Insider trading laws in india
In a Company, Insider Trading is trading by Insider and Insider do not mean employees or key managerial person of a company, insider could be connected to the information of the company and securities of the company.
Trading by insiders while in possession of unpublished price sensitive information thereby possibly gaining unfair advantage on the basis of information is received is called Insider Trading. Prevention of insider trading is not a new concept to India.
However there were no provisions in The Companies Act,to deal with the insider trading. In India, the journey of regulating insider trading began in with the enactment of the Securities and Exchange Board of India Insider trading laws in india and the regulation insider trading laws in india there under called the SEBI prohibition of insider trading Regulation In Novemberthe Securities and Exchange Board of India decided to substantially overhaul the regulations in the wake of the recommendations of Justice N.
Part II of insider trading laws in india Paper describes concept of insider trading and regulatory framework in India. Part III traces the various theories across the world, which governs insider trading. It is argued that, there is a need to regulate insider trading in private companies.
Currently, In terms of central made law. There are two Acts, which are having provisions an insider trading in securities market. Sinceit has been delegating clearly provided a function of SEBI to prohibit insider trading in securities market. Ina new Act comesThe Companies Act, which incorporates a provision sec and saying insider trading as far as listed company and proposed to be listed company concerned are going to be regulated by SEBI.
It defines in the explanation what does insider trading mean and it says act of subscribing, buying, selling, dealing or agrreing to subscribe, buy, sell or deal in any securities by any director or key managerial personnel or any other officer of a company either as principal or agent if such director or key managerial personnel or any other officer of the company is reasonably expected to have access to any non-public price se nsitive information in respect of securities of company and act of counseling about procuring or communicating directly or indirectly any non-public price —sensitive information insider trading laws in india any person.
It also defines price sensitive information. It says any information which relates directly or indirectlyto a company and which if published is likely to materially affect the price of securities of the company.
In regulation, Trading means and includes subscribing, buying, selling, dealing, or agreeing to subscribe, buy, sell, deal in any securities.
If we see regulation dealing in securities was defined. The only difference is earlier dealing used trading, now trading use dealing. But per se in concept is not a diversion.
Insider Trading is trading by insider and insider do not mean employees or key managerial person of a company, insider could be connected to the information of the company and securities of the company.
In own words Insider Trading means invest today on tomorrows news i. X Limited is a Pharmaceutical Company in India. Equity shares of X Limited are listed in the stock exchange. X Limited have been trying to get permission to sell one of his drug in United States for which it has made the application which is pending with the United State Authority for sometime.
Authority insider trading laws in india or may not grant the permissionif the permission is granted, the sales and profit is x limited will multiply means, this permission would definitely triggered an movement in the share price of x limited.
In this example before the permission is actually granted, some of the senior executive of x limited would aware that the U. Authority are expected to grant the permission shortly.
They were also aware that once permission is receivedshare price of x limited will go upso they had already bought the shares at the level of rs. These senior executive sold the shares and make profits seems very easy money making but these gains on the basis of unpublished price sensitive information which is unethical. When we see the history, the companies act always mandated disclosures on appointment of a directors or an officer of a company.
There were various committees Reports. All the committees in one way or another mandated various disclosures to the made by the people who are connected to the company and these people who were prominently and who were in a position to access some information or who were in the decision making capacity with in a company. So till now in the jurisprudence insider trading is probably an offence which can be committed by high profile people connected with the people and can take advantage of that information.
Since that time company law mandated disclosures not only the people with in the company, but the people outside the company or the people who receiving such information.
Classical theory of fiduciary duty-Under the classical theory, a corporate insider such as an officer or director violates rules by trading in the corporations securities on the basis of material non public information about the corporation. Misappropriation theory-Misappropriation theory is designed to protect the insider trading laws in india of the securities markets against abuses by outsiders to a corporation who have access insider trading laws in india confedential information that will affect the corporations security price when revealed, but who owe no fiduciary or other duty to that corporations shareholders.
In events of insider trading Harvard business reviewprof. Insider trading is the only way properly to compensate the entrepreneur who perform the function of innovation so necessary to the survival and growth of a free enterprise economy.
Knowledge of specific events or of the probability of future events that will ultimately cause a change in share prices. Insider trading does not reward efficient management as such it rewards the possession of confedential reside information, whether the information is favourable to the prospects of the corporation or not.
