Insider Trading - a Trade of Secrets

         TOPIC: INSIDER TRADING: A TRADE OF SECRETS

Name of the author: Shabnam Virdi

(Assistant Prof. in Commerce)

Hansraj Mahila Maha Vidyalaya, Jalandhar

Email ID:  virdi_shabnam@yahoo.in

Contact no.  95016-27139

Title of the paper: INSIDER TRADING: ATRADE OF SECRETS

ABSTRACT:

The practice of insider trading is related with buying and selling of securities by such a person who has access to the information which is material and non-public. In other words, it is a malpractice wherein the securities of a company are undertaken by those people to whom, because of their work, have access to the information which is not available to general public. Insider trading is unfair from the point of view of other stock holders because they do not have access to important but unrevealed insider information. Insider trading harms the security market in number of ways and it is discouraged by various regulatory bodies of different countries. In India too, SEBI highly discourage insider trading in order to promote fair trading securities in stock market. The objectives of this paper are to discuss the case studies regarding Insider trading and to bring its harmful effects into light.

MEANING:

 Insider trading is a malpractice in which people; who has access to the non-public information deal with a company’s securities. In other words, people who do have access to the strategic information about the company, may use this information for dealing in company’s stock, this practice is called insider trading. It is the use of confidential information about a business which is gained through any relation in a company, to buy\or sell stocks based on the private knowledge that the value will go up or down.

WHO IS AN INSIDER?

An insider would be key employee, director, or executive, majority stockholder, company’s lawyers and accountants. It can be said that an insider is anyone who has a fiduciary relationship with the organisation. In other words, an insider is anyone who is privy to information that is not available to general public.

ESSENTIAL OF INSIDER TRADING

• A person must be an “INSIDER” or a “CONNECTED PERSON” as per SEBI Regulations.
• The information which has been used to do trade must be “Price Sensitive Information”.
• That information should not have been unpublished yet.
• By using the price sensitive, unpublished information, the insider or connected person earns the benefit.

HARMFUL EFFECTS OF INSIDER TRADING

Insider trading influences the trade in securities in a number of ways. It adversely affects the function of stock markets.

• Insider trading is a form of stealing. A practice in which businessmen steal from the weak. It damages the entire system of stock market functioning. On the whole, the efficiency of the market is destroyed.
• Confidence of investors is eroded. When such a thing takes place in the market, then true investors lose their interest in the trade.
• The raising of capital is made more difficult. It is not less than a fraud.
• There is a willing seller who would have sold anyway. It is caveat emptor in the marketplace.
• When the perception of unfairness takes place in the minds of investors, being playing on safe side they sell their holdings, leading to disinvestment due to which the international reputation of the market suffers.
• Biggest difficulty created by insider trading is a lack of faith in exchange markets where these illegal trades take place.
• Insider trading is a betrayal of trust that exists between a company and its investors. By acting on the information that shareholders do not have access to, officers of an organisation are acting purely in their self interest.

ARGUMENTS IN FAVOUR OF INSIDER TRADING

• Insider trading acts as a price accelerator. It brings the price of securities to their proper level more quickly than would otherwise. It is good for forcing information on to the market".
• Insider trading is beneficial because it provides an additional incentive to management to be more entrepreneurial in running the companies that they control.
• Insider trading is good for the market as it provides increased activities to the market and it drives the market.

CASE STUDY: 1 HLL VERSUS SEBI

This controversy started when Hindustan Liver Ltd., a subsidiary of Unilever, purchased 8,00,000 shares of BBLIL(Brooke Bond Lipton India Ltd.) from UTI just 25 days before the HLL-BBLIL merger which was announced on April 19,1996. It was the buzz news of that time where one party was the capital market regulator (SEBI) and another was a subsidiary of Unilever (HLL).

 STEPS OF SEBI:

• SEBI, who was suspecting insider trading in this transaction held on March 25,1996, conducted inquiries and in August, 1997, It issued a show-cause notice to the  chairman, all Executive Directors, the Company Secretary.
• In March, 1998, SEBI passed an order charging HLL with insider trading.
• SEBI directed HLL to pay compensation to UTI.
• It started criminal proceedings against 5 common Directors of HLL and BBLIL.

ALLEGATION:

SEBI claimed the presence of prima facie evidence that company was indulged in insider trading through the use of “unpublished price sensitive information” prior to its merger with BBLIL. SEBI found HLL guilty on the grounds that HLL bought shares from UTI, knowing that HLL was going to merge with BBLIL. In this way, HLL was using “unpublished” and “price sensitive” information to trade.