QUESTION : What do you understand by Insider Trading? Discuss the steps taken by SEBI in curbing it.
Insider trading is the buying or selling of a security by someone who has access to material nonpublic information about the security.Insider trading can be illegal or legal depending on when the insider makes the trade.It is illegal when the material information is still nonpublic.Trading on the basis of unpublished price-sensitive information is illegal.
When insiders, e.g. key employees or executives who have access to the strategic information about the company, use the same for trading in the company’s stocks or securities, it is called insider trading and is highly discouraged by the Securities and Exchange Board of India to promote fair trading in the market for the benefit of the common investor.In India, trading based on unpublished price sensitive information is among the most serious offences in the stock market.
SEBI has stepped up on improving its surveillance mechanism after prescient messages, related to the financial results of several blue-chip companies, including Axis Bank, HDFC Bank and Tata Motors, were being circulated on WhatsApp.
Why curbing it is important?
- If some market participants make profits on the basis of insider information, it will put others in an unfavourable position and can affect investor confidence.
- At the macro level, lack of trust in the market can impede mobilization of capital, which can affect investment and economic growth in the long run.
- To ensure that investors don’t lose faith in the market.
- In order to promote fair trading in the market for the benefit of the common investor.
Steps taken by the SEBI in preventing it
- On January 15, 2015 the SEBI laid down the ‘Prohibition of Insider Trading Regulation 2015’ to curb and prevent this malpractice. The regulations prescribed in the Insider Trading Regulations are based on the recommendation made by an 18 member committee constituted by SEBI under the chairmanship of Justice N.K Sodhi, which got approved by SEBI board in its meeting held on November 19, 2014.
- operations on persons directly or indirectly connected to these companies whose earnings SEBI has conducted massive search and seizure were leaked.SEBI has interrogated analysts, conducted raids on stock brokers and deployed search-and-seizure powers to confiscate laptops and mobile phones.
- Besides it had also put out advisory and asked companies involved to conduct an internal enquiry against people in possession of the information
- SEBI is working on formalizing information sharing with other enforcement agencies armed with advanced technologies.
- The regulator is also building techniques to scan social media platforms and nab those benefitting from the stock market by trading based on insider tip-offs.
- Gathering evidence in insider trading cases has never been easy
- Lack of innovative practices as the violators were often intelligent to not leave any trace on formal channels.
- SEBI had constituted a committee, led by former law secretary T K Vishwanathan, to suggest measures to improve surveillance and help prevent insider trading activities.
- It is working on important aspects, particularly the trading plan, handling of UPSI during takeovers and alignment of insider trading rules with the Companies Act provisions.
- The committee has suggested some short-and medium-term measures for improved surveillance of the market, as well as issues of high frequency trades, harnessing of technology and use of analytics in surveillance.
- The committee is in the advance stages of finalizing the recommendations and a report would be soon be submitted to the SEBI board.
- Also strengthening of rules governing insider trading is among the key proposals in the agenda set by Sebi for 2018-19, along with making improvement to the Prohibition of Insider Trading Regulations (PIT) and Prohibition of Fraudulent and Unfair Trade Practices(FUTP) regulations.
- According to sources, SEBI is planning to use analytical and statistical tools, such as artificial intelligence, to establish the link between those passing sensitive information and the ones trading based on it.
- SEBI is considering making changes in the legal framework to mandate market intermediaries, such as stock exchanges and brokers, to carry out necessary surveillance of client trading activity.
- Also, the Securities and Exchange Board of India is considering asking companies to frame a policy on how to handle unpublished price-sensitive information, or UPSI, and convey the policy to employees;
- Restrict the access of sensitive information to select employees,
- Monitor big share price changes before important events like earnings releases
- Conduct background checks on employees dealing with such information
- Identify people involved in major deals and ensure information given to junior or external teams is on a need-to-know basis
- Create separate work spaces with secured access for those preparing and discussing issues that are price-sensitive.