exchange curb insider

trading and unfair stock deals.

• In 1989 the Abid Hussain committee recommended that the insider

trading activities may be penalized by civil and criminal proceedings

and also suggested the SEBI formulate the regulations and governing

codes to prevent unfair dealings.

• India through SEBI (Insider Trading) Regulations 1992 amended in

2002 has prohibited this fraudulent practice.

• 39 cases of insider trading in the last 2 years.

Insider Trading Regulation in India

• SEBI (Prohibition of Insider Trading) Regulations, 1992

• The Regulations are divided into 4 parts:• Preliminary• Prohibition on Dealing, Communicating or

Counselling• Investigation• Policy on Disclosures and Internal Procedure for

Prevention of Insider Trading

Prohibition on Dealing, Communicating or Counselling

• Regulation 3

• No insider shall

• deal in securities of a company listed on any stock exchange when in

possession of any unpublished price sensitive information, or

• communicate, counsel or procure directly or indirectly such information

to any person

• Regulation 3A

• No company shall deal in the securities of another company or

associate of that other company while in possession of any unpublished

price sensitive information.

• Regulation 3B

• There should be “Chinese Wall” within the company & one department

should be unaware of operations of another department.

Investigation• Regulation 4A

• If the SEBI suspects that any person has violated any provision of these regulations, it may make inquiries with such persons.

• The SEBI may appoint officers to inspect the books and records of insider(s) for the purpose of inspection.

• Regulation 5• The SEBI can investigate and inspect the books of account, either

records and documents of an insider on prima facie.• SEBI can investigate into the complaints received from investors,

intermediaries or any other person on any matter having a bearing on the allegations of insider trading.

• Regulation 6• Before undertaking any investigation under regulation (5) SEBI shall

give a reasonable notice to insider for required purpose.

Penalties• 6 months ban on publicly listed company directors and

other connected persons – such as officers and designated employees

• A fine of `250 million or three times the profit accrued – whichever is greater.

• Insider trading can also warrant up to 10 years of imprisonment.

M&A and Insider Trading

•Buyers paying significant premium over market price

•Trading spikes in stock and call options in days leading upto deal announcements

•There is more suspicious pre-deal trading with private equity buyouts than with corporate M&A.

•Complex deals with more players have more “leakage potential.”

Case..• GTB - UTI Merger Planning to become largest private sector bank (UTI-Global

bank) Swap Ratio of 2.25:1 Shares of UTI bank and GTB witnessed huge volumes (two

upper circuit) Questioning the swap ratio Second valuation due to controversy SEBI Probe A new share swap ratio of 2:1 Both decided to call off the merger simultaneously with

different reasons

Disclosures for prohibition of Insider Trading

• Initial Disclosure

1 Like buying the stake greater than the 5% of the paid up capital of the company the acquiring company should inform the Stock Exchange with in 2 days of acquiring the stake.

2 The new director should disclose all its trade position in Equity or derivatives with in 2 days of its appointment.

• Continuous Disclosure

1 If the director changes its holding by 2% .

2 Investment of Rs 5 Lacs or 25000 shares or buying the 1% stake of the paid

up capital which ever is the least should be disclosed.

3 All holdings in securities of that company

4 Periodic statements of all transactions

5 Annual statement of all holdings

6 Any other disclosure of the company to stock exchanges.

Model Code of Conduct for Prohibition

• A compliance officer is required to be appointed by the company.

• There should be pre-clearance of trade by the officer of designated employees. Designated employees includes :

i. Employees from top 3 layers of Mgmt.

ii. All Employees in finance department irrespective of any designation & grade.

iii. Employee designated by BOD from time to time to whom the trading restriction shall be a applicable.

• Trading window ,is closed 7 days prior & 24 hours post event for the “connected persons” during the UPPSI activities like RESULTS,IPO,CAPEX,BUY BACK , etc.

CASE – TATA FINANCE (Mr. Dilip Pendse)

Abs Industries Case

SEBI charges ABS Industries MD Rakesh Agrawal for allegedly purchasing his own company’s shares from the market prior to the takeover deal between ABS and Bayer

Sebi directs Agrawal to deposit Rs 34 lakh to compensate ABS investors, besides initiating adjudication proceedings against the former promoter

Agrawal challenged the Sebi order before SAT.SAT partially turned down the Sebi ruling of imposing penalty on Agrawal and declined to issue any order related to adjudication

Sebi later contested the SAT order in SC

The case is settled through consent order with Agrawal paying a monetary penalty.

Samir Arora Case

• Sameer Arora was star fund manager and head of Asian Emerging Markets of Alliance Capital Management

• In April 2003, there were talks about the consolidation of Digital Global Soft Ltd. with the Hewlett Packard Indian Software Operations, a 100% subsidiary of HP.

From January 2002• Alliance's

holdings in Digital kept creeping up

July 2002• Alliance’s

peaked and then dipped a bit, just before the not-so-good second quarter results were announced by the company

March 2003• Alliance

seemed to be dumping the stock

May 2003• Alliance's

holding come down to zero

June 2003• Digital

announces the swap ratio which is perceived to be unfavorable by the market

• Digital Stocks falls by 26%

Samir Arora Case

• In August 2003, SEBI charged Samir Arora of insider trading under Section 11B and 11(4)(B) of the SEBI Act for:

A. Trading DGL shares on the basis of unpublished price sensitive information.

B. Non-disclosure after crossing 5% limit in several companies

C. Causing panic in the market by making public his decision to quit Alliance Capital, leading to the redemption of Rs 1300 Crore.

Insider trading law and stock plans: Grant Date timing

• There are concerns about making stock grants when the company has material nonpublic information. Watchdogs look for actions arising as a result of:

• Issuing options and setting the grant date prior to the actual issue date so that it falls on the date where the company's stock was at the lowest point in some recent interval

Back-dating of Shares

• Delaying an options grant until just after bad newsBullet Dodging 

• Timing an options grant to precede good newsSpring-loading 

• Where members of the board who approve the grant are aware of the forthcoming good news

Symmetric spring-loading 

Approaches companies take

• Written policy• Model code of Conduct• Blackout periods before earnings announcements• Special blackout periods for other confidential

information, such as acquisitions .These can vary by level in company and by who knows the information.

• For stock options sale various methods like regular schedule dates, trading window can be adopted

• Pre-clearance of trades by executives and directors.• Compliance, legal, corporate secretary staff reviews all

trades for any problems.