“A STUDY OF THE INSIDER TRADING LAWS IN

INDIA”

Submitted By
ROHAN PATEL
Division – C
PRN – 17010223038
Program – BA LLB

Symbiosis Law School, NOIDA

Symbiosis International (Deemed University)

Under the guidance of

Dr. Mohit Sharma

Faculty,
Company Law-II

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 CERTIFICATE

The Project entitled “A Study of Insider Trading Laws in India” submitted to

the Symbiosis Law School, NOIDA for Company Law-II as part of Internal
assessment is based on my original work carried out under the guidance Dr.
Mohit Sharma from December, 2019 to February, 2020. The research work has
not been submitted elsewhere for award of any degree.
The material borrowed from other sources and incorporated in the submission
has been duly acknowledged.
I understand that I myself could be held responsible and accountable for
plagiarism, if any, detected later on.

Signature of the candidate

Date: February 3, 2020

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 INTRODUCTION
“After the liberalisation policy was taken up by India in 1991, the growth of Capital market started to
increase at a rapid speed. The already existing organisations of the time like the CCI (Controller of
Capital Issues) and the Department of Company Affairs were looking after other aspects which made the
people realised the need for a single authority to regulate and administer the security law in the country.
Keeping this point in mind SEBI (Security and Exchange Board of India) which was earlier established as
an administrative body in April 1988, was given a statutory status under section 3 of Securities and
Exchange Board of India Act, 1992 on 30th January 1992.1 This made SEBI a corporate body, thus
having a separate legal existence.”

Insider trading means the dealing in securities a company on the basis of certain confidential information
relating to the company which is not published or not in the public domain. It classically involves the
breach of a fiduciary duty by the officers of any company or by such connected persons. SEBI is the
regulatory authority in India which deals with such manipulative and deceptive trade practises.

This research paper will be dealing with various aspects of SEBI and will analyse the different functions
and objectives that the carried out by the institution in matters of Insider trading. It will further make a
comparative analysis which will focus on the areas in which the SEBI needs a relook.

INSIDER TRADING AND ITS REGULATION IN INDIA

“Insider Trading generally refers to trading by a person based on inside information. Even though
economists around the world have not yet reached a consensus on whether banning insider trading
enhances market efficiency or not, the regulators all over the world have been attempting to curb insider
trading for a long time now. Laws prohibiting insider trading surely seek to curb the disparity in
information, non-transparency in dealings and erosion of investor confidence, if not enhance market
efficiency.2 In other words insider trading refers to the buying or selling of securities based on
information that are privileged or confidential and are unavailable to the general public.”

Insider trading has been a controversial issue in India as well and is closely monitored by the Securities
and Exchange Commission. In India, the menace of Insider-Trading was first narrated by PJ Thomas in
1948, in his report titled ‘Report on the Regulation of the Stock Market in India’ recognised several

1
Rajiv Kumar Singh, Role of Securities & Exchange Board of India (SEBI) in regulating Mutual Funds,
http://sgsrjournals.com/paperdownload/5.pdf
2
Sumit Agarwal & Robin Joseph Baby, SEBI ACT:A LEGALCOMMENTARY ON SECURITIES &
EXCHANGE BOARD OF INDIA ACT,1992, 1st ed., p.p. 303

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threats of insider trading in India. He highlighted in his report the effective provisions that were in place
in the U.S.A that were made by the Securities Exchange Act, 1934. He also mentioned the measures taken
in countries like Canada and UK which were trying to make all such transactions public. Later in 1979 the
Sachar Committee recommended the amendments to the Companies Act,1956 to restrict insider trading,
which was later followed by the Patel Committee report which recommended amendments to be made to
the Securities Contracts Act, 1956. But until 1992 there was no legal sanction on the activities concerning
insider trading.

The definition of insider trading has been provided in the SEBI (Prohibition of Insider Trading)
Regulations, 1992 (PIT Regulations) framed under section 11(2)(g) of the SEBI Act. The PIT regulations
prohibit insider trading and regulate trading by insiders. In addition they also prohibit communication,
solicitation and counselling of the unpublished price sensitive information in a bid to enhance
transparency in the securities dealings. An insider is defined under the PIT Regulations such that the
person who receives unpublished price sensitive information is also covered within its ambit.

“Insider trading is however considered to lawful when the insiders of the company who are in possession
of price sensitive information, buy or sell securities of their own company within the confines of
company’s policy and regulations governing this trade.3”

An insider is defined under regulation 2(e) of the PIT regulations as:

Insider means any person who:

(i) Is or was connected with the company or is deemed to have been connected with the company and
is reasonably expected to have access to unpublished price sensitive information in respect of
securities of a company, or
(ii) Has received or has had access to such unpublished price sensitive information.

