Insider Trading Compliance – Corporate governance of highest standard

‘Insider trading tells everybody at precisely the wrong time that everything is rigged, and only people who have a billion dollars and have access to and are best friends with people who are on boards of directors of major companies – they’re the only ones who can make a true buck. Securities fraud generally and insider trading in particular should be eminently deterrable crimes’-Preet Bharara,

American lawyer

What is insider trading?

Insider trading is a malpractice whereby one advantageously exploits unpublished price sensitive information obtained through a privileged relationship i.e. of being an insider for trading in listed securities (bonds, stocks, stock options) for the purposes of making profits (or to avoid losses). This is at a time when the public is unaware of the information. Further, the price of securities would have
been materially altered if the information were disclosed or available to all.

The insiders can be a corporate officer or Director from the board of directors, employee, controlling shareholder or someone who has access to the non-public information from company sources.

Why is it wrong?

In simple terms, would you play a game where you had equal chances of winning like the other players or would you prefer to participate in a game which was rigged, and the winner was predetermined? Obviously, the former! Now consider a situation, if you had no information of the rigging and frequently played such a rigged game, you would end up losing often. Since, no one likes
losing all the time, you would gradually stop playing entirely. Let’s now understand this in the context of insider trading violations as below.

Insider trading violates the fundamental assumption of efficient capital market system. If insider trading not prevented, persons with insider information would consistently make profits, while the rest of the uninformed public would lose money. Thus overtime, the investors would stop trading in the capital markets. The companies would be unable to raise capital in the primary and secondary
markets. The entire market system would be defeated!

Case studies:
Sebi fines director of Acclaim Industries ₹42 lakh for insider trading violation

According to SEBI, Mr. Abhishek Mehta, managing director and promoter of the firm at the time of the violation had flouted trading norms by selling shares and reducing his shareholding, at the time of possessing unpublished price-sensitive information.The incident came to light after a probe was conducted during the period Jan-Dec 2012, when the board had approved the merger of with Database Software Technology Pvt Ltd (DSTPL) in January 2012. However, subsequently, in Feb 2012, the company decided to cancel the merger and did not reveal the decision to the stock exchange. In the meanwhile, Mehta sold shares in the company
booking profits, when the public was unaware of the merger cancellation. In an order dated January 25, 2019, SEBI held him guilty of contravening PIT and thereby imposed fine on him.

The judgement in case of Rajat Gupta, former Goldman Sachs board member

Gupta was charged by the US Securities and Exchange Commission with violation of insider trading norms and convicted in 2012 by a federal jury. The charge was that Gupta had leaked confidential information about board room meetings relating to Goldman Sachs and P&G to Raj Rajaratnam, head, Galleon Group, a hedge fund. The latter had then traded on such information, hedged himself against price fluctuations and booked profits. The timing of the information leak and the fact that it was revealed before it was available publicly, led to Gupta being held guilty of insider trading.

This is proof of the fact that along with jail term, there are stringent monetary fines that follow violation of insider trading regulations. It must be remembered that the insider trading regulation is
not a paper tiger.

Thus, why play with fire? Self-regulation is best. Companies must endeavour to follow the highest standards of corporate governance, thereby building investor confidence that the securities are fairly priced, and the trading is being carried out without any undue advantage to any. This is the most sustainable way to create shareholder value in the long run. A huge help in achieving this would be to have a digital insider trading software that would capture all the relevant information in the form of a database on real time basis, along with the relevant legal provisions. Recognising this, SEBI has mandated the use of a digital software to monitor and track compliance with insider trading rules. Thus, it is in the best interest of forward-looking companies to proactively invest in an insider trading compliance software to avoid any scope of fines or penalties.

Leave a Reply

Your email address will not be published. Required fields are marked *