It leads to loss of efficiency due to the incentives that are created for the insider to conceal information dissemination missed information above the corporation which he engages In trading.
So the provision, prima insider trading laws in india, suggests that it is uniformly applicable to all companies — regardless of whether they are public or private, listed or unlisted. However, a closer reading of the provision reveals another story. Considering the proliferation of conflicting interpretations, insider trading laws in india may be useful to consult the reports of insider trading laws in india drafting committee for the Companies Bill to gain an insight into the true legislative intent behind the provision.
This suggests that, contrary to popular perception, Section of the Companies Act was perhaps never intended to extend the insider trading prohibition to private companies but merely to bolster the existing regime of insider trading in India. Nonetheless, given the amorphous language of Sectionthere would always be a lingering possibility of dragging private companies within the ambit of the provision. Insider trading laws in india clarification from the Ministry insider trading laws in india Corporate Affairs can dispel this ambiguity, putting the speculation to rest.
Unfortunately, such a clarification does not seem to be forthcoming in the near future, since, as recently as in Junethe Ministry of Corporate Affairs released a notification exempting private companies from certain provisions of the Companies Act But no such proposal was made with respect to Section and the Ministry of Corporate Affairs once again missed an opportunity to clarify the issue. It is believed that stock exchanges exist to provide a fair, level playing platform where the potential buyers and sellers of securities meet to enter into a transaction.
Therefore, insider trading needs to be prohibited to preserve investor confidence and ensure the efficiency of the financial market. There is no price discovery if the securities of a company are not listed and hence there cannot be a risk of speculative trading or misuse of corporate information involved in the transaction of securities of a private company.
When viewed from this standpoint, the regulation of insider trading in private companies is not entirely devoid of merit. In fact, a closer look at the difference between a private and public company would reveal that the risk of insider trading is perhaps even greater in a private company than a public one.
Public companies in India operate under a strict disclosure regime. Shareholders in a public company are generally familiar with the annual reports which provide extensive information about the company, its financial position, new developments, etc.
Further information about the company can also be accessed on the website of the stock exchange where it is listed. Accordingly, the members of the public insider trading laws in india the shareholders are insider trading laws in india at a level-playing field in terms of the information that is known about the company. Essentially, this means that the possibility of insider trading in a public listed company would arise only at times when there is particular price-sensitive information which has yet insider trading laws in india been disclosed to the public and is known only to some officials of the company.
Given the elaborate and extensive disclosure requirements, it is argued that such undisclosed information is a rare commodity in the context of public companies. Unlike public companies, private companies have scant reporting and disclosure obligations and at any given point of time, the information about the company is available only to the directors and persons in authority or employees depending upon their varying levels of responsibility within the insider trading laws in india.
This would mean that a member of the public intending to buy securities of a private company from an existing shareholder is bound to be at a huge disadvantage in terms of access to information and the shareholders are quite insider trading laws in india at the mercy of the directors.
In the case of listed companies and those intending to get listed, Section of the Companies Act conveniently delegates the power of enforcement of Section to the SEBI while the authority responsible for enforcing the rule in the context of private companies is still shrouded in mystery. The method of enforcing or detecting insider trading is also similarly vague and unclear. Listed companies have a centralized enforcement of insider trading laws whereby the SEBI detects cases of insider trading based upon unusual price and volume activity.
In the context of private companies, absent a trade on stock exchanges, there is no understanding on how the regulatory authorities will oversee the enforcement of the provision and detect cases of violation. Through the inclusion of insider trading provisions in the Companies Actthe legislature has raised more concerns than it ever hoped to address. Section of the Act is a site of complete confusion and uncertainty regarding I - the scope of the application itself and II - in the event that the provision is finally made applicable to private companies — regarding the mechanism insider trading laws in india enforcing the statutory restrictions.
Under the law as it stands today, the director of a private company entering into any transaction of securities of his company is potentially engaging in insider trading which could expose him to the liability of a heavy fine or maybe even imprisonment.
Sodhi  The Companies Act, Act 18 of ,s. Umedbhai Patel, 81 Bom L. Sodhi  Section 1 reads:. Your email address will not be published. Notify me of follow-up comments by email. Notify me of new posts by email. Author Profile Legal India Admin.
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