http://web.sebi.gov.in/acts/insideregu.pdfINSIDER TRADING

Insider Trading is trading of a public company's stock or other securities i.e. as bonds or stock options by individuals with access to non-public information about the company. Normally, trading by corporate insiders such as officers, key employees, directors, and large shareholders is permitted, if this trading is done in a way that does not take advantage of non-public information. But, the term insider trading is frequently referred to a practice in which an insider or a related party trades based on material non-public information obtained during the performance of the insider's duties at the company, or otherwise in breach of a fiduciary or other relationship of trust and confidence or where the non-public information was misappropriated from the company fraudulently.

Definition:Insider Trading is the buying , selling or dealing in securities of a listed company by a director , member of management , employee of the company , or by any other person such as internal auditor , advisor , consultant , analyst etc., who has knowledge of material inside information which is not available to general public.

Insider:According to the Indian stock market regulator, SEBI, "insider" means any person who, is or was connected with the company or is deemed to have been connected with the company, and who is reasonably expected to have access, connection, to unpublished price sensitive information (UPSI) in respect of securities of a company, or who has received or has had access to such unpublished price sensitive information. Inside unpublished price sensitive fact is inside information which only a select few persons know because of their closeness to the company and which has not been publicly circulated.

Categories of insider:There are two categories of Insiders i.e. (I) Primary Insiders who are directly connected to the company. For e.g.: Director, office, employee, shareholders or any person who is related to the company.

(ii) Secondary Insiders are those who deemed to be connected with the company as they are expected to have access to unpublished price sensitive information. For e.g.: subsidiary company, sister concern, merchant bankers, advisors, brokers etc.

PROHIBITION AGAINST INSIDER TRADING:

1. Prohibition of Dealing:

According to Regulation 3, No insider shall counselling on matters relating to insider trading. Either on his own behalf or on behalf of any other person, deal in securities of a company listed on any stock exchange any unpublished price sensitive information.

2. Prohibition on communication:

Communicate or counsel or procure directly or indirectly any unpublished price sensitive information to any person who while in possession of such unpublished price sensitiveInformation shall not deal in securities.

3. Prohibition on counselling :

Counselling is prohibited by any person to be its securities on the basis of unpublished price sensitive information.

MODEL CODE OF CONDUCT FOR PREVENTION OF INSIDER TRADING FOR LISTED COMPANIES:1. Appointment of Compliance Officer:The listed company shall appoint a Compliance Officer senior level employee who shall report to the Managing Director/Chief Executive Officer. The compliance officer shall be responsible for setting forth policies, procedures, monitoring adherence to the rules for the preservation of Price Sensitive Information, pre-clearing; of designated employees and their dependents trades (directly or through respective department heads as decided by the company), monitoring of trades and the implementation of the code of conduct under the overall supervision of the Board of the listed company.2. Duty of employees and directors to preserve Price Sensitive Information:Employees/directors shall maintain the confidentiality of all Price Sensitive Information.Employees/Directors shall pass on such information to any person directly or indirectly by way of making a recommendation for the purchase or sale of securities.3. Handling price sensitive information on Need to know basis:Price Sensitive Information is to be handled on a need to know basis, i.e., Price Sensitive Information should be disclosed only to those within the company who need the information to discharge their duty.

4. Limited access to confidential information:Files containing confidential information shall be kept secure. Computer files must haveadequate security of login and password etc.5. Prevention of misuse of Price Sensitive Information:All directors/officers and designated employees of the company shall be subject to trading restrictions as enumerated below.(I) The company shall specify a trading period, to be called trading window, for trading in the companys securities. The trading window shall be closed during the time the information is unpublished.(II) The trading window shall be opened 24 hours after the information is made public. (III) All directors/officers/designated employees of the company shall conduct all their dealings in the securities of the Company only in a valid trading window and shall not deal in any transaction involving the purchase or sale of the companys securities during the periods when trading window is closed, in or during any other period as may be specified by the Company from time to time.6. Pre-clearance of trades:All directors/officers/designated employees of the company who intend to deal in the securities of the company should pre-clear the transaction as per the pre-dealing procedure as described here under.7. Reporting Requirements for transactions in securities:All directors/officers/designated employees of the listed company shall be required to forward following details of their securities transactions including the statement of dependent family members (as defined by the company) to the Compliance Officer: (a) All holdings in securities of that company by directors/officers/designated employees at the time of joining the company; (b) Periodic statement of any transactions in securities. 8. Penalty for contravention of code of conduct:Any employee/officer/director that trades in securities or communicates any information for trading in securities in contravention of the code of conduct may be penalized and appropriate action may be taken by the company under the Insider Trading Regulation Act, 1992.

Case Study

Dilip pendse v. Sebi This was perhaps the simplest case of Insider Trading which was handled by SEBI and it had no difficulties in punishing the offenders. The facts were that Nishkalpa was a wholly owned subsidiary of TATA Finance Ltd (TFL), which was a listed company. D. P. was the MD of TFL. On 31/03/2001, Nishkalpa had incurred a huge loss of Rs. 79.37 crore and this was bound to affect the profits of TFL. This was basically the unpublished price sensitive information of which Pendse was aware. This information was disclosed to the public only on 30/04/2001. Thus any transaction by an Insider between the period 31/03/2001 to 30/04/2001 was bound to fall within the scope of Insider Trading. DP assed o his information to his wife who sold 2, 90,000 shares of TFL held in her own name as well as in the name of companies controlled by her and her father-in-law. It was very easy for SEBI to prove Insider Trading in this cake walk or vanilla case.