Insider trading, the act of trading in a company’s securities based on material non-public information, is rigorously regulated in India under both the Companies Act, 2013, and the Securities and Exchange Board of India (SEBI) regulations. This discussion will explore the specific sections of the Companies Act and the relevant SEBI regulations governing insider trading, along with notable case laws that have shaped the legal landscape.
Companies Act, 2013: Section 195
Definition of Insider Trading:
Section 195 of the Companies Act, 2013, defines insider trading as the act of subscribing, buying, selling, dealing, or agreeing to subscribe, buy, sell, or deal in securities by an insider based on unpublished price-sensitive information.
Penalties:
Individuals found guilty of insider trading can face severe penalties. The Act prescribes imprisonment for up to ten years and a fine up to ₹25 crore or three times the amount of profits made from insider trading, whichever is higher.
SEBI (Prohibition of Insider Trading) Regulations, 2015:
The SEBI regulations are instrumental in preventing and penalizing insider trading. The key provisions are outlined in the SEBI (Prohibition of Insider Trading) Regulations, 2015.
Definition of Insider:
Regulation 2(1)(g) broadly defines insiders, including directors, employees, and any person who is in possession of or has access to unpublished price-sensitive information.
Trading Window Closure:
Regulation 4 mandates companies to enforce a trading window closure for insiders, preventing them from trading during specified periods when the information is likely to be sensitive.
Code of Conduct:
Regulation 9 requires listed companies to formulate a code of conduct for prevention of insider trading. The code must outline procedures and safeguards to be followed by insiders.
Disclosure Requirements:
Regulation 7 mandates insiders to disclose their trading activities to the company and the stock exchanges within specified timelines.
Prohibition on Communication of Unpublished Price-Sensitive Information:
Regulation 3 prohibits communication of unpublished price-sensitive information except where required in the ordinary course of business.
Maintenance of Digital Database:
Regulation 9A requires companies to maintain a structured digital database containing the names of such persons or entities with whom information is shared.
Case Laws on Insider Trading:
1. SEBI vs. Reliance Industries Limited (2014) – Emphasis on Fair and Transparent Markets:
SEBI imposed a penalty on Reliance Industries for alleged insider trading. The Securities Appellate Tribunal (SAT) upheld SEBI’s findings, emphasizing the importance of fair and transparent markets.
2. SEBI vs. Rajat Gupta (2019) – Two-Year Ban for Insider Trading Violations:
This case involved Rajat Gupta, former McKinsey head and Goldman Sachs director. SEBI barred him from accessing the securities market for two years for insider trading violations.
3. SEBI vs. Manoj Gaur (2021) – Penalties Imposed for Insider Trading:
SEBI imposed a penalty on Manoj Gaur, executive chairman of Jaiprakash Associates, for insider trading. The case underscores SEBI’s commitment to enforcing insider trading regulations.
Conclusion:
Insider trading is meticulously regulated under Section 195 of the Companies Act, 2013, and the SEBI (Prohibition of Insider Trading) Regulations, 2015. The legal framework, coupled with stringent penalties, aims to deter individuals from engaging in such practices, ensuring a level playing field in financial markets. The case laws provide practical insights into the interpretation and enforcement of these regulations, contributing to the evolving landscape of insider trading laws in India. Staying compliant with these provisions is crucial for companies, insiders, and investors to maintain the integrity of the financial markets.
