INSIDER TRADING Regulations & Practices. Agenda for Presentation Introduction History behind insider trading Regulatory Aspect of Insider Trading Cases

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INSIDER TRADING Regulations & Practices Slide 2 Agenda for Presentation Introduction History behind insider trading Regulatory Aspect of Insider Trading Cases Slide 3 Introduction Slide 4 Insider trading essentially denotes dealing in a company s securities on the basis of confidential information relating to the company which is not published or not known to the public used to make profit or loss. It is fairly a breach of fiduciary duties of officers of a company or connected persons as defined under the SEBI regulations,1992, towards the shareholders. Slide 5 Contd Insider terms actually includes both legal and illegal conduct. The legal version is when corporate insider officer, directors, and employees buy and sell stock in their own companies. when corporate insiders trade in their own securities, they must report their trades to SEBI. Illegal insider trading refers generally to buying or selling a security, in breach of fiduciary duty or other relationship of trust and confidence, while in possession of material, non public information about the security. Slide 6 Who are insider traders? Corporate officers, directors, and employees who traded the corporations securities after learning of significant, confidential corporate developments. Friends, business associates, family members, and other types of such officers, directors, and employees, who traded the securities after receiving such information. Slide 7 Contd Employees of law, banking, brokerage and printing firms who were given such information to provide services to the corporation whose securities they traded. Govt employees who learned of such information because of their employment by the govt. Other persons who misappropriated,and took advantage of, confidential information from their employers. Slide 8 Why forbid insider trading? The prevention of insider trading is widely treated as an important function of securities regulation. In order to make sense of insider trading, we must have basic understanding of markets, prices and role of markets in the economy. Insider trading appears unfair, especially to speculators outside a company who face difficult competition in the form of insider trading. Slide 9 History behind Insider Trading Slide 10 History behind Insider Trading Regulation in India Insider trading in India was unhindered in its 130 year old stock market till about 1970. In 1979, the Sachar committee recommended amendments to the companies Act,1956 to restrict prohibit the dealings of employees. Penalties were also suggested to prevent the insider trading. 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. Slide 11 Contd 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 regulations 1992 has prohibited this fraudulent practice. These regulations were drastically amended in 2002 and renamed as SEBI regulations 1992. Slide 12 In India. Only 14 cases taken up by SEBI for insider trading in 2003-04, which went down to only 7 in 2004-05. In terms of cases completed, the no was only 9 and 5 respectively. So does India has fewer incidence of insider trading or our systems/laws not geared enough to detect such cases? Slide 13 Regulatory aspect of Insider Trading Slide 14 Regulatory aspects of prohibition of Insider Trading SEBI prohibition of Insider Trading regulation 1995. Section 11(2) E of companies act 1956 prohibits the Insider Trading What is Insider Trading is not defined in the companies act -1956 Slide 15 Why there is need for the Prohibition of Insider Trading??? As per SEBI the Prohibition of Insider Trading is required to make Securities Market: Fair & Transparent To have a level playing field for all the participants in the market For free flow of information & avoid information asymmetry Slide 16 Who is Insider??? Who is Insider is defined under the SEBI Prohibition of Insider Trading regulation 2 (e) Insider is the person who is connected with the company, who could have the Unpublished price sensitive information or receive the information from somebody in the company. For the purpose this definition, words connected person shall any person who is a connected person six months prior to an act of insider trading Slide 17 Who Can be a connected person??? It could be director of the company,or is deemed to be a director of the by virtue of sub-clause(10) of section 307 of the companies act 1956 He /She could be officer or professional of the company or holding a business relationship with the company. Any person having UPPI from the any subsidiary or group company is also stated to be the connected person. Connected person can also be from intermediarys like stock exchange, Merchant Bank, Transfer agent, debenture trustee, Bankers & relatives of promoter or of BOD. Slide 18 Relatives are defined very extensively in the companies act 1956 1. Father 2. Mother 3. Son 4. Sons wife 5. Daughter 6. Fathers father 7. Fathers mother 8. Mothers mother 9. Mothers father 10.Sons son 11.Sons sons wife 12.Sons daughter 11.Sons sons wife 12.Sons daughter 13.Sons daughters husband 14.Daughters husband 15.Daughters son 16.Daughters sons wife 17.Daughters daughter 18.Daughters daughters husband 19.Brother 20.Brothers wife 21.Sister 22.Sisters husband But several close relatives are excluded Like all in-laws (Brother-in- law, Father-in-law etc.)-Brothers wifes brother etc. Slide 19 What is price sensitive information??? The Price sensitive information is defined in Regulation 2(h)(a) of the prohibition of Insider Trading. It means any information which relates directly or indirectly with the company & which if published is likely to materially affect the prices of the securitys of the company. Slide 20 The information which is deemed to be price sensitive are like. Periodical financial results Intended declaration of the dividends(both Interim & Final) Issue of securities or buy back of securities Any major expansion plans or execution of new projects. Amalgamation & mergers or takeovers. Disposal of the whole or substantial part of the undertaking Any significant changes in policies, plans or operations of the company. Slide 21 Regulation 3 of the Prohibition of Insider trading No Insider should deal insecurity, while in possession of UPPI. He / She should not communicate or procure the UPPSI to others. Slide 22 Regulation 3(B) This regulation states that there should be Chinese Wall With in the company & one department should not know about what other departments are doing. Slide 23 Disclosures for prohibition of Insider Trading Initial Disclosure 1Like 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. 2The new director should disclose all its trade position in Equity or derivatives with in 2 days of its appointment. Continuous Disclosure 1If the director changes its holding by 2%. 2Investment 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. Slide 24 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. There are several forms in accordance with disclosures & code of conduct. Insider_Trading_Code_of_Conduct.pdf Slide 25 Investigation of Insider Trading Regulation 4(a) deals with the request for the enquiries. SEBI can also appoint the outsider auditor for the enquiry & auditor would have the same power as the SEBI possess. Before undertaking any investigation under regulation (5) SEBI shall give a reasonable notice to insider for that purpose. Where SEBI is satisfied that in the interest of investors or in public interest no such notice should be given, it may by an order in writing direct that the investigation be taken up without such notice. Slide 26 SEBIs Power to make inquiries and inspection 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. 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. Slide 27 Case Studies o HLL-BBLIL MERGER o RAKESH AGARWAL vs. SEBI o SAMIR ARORA vs. SEBI Slide 28 HLL-BBLIL MERGER CASE Slide 29 HLLBROOKBOND LIPTON INDIA LTD Focus on legal controversy involving BBLILs merger with HLL. SEBI, suspecting insider trading, conducted enquiries. In August 1997, SEBI charged HLL of insider trading by using Unpublished Price-Sensitive Information. Slide 30 HLLBROOKBOND LIPTON INDIA LTD HLL bought 8 lakh shares of BBLIL from UTI at Rs 350.35 per share (At a premium of 9.5% of the ruling market price