What is 'Insider Trading'?

Promoters of companies are often charged with taking undue advantage over ordinary shareholders by selling/ buying the shares of their companies through price rigging. The issue is again hogging limelight in the aftermath of the 'Satyam' fraud. Let us try to understand the concept of 'Insider trading' and the law in place to prevent it.

Insider trading is the trading of a company's stock or other securities including stock options by individuals with potential access to non-public information about the company. The Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992, describes "insider" as any person who, is or was connected with the company, and who is reasonably expected to have access to unpublished price-sensitive information about the stock of that particular company, or who has access to such unpublished price sensitive information. Trading by corporate insiders such as officers, directors, and large shareholders may be legal, if this trading is done in a way that does not take advantage of non-public information. Information about such trading is to be published in public domain within a reasonable period of the transaction taking place.

Market regulator SEBI has put in place a comprehensive Integrated Market Surveillance System to track trading data from all the market participants: stock exchanges, depository participants, custodians as well as data of clearing houses. This system helps it detect potential and accomplished insider trading and manipulation. Recently SEBI has amended the insider trading regulations:

• A 'deemed insider' can be anyone who has access to unpublished price sensitive information and the connection with the company has been removed.
• All companies have to apply SEBI's model code without diluting it in any manner.
• Directors, officers and designated employees who buy or sell shares can’t carry out a reverse transaction within six months. They are also no longer allowed to hold derivative positions.

It is common knowledge that insider trading takes place frequently, but it is very difficult to book the violators due to the difficulties in implementation of the law. As investors we need to be vigilant about extraordinary movements in stock prices and take suitable measures to safeguard our investments. Past track record of the promoters is a guiding principle for investment in a particular company.