“A person to be qualified within the first clause regulation 2(e) must fall within the definition of a
‘connected person’ as provided under regulation 2 (c) or a ‘person deemed to be a connected person’
within the scope of Regulation 2(h). A connected person is defined as defined under regulation 2(c)
includes firstly, a director or a person deemed to be a director or secondly, any person who (a) occupies
the position of an officer of the company, (b) occupies the position of an employee of the company (c)
any person who holds a position involving a professional or business relationship between himself and the
company, whether temporary or permanent and who may reasonably be expected to have access to
unpublished price sensitive information in relation to that company. It has been further clarified that a

3
Thummuluri Siddaiah, FINANCIAL SERVICES, 2nd ed., 2011, pg 226

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connected person means a person who is a ‘connected person’ within the scope of the definition for a
period of six months prior to an act of insider trading. 4 The definition of a person ‘deemed to be a
connected person’ have been defined in a very wide manner bringing into its ambit a wide group of
associated individuals. Also, the definition of the connected persons has been furthered widen after the
2002 amendment which bought intermediaries within the ambit of such persons. Any member of the
Board of Directors, an employee of a self-regulatory organisation recognised or authorized by Board of
regulatory body, a relative of the aforementioned persons, banker of the company have all been included
under the definition of a connected person after the 2002 amendment. It also now includes any firm, trust,
Hindu Undivided family, company or association of persons under regulation 2(h). A person to be
qualified as an insider will also have to fulfil clause second of the regulation, i.e., he has to have access to
unpublished price sensitive information. Exclusion of the second clause may further the definition of term
‘insider’ beyond desirable limits.”

JUDICIAL INTERPRETATION

“In the case of Hindustan Lever Ltd. v. SEBI5 which was one of the earliest cases of insider trading in
India it was fiercely contested as to whether a person obtained certain information through such
connections or not. In this case Hindustan Lever Ltd (HLL) was alleged to have been involved in insider
trading when it purchased 8 lakh shares of Brooke Bond Lipton India Ltd (BBLIL) from Unit Trust of
India (BBLIL) on the basis of unpublished price sensitive information regarding the impending merger of
HLL and BBLIL. Both HLL and BBLIL were two subsidiaries of a common parent and one dealt in the
shares of the other. The information of the proposed merger was therefore known to core team.” The SAT
set aside the contention of SEBI on the ground that the knowledge of the merger was generally known.
The significant outcome of this case was however the amendment made to the SEBI regulations, which
made any information known to the media unqualified as unpublished price sensitive information but
after the 2002 Amendment, in the case of Dr. Anjali Beke v SEBI6 a person who received information
from the Managing Director of the Company was held be practising insider trading by the SAT.

“One of the most significant case in relation to insider trading in India is the case of Rakesh Agrawal v.
SEBI7 in which Mr.Rakesh Agarwal who was the Managing Director of ABS Industries Ltd was alleged
4
Arun Kumar Singh and Anil Kumar, Insider Trading: Comparative Analysis of India and USA,
http://dx.doi.org/10.2139/ssrn.2552418
5
[1998] 18 SCL 311 (SAT).
6
Appeal No. 148/2005
7
[2004] 49 SCL 351 (SAT).

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to have been involved in insider trading while having access to price sensitive information regarding the
merger of ABS Industries Ltd. to Bayer AG. After investigation SAT found that the intention behind
acquiring of the share was only to facilitate the entry of Bayer and not to gain unfair personal gain.” SAT
held that although it was true that in the process the shares purchased at a lower price fetched a higher
price when offered in the public offer, this gain was only incidental, and certainly not to cheat. Thus, SAT
held that Rakesh Agrawal was not guilty of insider trading. SEBI appealed from the decision of SAT to
the Hon’ble Supreme Court which has settled the matter by its consent order whereby Mr.Rakesh
Agrawal has agreed to pay Rs. 48,00,000 towards the settlement. Also with respect to the prosecution
initiated by SEBI in 2001, the offence was compounded by payment of Rs. 4,90,000 by the accused to
SEBI.8

“In the case of Samir Arora v. SEBI9 the court stressed on the fact that where an employee through his
position in a company cannot be reasonably expected to have access to unpublished price sensitive
information it is necessary to prove that such employee has in fact received such information and in the
failure to do so, the person cannot be held liable for insider trading. A similar case was the case of
Sadhana Nabera v. SEBI10where in the absence of any documentary evidence to show the accessibility
of an auditor to unpublished price sensitive information, the auditor was not held to be an ‘Insider’.”

At present the question relating to what would constitute insider trading can be found by the perusal of
Regulations 3, 3A, 3B and 4 conjointly. According to Regulation 4 any insider who deals in securities in
the violation of Regulations 3 or 3A shall be guilty of insider trading. Regulation 3 prohibits certain
actions: it provides that no insider shall, firstly, either on his own behalf or on behalf of any other person,
deal in securities of a company listed on any stock exchange when in possession of any unpublished price
sensitive information; or secondly, communicate or counsel or procure directly or indirectly any
unpublished price sensitive information to any person who while in possession of such unpublished price
sensitive information shall not deal in securities. 11 In addition to this, section 3A also restricts any
company from dealing with the securities of another company or associate of that other company when in
possession of any unpublished price sensitive information.

