Insider Trading (sebi)
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INSIDER TRADING
What is Insider Trading? Securities trading by insiders based on material non public information in violation of a fiduciary or similar duty of trust and confidence to the company issuing the security, to the company’s shareholders or to the source of information
Benefits of Insider Trading to Insiders
Make Profits - James O’Hagan made a profit of more than $4.3 million
Avoid Losses - Martha Stewart avoided a loss of $45, 673
Who are Insiders? Types of Insiders Primary Insiders
Secondary Insiders
Classic Constructive Corporate Insider Insider
Tipee
Accidental Insider
PRIMARY INSIDERS Classic Corporate insiders Directors Officers Shareholders holding substantial no. of shares (10%)
PRIMARY INSIDERS…contd. Constructive insiders Persons who are not employed by the corporation but receive confidential information from a corporation while providing services to the corporation. e.g. professional advisers, lawyers, investment bankers
SECONDARY INSIDERS Accidental Insiders Not liable for insider trading unless their behavior proves otherwise
SECONDARY INSIDERS Tippee Tipper
Tippee material price sensitive information
No direct fiduciary relationship to the company or its shareholders Tippee assumes a fiduciary duty to the shareholders of a corporation not to trade in securities if the tippee knows or should have known that the tipper has breached a fiduciary duty Dirks v. SEC
Who are Insiders? SEBI Defn. A person who is or was connected to a company or deemed to have been connected with the company, and is reasonably expected to have access to unpublished price sensitive information in respect of securities or who has received or has had access to such unpublished price sensitive information.
Insider - SEBI Defn Connected Person
Deemed to be Connected Person
Director
Companies under the same management
Officer
Specified Intermediaries
Professional relationship with the company
Director/employee of public financial institution Official/employee of an SRO Relative of the above Banker to the company Relatives of connected persons Entities where connected persons/deemed to be connected persons have > 10% interest
Who are Insiders? Should corporates be included as Insiders? -
Some jurisdictions cover only individuals
-
Subjecting corporates to sanctions motivates them to introduce higher standards
Violation of fiduciary a duty The corporate insider by accepting employment has made a contract with the shareholders to put the shareholders interest before their own in matters related to the corporation. A duty to disclose inside information does not arise merely by possession of the information but by the existence of a fiduciary duty
What is material price sensitive information? SEBI Defn. Periodical financial results of a company Intended declaration of dividends (both interim and final Issue of securities or buy back of securities Any major expansion plans or execution of new projects Amalgamation, mergers or takeovers Disposal of whole or substantial part of the business Any significant change in the policies, plans or operations of the Company
What is material price sensitive information?……….contd. In the US Information of such a nature that someone who has inside knowledge of it could be expected to trade successfully in the securities in question and make a profit or avoid losses Malaysia/Singapore Information that a reasonable person would expect to have a material effect on the price of securities
Misappropriation Theory Anyone who misappropriates (steals) information from their employer and trades on that information in any stock (not just their employers stock) is guilty of insider trading Misappropriation theory is a part of US Law Can also be found in Indian Law (Code for Prevention of Insider Trading by specified intermediaries) US v. James O’Hagan
Methods of prevention of Insider Trading
Disclosure of interest by corporate insiders Listed companies Persons holding more than 5% of the shares/voting rights (if change exceeds 2% of total voting rights) Directors and Officers (if change exceeds Rs. 5 lakhs/25000 shares/1% of capital
Other entities Initial statement of holding Periodic statement of holding
Methods of prevention of Insider Trading
Disclosure of Price Sensitive Information - Different jurisdictions – different methods
1. By transmission of the information to a news agency 2. By dissemination of the information by the stock exchange
Methods of prevention of Insider Trading……contd.
Limited access to price sensitive information “Need to know basis”
Chinese Wall
Separate inside areas from public areas Bringing over the wall
Methods of prevention of Insider Trading……contd.
Trading window facility Decided by the company closed during the time price sensitive information is un published Opened 24 hours after the information is made public Exercise of ESOPs allowed
Methods of prevention of Insider Trading……contd. Minimum holding period Securities to be held for minimum period of 30 days to be considered as investment Also applies to IPO allotment (30 days from the date of allotment) Can be waived of only in the case of personal emergency Issues in the case of derivatives
Methods of prevention of Insider Trading……contd
Restricted listed only applicable to specified intermediaries
Pre-clearance of trades All directors / officers / designated employees to pre – clear their trades Pre-clearance to be given by Compliance Officer Valid for one week
Methods of prevention of Insider Trading……contd.
Pre-clearance of trades/Restricted Prevents Front Running
Pre – clearance vis-a vis Research Ananlysts
Legal v/s Illegal Insider Trading
Legal Insider Trading - Trading after due disclosures - Trading by accidental insiders - Trading by tippees without a fiduciary duty
Insider Trading - Trading in violation of the rules & regulations - Trading by tippee knowing that the tipper is violating a fiduciary duty
Why forbid Insider Trading?
