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Keep out of insider tradingA look at whatconstitutes unfair practice

and how you can ensureyou always play fair inthe eyes of the law.

friends aboutstocks the as-set manage-

mentcompanywas planningto buy, thushelping them front run the stocks andmake profitable trades. SEBI stepped

the case of hedge fundGalleon, which specialised in

trading stocks of technology compa-nies such as IBM and Google Inc. Raj-

to keep their employees from acting onsuch information. While some disal-

Srividhya Sivakumar

Your investment banker friend callsup and tells you to buy a particularstock. He says he knows of a big dealthe company is going to make in a fewdays. Are you thinking easy money?Well, think again. It could also becomea case of insider trading.

Getting price-sensitive tips on acompany, its financials or a probableM&A from colleagues, broker or in-vestment banker friend, before it is outin the public domain can become apotential minefield. For that matter, inyour capacity as an employee of anorganisation, privy to its impendingorder win or merger plan, you cancome in harms way even if you sharethese little nuggets with your traderfriend or act on them.

With allegations of insider trading,front-running and price rigging mak-ing the rounds once again in the mar-kets, heres a look at what constitutesinsider trading and what puts it on thewrong side of the law.

INSIDERS JOB

But first, who is an insider? An insiderwould be a person who is, or was, con-nected to the company and who is rea-sonably expected to have access to

unpublished price-sensitive informa-tion in respect to the securities of thatcompany.

That said, the law doesnt implicatesuch insiders on possessing, buyingand selling their companies shares, aslong as they make adequate disclosureabout the transaction to the regulatorand the exchanges on which the sharesare listed. Both NSE and BSE carrysuch disclosures on their Web site.

There are, however, punishments

and penalties if the insiders fail toabide by the rules laid down for them.For instance, Adlabs founder Manmo-han Shetty was found guilty of insidertrading in June this year by SEBI. Hewas slapped a fine of Rs 1 crore onviolation of the 24-hour embargo ondirectors, officers or designated em-ployees of a company from undertak-ing any transactions when importantcorporate announcements are made.

Some time ago, there was also thecase of a dealer with HDFC MutualFund who passed on information to his

low their employees from taking directequity exposures, others allow such anexposure only after the go-ahead fromthe companys compliance office.

For that matter, mutual funds andprop desk dealers arent even allowed

to take mobile phones inside the deal-ing room. But that leaks occur despitesuch measures, observers say, high-light that people are and will only be asgood as they want to be.

GLOBAL SIMILES

The insider trading malaise plagueseven the highly-regulated developedmarkets. Take the case of Sam Waksaland Martha Stewart (2001), who actedon insider information to cut losses on

their ImClone Systems shares or thecase of a ring of bankers and fund man-agers, including ex-employees of UBS,Bear Stearns and Morgan Stanley,which was busted in 2007 by the SECfor illegal trading ahead of mergersand analysts stock-tips.

There were instances of insidertrading in Enron too, with some of thetop officials in the know of the compa-nys real state of affairs selling theirshares much before the whole issuebecame public.

Among the more recent instances is

in and meted out penalty to the partiesinvolved.

While SEBI has, over the years,tightened the noose around potentialviolators, information leaks are notgetting plugged. Traders and investors

who have tracked equities across mar-ket cycles would probably know thatsuch leaks arent really new.

Unfortunately, these abound in themarkets most of the time, as can beseen in the running up or falling ofcertain stocks before a significantevent winning of a big order, acqui-sition, or even results.

REGULATORY HAZARDS

More often than not, regulating such

illegal insider trades isnt easy. It needsa full-fledged team of analysts poringover trade patterns to even pin-pointthe possibility of illegal insider tradesbeing done.

While SEBI on its part is trying hardto level the playing field for all in-vestors, a large part of its efforts alsodepend on the quality of corporategovernance in companies.

Note that brokers, investment bank-ers and financial intermediaries whoby virtue of their profession qualify asinsiders have a stringent set of rules

aratnam, the funds founder, wasalleged to have used insider informa-tion, procured through his contacts inthe technology industry, to earn mil-lions of dollars in profits for his fund.

Ridiculous as it may sound, there

was also the case of a company thathacked into computers to get themuch-priced insider information!

A Hong Kong firm Blue Bottle madeabout $2.7 million by trading on in-formation it had gathered by directlyhacking into computers to view pressreleases of companies before theywere published.

MIND YOUR SOURCE

The case of insider trading is a much-

debated one. While some argue againstit, as it puts a handful of investors at anadvantage, there also are those thatargue in its favour, saying insider trad-ing makes the market more efficient.They go on to say that investors shouldbe encouraged to dig out informationon companies in any way they can!

But as long as SEBI doesnt say so,you may be better off knowing thecredibility of your source. Dont try toinadvertently string your sourcealong, as it can put you in serious trou-ble.