What is Insider Trading?

Insider Trading, also known as insider dealing, is the illegal buying and selling of company shares by people who have special information such as equity and bonds by the insiders of a company, which includes the employees, directors, executives, and promoters.

Concept of UPSI 

UPSI (Unpublished Price Sensitive Information) refers to any information that is not generally available and is likely to affect the price of a security. This information becomes generally available and is likely to affect the price of the security when it becomes available to the public.

A Connected Person is someone who has a connection to UPSI, which means they will be in possession of the organization's secrets. This could include people like auditors, consultants, or even family members.

SEBI regulations state that someone who is connected to the company or has access to its confidential information is considered an insider.

A connected person is someone who has somehow had a relationship with the company during the six months prior to insider trading. This could be someone who is a company director, employee, or close relative of one, or a lawyer or banker who has worked with the company or interacted with the stock exchange or asset management company.

A brief overview of SEBI (Prohibition of Insider Trading) Regulations, 2015

SEBI insider trading regulations are as follows:

• Communication or procurement of unpublished price-sensitive information
• Trading when in possession of unpublished price-sensitive information
• Submission of Original Information to the Board
• Protection against retaliation and victimization

SEBI Regulations prohibit an insider from trading in the securities of a company listed on any stock exchange if they have knowledge of unpublished price-sensitive information.  Any person who has UPSI must not tell others about it or reveal it to the people who already have it.

Penalties

Insider trading is specifically prohibited under Section 12a(d) of the SEBI Act 1992 and Section 15g imposes a fine of ten thousand to twenty-five crore rupees, or a penalty equal to three times the profit made from such trading,

Section 195 of the Companies Act, 2013 forbids trading on inside information and states that a company official who is found guilty of insider trading may be sentenced to five years in prison and/or fined up to Rs. Twenty-five million rupees.

Examples

Rajkumaran Rajaratnam is a former Sri Lankan-American hedge fund manager and founder of Galleon Group, a New York hedge fund management firm. On October 16, 2009, he was arrested by the FBI for insider trading, which nearly caused the Galleon Group to fold. On May 11, 2011, was convicted of all 14 counts of conspiracy and securities fraud. On October 13, 2011, Rajaratnam was sentenced to 11 years in prison and fined more than $150 million in criminal and civil terms.

Rajat Kumar Gupta is an American Indian businessman and convicted criminal who, as CEO, was the first foreign-born General Manager of the management consulting firm McKinsey & Company from 1994 to 2003. In 2012 he was convicted of insider trading and spent two years in jail. Rajat Gupta was convicted in June 2012 on insider trading charges of four criminal felony charges in a galleon scandal conspiracy and securities fraud. He was sentenced in October 2012 to two years in prison, an additional year on supervised release, and ordered to pay $5 million in fines.

Conclusion

While insider trading may be existing for a very long time, the government is enforcing strict regulations to ensure people do not indulge in illegal trading and unfair practices. The fines and penalties levied for those involved in insider trading also serve as a deterrent to an individual who has access to unpublished price-sensitive information. Most publicly listed companies try to ensure strict compliance with the PIT regulations which include providing awareness training to all relevant staff and adhering to the reporting requirements as per the regulations. Regular compliance audits also provide assurance to the board members, senior management, and most importantly the regulators, that the company is compliant with all applicable regulations.