A Company’s information is its own propertyothers should not profit from it It disrupts market efficiency Unfair competition to speculators outside the company It undermines investor confidence in the fairness and integrity of the securities market
US
Penalties
Civil Penalties 4. 3 times profit made/loss avoided 5. Controlling persons -3 times profit made/loss avoided or $1 million (higher) 6. Injunctions Administrative Penalties Cease and desist order
Penalties Criminal Penalties
Natural persons - Fine upto $5 million and/or 20 yrs imprisonment Other entities – fine upto $25 million
Penalties In India – for violation of code of conduct By the organisation Disciplinary action Wage freeze Suspension Monetary penalty By SEBI Unlimited Powers – ANY action
THANK YOU
What is Insider Trading? Securities trading by insiders based on material non public information in violation of a fiduciary or similar duty of trust and confidence to the company issuing the security, to the company’s shareholders or to the source of information
Benefits of Insider Trading to Insiders
Make Profits - James O’Hagan made a profit of more than $4.3 million
Avoid Losses - Martha Stewart avoided a loss of $45, 673
Who are Insiders? Types of Insiders Primary Insiders
Secondary Insiders
Classic Constructive Corporate Insider Insider
Tipee
Accidental Insider
PRIMARY INSIDERS Classic Corporate insiders Directors Officers Shareholders holding substantial no. of shares (10%)
PRIMARY INSIDERS…contd. Constructive insiders Persons who are not employed by the corporation but receive confidential information from a corporation while providing services to the corporation. e.g. professional advisers, lawyers, investment bankers
SECONDARY INSIDERS Accidental Insiders Not liable for insider trading unless their behavior proves otherwise
SECONDARY INSIDERS Tippee Tipper
Tippee material price sensitive information
No direct fiduciary relationship to the company or its shareholders Tippee assumes a fiduciary duty to the shareholders of a corporation not to trade in securities if the tippee knows or should have known that the tipper has breached a fiduciary duty Dirks v. SEC
Who are Insiders? SEBI Defn. A person who is or was connected to a company or deemed to have been connected with the company, and is reasonably expected to have access to unpublished price sensitive information in respect of securities or who has received or has had access to such unpublished price sensitive information.
Insider - SEBI Defn Connected Person
Deemed to be Connected Person
Director
Companies under the same management
Officer
Specified Intermediaries
Professional relationship with the company
Director/employee of public financial institution Official/employee of an SRO Relative of the above Banker to the company Relatives of connected persons Entities where connected persons/deemed to be connected persons have > 10% interest
Who are Insiders? Should corporates be included as Insiders? -
Some jurisdictions cover only individuals
-
Subjecting corporates to sanctions motivates them to introduce higher standards
Violation of fiduciary a duty The corporate insider by accepting employment has made a contract with the shareholders to put the shareholders interest before their own in matters related to the corporation. A duty to disclose inside information does not arise merely by possession of the information but by the existence of a fiduciary duty
What is material price sensitive information? SEBI Defn. Periodical financial results of a company Intended declaration of dividends (both interim and final Issue of securities or buy back of securities Any major expansion plans or execution of new projects Amalgamation, mergers or takeovers Disposal of whole or substantial part of the business Any significant change in the policies, plans or operations of the Company
What is material price sensitive information?……….contd. In the US Information of such a nature that someone who has inside knowledge of it could be expected to trade successfully in the securities in question and make a profit or avoid losses Malaysia/Singapore Information that a reasonable person would expect to have a material effect on the price of securities
Misappropriation Theory Anyone who misappropriates (steals) information from their employer and trades on that information in any stock (not just their employers stock) is guilty of insider trading Misappropriation theory is a part of US Law Can also be found in Indian Law (Code for Prevention of Insider Trading by specified intermediaries) US v. James O’Hagan
Methods of prevention of Insider Trading
Disclosure of interest by corporate insiders Listed companies Persons holding more than 5% of the shares/voting rights (if change exceeds 2% of total voting rights) Directors and Officers (if change exceeds Rs. 5 lakhs/25000 shares/1% of capital
Other entities Initial statement of holding Periodic statement of holding
Methods of prevention of Insider Trading
Disclosure of Price Sensitive Information - Different jurisdictions – different methods
1. By transmission of the information to a news agency 2. By dissemination of the information by the stock exchange
Methods of prevention of Insider Trading……contd.
Limited access to price sensitive information “Need to know basis”
Chinese Wall
Separate inside areas from public areas Bringing over the wall
Methods of prevention of Insider Trading……contd.
Trading window facility Decided by the company closed during the time price sensitive information is un published Opened 24 hours after the information is made public Exercise of ESOPs allowed
Methods of prevention of Insider Trading……contd. Minimum holding period Securities to be held for minimum period of 30 days to be considered as investment Also applies to IPO allotment (30 days from the date of allotment) Can be waived of only in the case of personal emergency Issues in the case of derivatives
Methods of prevention of Insider Trading……contd
Restricted listed only applicable to specified intermediaries
Pre-clearance of trades All directors / officers / designated employees to pre – clear their trades Pre-clearance to be given by Compliance Officer Valid for one week
Methods of prevention of Insider Trading……contd.
Pre-clearance of trades/Restricted Prevents Front Running
Pre – clearance vis-a vis Research Ananlysts
Legal v/s Illegal Insider Trading
Legal Insider Trading - Trading after due disclosures - Trading by accidental insiders - Trading by tippees without a fiduciary duty
Insider Trading - Trading in violation of the rules & regulations - Trading by tippee knowing that the tipper is violating a fiduciary duty
Why forbid Insider Trading?
A Company’s information is its own propertyothers should not profit from it It disrupts market efficiency Unfair competition to speculators outside the company It undermines investor confidence in the fairness and integrity of the securities market
US
Penalties
Civil Penalties 4. 3 times profit made/loss avoided 5. Controlling persons -3 times profit made/loss avoided or $1 million (higher) 6. Injunctions Administrative Penalties Cease and desist order
Penalties Criminal Penalties
Natural persons - Fine upto $5 million and/or 20 yrs imprisonment Other entities – fine upto $25 million
Penalties In India – for violation of code of conduct By the organisation Disciplinary action Wage freeze Suspension Monetary penalty By SEBI Unlimited Powers – ANY action
THANK YOU
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