Insider trading is a term subject to many
definitions and it encompasses both legal and prohibited activity. Insider
trading is the act of buying or selling company stocks and securities based on
information not known to public. Insider trading takes place legally every day,
when corporate insiders – officers , directors or employees – buy or sell stock
in their own companies within the confines of company policy and the
regulations governing this trading.
Insider trading is considered by many people to be no
different than outright stealing. In nutshell, Insider trading is the buying, selling or dealing in securities of a listed company by a
director. member of a management , employee of the company, or by any other
person such as internal auditor, advisor, consultant, analyst etc. who has
knowledge of material inside information which is not available to general
public.
According to Indian Regulation 3 of SEBI,
Regulations
seeks to prohibit communication and counseling, dealing relating to Insider Trading. According to regulation no insider on his behalf of any other person deal in securities of a company when in possession of any unpublished price sensitive information on communicate, procure or counsel, indirectly or directly any unpublished price sensitive information to any person, who does not deal in securities in possession of such unpublished price sensitive information.
seeks to prohibit communication and counseling, dealing relating to Insider Trading. According to regulation no insider on his behalf of any other person deal in securities of a company when in possession of any unpublished price sensitive information on communicate, procure or counsel, indirectly or directly any unpublished price sensitive information to any person, who does not deal in securities in possession of such unpublished price sensitive information.
Relation 3 of SEBI prohibits companies dealing with
securities of another associate or company while in possession of any unpublished
price sensitive information. Regulation adds connected persons relatives,
companies, firms, trust etc.
There are two Categories of Insiders, Primary
Insiders who are directly connected to the company where as Secondary Insider
are those who deemed to be connected with the company as they are expected to
have access to unpublished price sensitive information.
Power of SEBI
Under the prevalent regulations, the Securities
Appellate Board has been granted power to issue any directions as it deem fit
to protect the interest of investors, and in the interest of the securities
market, and for due compliance with the provisions of the Act, and gives it the
mandate to initiate criminal prosecution against an “insider” under section 24
of the Act, or can give directions.
i. Any
insider who deals in securities in contravention of the above provisions shall
be guilty of insider trading. The SEBI Act provides that any person who is
guilty of insider trading shall be liable to penalty not exceeding rupees five
lakhs.
ii. If SEBI
suspects that any person has violated any provision of these regulations, it
may make enquiries to such persons or any other persons it deems fit, to form a
prima facie opinion as to whether there was any violations of these
regulations. Also the SEBI can appoint one or more officers to inspect the
books and records of insider or any other person. And it shall be the duty of
any person to allow the inspection.
iii. The 2002
amendment empowers the SEBI to issue certain like directing the insider not to
deal in the securities, prohibiting him to deal with the securities,
restraining him to communicate or counsel any person to deal in securities,
declaring the transaction in securities null and void and directing the
adequate compensation to be given to investors.
The above regulations grant SEBI the power to
initiate criminal prosecution against the insider; however, it overlooks the
fact that the criminal prosecution is successful only when the offence is
proved to have been committed by the offender ‘beyond reasonable doubt’.
Present
penalties for insider trading
The SEBI act has basically given two options to the
board:
The first being to refer the complaint for
adjudication and the adjudicator may impose a penalty not exceeding 5 lakhs
rupees. The aggrieved party may prefer an appeal to a Securities Appellate
Tribunal and if necessary to the High Court. The act makes it clear that no
civil court has jurisdiction over the adjudication proceedings.
The second option for the SEBI is to file a criminal
suit against the alleged offender before the court not inferior to the
Metropolitan magistrate or judicial magistrate. The court can impose a fine not
less than 2000 rupees and an imprisonment that shall not be less than one month
but no exceeding 3 years or with both.
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