Why it is news?
SEBI’s lens on ace investor and India’s Warren Buffett, Rakesh Jhunjhunwala
What is Insider Trading?
- Insider trading is the buying or selling of a publicly-traded company’s shares/debt papers by someone who has confidential information about that shares/debt papers. Insider trading is defined as a malpractice wherein trade of a company’s securities is undertaken by people who by virtue of their work have access to the otherwise non-public information/confidential information which can be crucial for making investment decisions.
- When insiders, e.g. key employees or executives who have access to the strategic information about the company, use the same for trading in the company’s stocks or securities, it is called insider trading and is highly discouraged by the Securities and Exchange Board of India to promote fair trading in the market for the benefit of the common investor.
Who is an insider?
- An insider is a person who possesses either access to valuable non-public information about a corporation or ownership of stock equaling more than 10% of a firm’s equity. This makes a company’s directors and high-level executives insiders.
The mechanism to prevent insider trading
- According to SEBI Promoters will be held responsible for violation of insider trading norms, if they possess unpublished price-sensitive information (UPSI) regarding the company without any “legitimate purpose“.
- Legitimate purpose – Sharing of the UPSI by an insider with partners, collaborators, lenders, customers, suppliers, merchant bankers, legal advisors, auditors, insolvency professionals or other advisors or consultants, provided that such sharing has not been carried out to evade or circumvent the prohibitions of these regulations.
- The board of directors to maintain a digital database containing the names of such persons or entities with whom the information is shared.
- A promoter who does not hold any position on the board will not be considered a person having “Legitimate Purpose” to hold UPSI.
- Advisors who need access to UPSI needs to be informed that the information shared with them is insider information and they should apply it only for the purpose meant.
- Identification data of recipients must be maintained.
Cases under spotlight
- Cyrus Mistry, the former Chairman of Tata Sons, had alleged that information related to Tata group companies was being shared with Ratan Tata.
Recommendation of Kotak committee
- The committee has recommended flow of unpublished price sensitive information (UPSI) shall be considered for ‘legitimate purpose’, and not an offence under the SEBI (Insider Trading) for those who:
- Is part of the promoter group.
- Has a nominee director on the board.
- The information should be pursuant to a formal agreement in accordance with the regulations.
- Communication of information must comply with the Insider Trading Regulations.