Insider Trading Global Perspective

Insider trading is viewed differently in different countries. In some developed countries due to strong legislation the loopholes are blocked. But in some countries it is definitely a cause of concern. Basically 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 , adviser , consultant , analyst etc, who has knowledge of material inside information which is generally not available to general public. Or in other words these are secret information. The term Insider trading is a subject to many definitions and connotations and interpretations and in a way it encompasses both legal and prohibited activity. It is surprising that insider trading takes place legally every day, when corporate insiders – officers, directors or employees – buy or sell stock in their own companies within the confines of company policy and the regulations governing this trading and within the framework of law. 

This is a deal which is in normal course and systematic course. Simply insider trading i.e. buying or selling a security, in breach of a fiduciary duty or other relationship of trust , and confidence , while in possession of material , nonpublic information about the security deemed be covered under the ambit of law which is sometimes not legal. In case of bonus issue, the insider can give good clue. This prior knowledge of a bonus issue would result in the insider acquiring a significant exposure in particular scrip, who would increase his holding would increase significantly after the bonus is announced.

System Followed:

Corporate officers, shareholders, directors and employees who , traded the company’s securities after learning of significant, confidentiality corporate developments;

Employees of Accountant Firm, law, banking , brokerage and printing firms- who were given such information to provide services to corporation whose securities they trad.

Regulatory Government employees those learned of such information because of their employment by the government.

Thus for preventing such transactions it is an important obligation for any capital market regulatory authority, because insider trading undermines investor confidence in the fairness and integrity of the securities markets.

Let us discuss the law in different Countries.

1. United States of America.

The United States of America is the first country to tackle insider trading effectively and in a systematic way since 1933. Statutory insider trading laws were first passed in 1933. Congress passed the Securities Act of 1933 and the Securities and Exchange Act of 1934 in order to increase transparency for investors while placing the obligation of due diligence containing detailed information about the shares. Later on the second Act created the Securities and Exchange Commission (SEC) to regulate the secondary trading of securities. The Securities and Exchange Commission is empowered under the Insider Trading Sanctions Act, 1984. The Securities and Exchange Commission is empowered under the Insider Trading Sanctions Act, 1984 to impose civil penalties in addition to criminal proceedings to curb the menace of insider trading.

2. China

Chinese have two major stock exchanges one is Shanghai and the other is Shenzhen Stock Exchanges. It ranks the second in the world for market capitalization. In China the capital market is regulated by the China Securities Regulatory Commission (CSRC). It had made insider trading illegal in 1993 with the introduction of the Establishment of Securities Companies with Foreign Equity Participation Rules. These law catch-up in terms of insider trading regulation. Even though the Shanghai and Shenzhen stock exchanges have only been established since the early 1990s, insider trading is widespread with about 80 percent of all securities cases are connected with insider trading.

3 Japan

Japan as third in the world by market capitalization. The major stock exchange is Tokyo Stock Exchange which is the third largest stock exchange in the world. Japan passed its first insider trading law with the Financial Markets Abuse Act in 1988. These work with the Financial Markets Abuse Act is enforced by Japan’s Financial Services Agency (FSA) along with the Securities and Exchange Surveillance Committee (SESC). There was a very public insider trading scandal which led to stricter insider trading regulation in 1989. The Japanese insider trading law is very specific. It is basically based on the access doctrine which focuses on persons with access to the information, which includes employees,

4. United Kingdom.

The fourth largest exchange in the world is London Stock Exchange by market capitalization. Again the United Kingdom fourth in the world by market capitalization. In UK the authority is Financial Services Authority (FSA) which regulates securities trading. The UK-FSA aims to ensure that the stock markets are orderly and fair. The insider trading was considered illegal since 1980, but the FSA is empowered to convict people of insider trading. In the year 2000 the enforcement of Financial Services and Markets Act , stricter and more specific guidelines were laid down. As per FSA an insider is any person who has inside information. An insider may be a part of management, an employee, a shareholder. Insider trading may occur as a result of criminal activities or a friend tipping them off. Inside information is defined as, “information that is not generally available and that a reasonable investor would use to help them make investment decisions.

In India in 1992, the Securities and Exchange Board of India (SEBI) formed to regulate the market and enforce insider trading laws. In 2010 the law was passed. As per SEBI an insider as any persons including corporate officers, directors, employees, friends, business associates, family members, persons and other tippers with inside information that can influence stock prices. The law says that no insider shall either on his own behalf or on behalf of any other person to deal, communicate, and counsel a person to directly or indirectly sell securities with unpublished price sensitive information.There exists penal provisions. The Violators of insider trading in India are punishable up 3 times the amount of profits and/or 1 to 10 years in prison. The family members of a director or officer that own securities in the director or officer’s company must disclose to the public when there is a change in securities holding. There is compounding offense and consent process, which allows violators of insider trading to pay fines and fees instead of going through the criminal proceeding.

Thus unless a suitable framework is done the potential insider trading strategies for the acquirer and the target companies can cause harm. The insider trading strategies is having potential information. Thus in the presence of insider information there will be sudden rise and fall of trading volumes for the target companies. In India the regulating authority have a brilliant law. The Securities and Exchange Board of India has prescribed the SEBI (Prohibition of Insider Trading) Regulations, 2015 to put in place a framework for prohibition of Insider Trading in securities and to strengthen the legal framework thereof. Recognizing that insider trading occurs, prudent investors must have strategies and mechanisms to protect against insider trading by having a diversified portfolio, hedging market risk, conducting quality analysis, and trusting
research. Unless suitable and strong law is enforced the illegal insider trading will continue to be a problem that threatens the integrity of the global market.