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