LOOPHOLES IN THE FRAMEWORK: GENERAL SUGGESTION

8
Arun Kumar Singh and Anil Kumar, Insider Trading: Comparative Analysis of India and USA,
9
[2005] 59 SCL 96 (SAT)
10
Appeal No. 26/2007, SAT order dated 19.02.2008
11
Arun Kumar Singh and Anil Kumar, Insider Trading: Comparative Analysis of India and USA,

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“The regulatory laws in India suffers from some significant loopholes which calls for immediate attention
of the law makers. The definition of the word “Insider” under Regulation 2(e) suffers from ambiguity.
The section talks about two elements to be fulfilled for qualifying a person as an insider: (a) proof of a
connection with the entity concerned (b) a reasonable belief of his having had access to unpublished price
sensitive information. In addition to this, subsection (ii) of section 2 says that inorder to qualify as an
insider although a relationship with the company is not essential, it is essential to actually prove receipt of
the information. The definition of the word is such that it has widened the scope to such an extent that
even outsiders are bought within the ambit of an insider under the SEBI regulations.”

There also seems to be disconnect in Section 15G of the SEBI Act which provides the penalty for insider.
There is a grey areas which appear to emerge from clauses (i) and (iii) of this provision, where the
liability is said to have arisen when an insider or a person to whom he has communicated unpublished
price sensitive information to deals in securities, ‘on the basis of’ such information. 12 The phrase ‘on the
basis of’ which was used in Regulation 3 was however replaced by amendment in 2002 amendment and
was substituted with the phrase ‘when in possession of’. However, a similar amendment has not been
made in Section 15G which has given rise to an anomalous situation making it unclear as to when the
liability arises.

The degree of mensrea is which is required to establish the charge of insider trading is another very
significant aspect that has been bought into concern. The failure to establish the requisite mensrea is a
major dilemma for enforcing agencies, especially given the covert nature of the offence of insider trading.
A clear example is the Rakesh Agrawal Case wherein it was held to establish a violation of Regulation 3
it was necessary to prove an element of ‘deceit’ or ‘manipulation’, which the SEBI was unable to prove in
the facts of that case13. The SAT had rejected the contention made by the SEBI that it was not necessary
to establish a profit motive to establish the charge of insider trading making it clear that although not
contemplated directly, the establishment of the mental element is of prime importance in case of
establishing the offence of insider trading.

CONCLUSION

12
Arun Kumar Singh and Anil Kumar, Insider Trading: Comparative Analysis of India and USA,
13
Arun Kumar Singh and Anil Kumar, Insider Trading: Comparative Analysis of India and USA,

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“The biggest disadvantage in India is the absence of a specific law to deal with Insider Trading.
Moreover, the problem with the cases of insider trading is the establishment of the mental element
along with the establishment of the facts in order to prove whether the access to such unpublished price
sensitive information was possible for the person in question. The changes made to the act in 2002
made it mandatory for the directors and other officers of the company and other related persons are
subjected to mandatory disclosures. It is a fact that the SEBI is not having enough powers for more
exhaustive and efficacious investigation of cases involving Insider Trading. As witnessed in US,
empowering the regulator would definitely be helpful in imparting justice and convicting every such
violator of the Insider Trading regulations by providing greater degrees of positive evidence supporting
every such conviction thus proving every case beyond reasonable doubts. Because despite of not
having to prove the connection of the accused with the company most of the cases are not established
owing to the lack of evidence gathered against the accused. This is the peculiar problem faced in
countries like India.”

REFRENCES

 Arun Kumar Singh and Anil Kumar, Insider Trading: Comparative Analysis of India and
USA,
 Bekaert, G. and C. Harvey, 1997, Emerging equity market volatility, Journal of Financial
Economics 43, 29-77.
 Dutta, P. and A. Madhavan, 1995, Price continuity rules and insider trading,
Journal of Financial and Quantitative Analysis 30 , 199-221.
 Dye, R., 1984, Insider trading and incentives, Journal of Business 57, 295-313.
 Engle, R., D. Lilien and R. Robins, 1987, Estimating time varying risk premia in
the term structure: The ARCH-M model, Econometrica 55, 391- 407.
 Fishman, M. and K. Hagerty, 1992, Insider trading and the efficiency of stock
prices, Rand Journal of Economics 23, 106-122.
 Handbook of World Stock, Derivative and Commodity Exchanges, 1998,
International Financial Publications , London.
 Harvey, C., 1991, The world price of covariance risk, Journal of Finance 46,
111-157.
 Rajiv Kumar Singh, Role of Securities & Exchange Board of India (SEBI) in regulating
Mutual Funds, http://sgsrjournals.com/paperdownload/5.pdf
 U.S. Securities and Exchange Commission, https://www.sec.gov/about/whatwedo.shtml
 http://www.business.illinois.edu/broker/pdf/insider.pdf

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