Rules come along with those seeking to dodge them. One of the most prolific examples of such dodging artistry in the financial world is in the world of insider trading – India’s most significant financial crime, that has been around since the early 1920s. In a nutshell, insider trading is a broad term used to define the act of utilizing non-public and price-sensitive information, known as Unpublished Price Sensitive Information or UPSI through the purchase or sales of listed securities in the share market.
Hard to trace and with the potential to enable incredible levels of individual profits, regulatory authorities have struggled with this crime for decades. Insider trading leads to a loss of confidence in the functioning of the market, resistance towards investments and an overall adverse effect on foreign investments. Over a period of time, there is a distinct loss in the overall economy.
Regulatory Progression
The first-of-its-kind recommendation for regulatory action against insider trading was witnessed in 1940. Subsequently, in 1948, a report by the Thomas Committee was submitted that required all relevant entities to undertake comprehensive financial disclosure.
Finally, in 1956, the Companies Act, was the stepping stone towards preventing insider trading in India. This act required the directors and other key managerial individuals to maintain a stable record and disclosure of their shareholdings.
Loopholes proliferated and were continually identified and plugged. However, insider trading continued to multiply, and by 1986, the Patel Committee defined and banned, “Trading in the shares of a company by the person who are in the management of the company or are close to them on the basis of undisclosed price sensitive information regarding the working of the company, which they possess but which is not available to others.”[1]
In 1989, the Abdul Hussain Committee recommended that insider trading be made liable under civil and criminal laws. The Securities and Exchange Board of India (SEBI) was tasked with regulation of the Insider Trading risks.
As we celebrate 75 years of stricter controls through SEBI, regulations are continually evolving to ensure compliance and avoid insider trading.
UPSI Misuse
The Hindustan Lever Limited (HIL) vs SEBI case of insider trading was the first successful enactment of action against the crime. The TISCO Case in 1992 (where small quantities of shares were sold just before the announcement of the half yearly results), is considered to have laid the base for formation of the Securities and Exchange Board of India in the year 1992. However, from 1992, regulations have kept evolving to ensure that insider trading crimes would not slip through the cracks. From 2015 to 2019, amendments have been made to close gaps in, which now cover direct and indirect transactions. However, given the headroom and scope, several more amendments are expected to further tighten the requirements tracking international developments.
As a majority, most financial entities and scholars agree on the deception involved in insider trading. The scope of unfair advantage with little to no risk is too high to ignore. Malpractices are frequently carried out through information manipulation or even rumor-mongering that shifts the direction of the investors. Compounding the dilemma is the fact that insider trading and disclosure of UPSI is difficult to prove and can escape under the radar. However, as witnessed across the globe, the repercussions of insider trading can be devastating toward the economy and there is little choice but to continue to evolve and tighten compliance with the regulations further.
References:
[1] Das, Sonakshi. “The Know-All of Insider Trading – Decades of Corruptive Prevention.” Academike, 15 Jan. 2015, www.lawctopus.com/academike/know-insider-trading-decades-corruptive-prevention/#_edn8.
