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LEARNING OBJECTIVES
In simple terms ‘insider trading’ is buying or selling a security, in breach of a fiduciary duty or other relationship of trust, and confidence, while in possession of material, non-public information about the security. Therefore, preventing such transactions is an important obligation for any capital market regulatory system, because insider trading undermines investor confidence in the fairness and integrity of the securities markets. A Company Secretary being a professional play an important role in a company to prevent Insider Trading by establishment of policies and procedures in this regard. This lesson will enable the students to have the basic understanding of the Insider trading regulations in India, the disclosures required to be made under the regulations by the company, employee directors, promoters, etc. the duty of compliance officer, Model Code of Conduct, Code of Corporate
Disclosure Practices, the Penal provisions for Insider Trading by SEBI and the new provisions of the Insider Trading in the Companies Act, 2013, etc.
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The practice of Insider Trading came into existence ever since the very concept of trading of securities of a
company became prevalent among the investors worldwide and has now become a formidable challenge for
investors all over the world.
The United State of America was the first country to formally enact a legislation to regulate insider trading. Over
the years, most of the jurisdictions around the world have recognized the requirement to restrict insider trading
in one form or other and accordingly put in place legal restrictions to this effect.
India was not late in recognizing the detrimental impact of insider trading. The history of Insider Trading in India
relates back to the 1940’s with the formulation of government committees such as the Thomas Committee
under the chairmanship of Mr. P.J.Thomas to evaluate restrictions that can be imposed on short swing profit of
1948, which evaluated inter alia, the regulations in the US on short swing profits under Section 16 of the Securities
Exchange Act, 1934. Thereafter in India provisions relating to Insider Trading were incorporated in the Companies
Act, 1956 under Sections 307 and 308, which required shareholding disclosures by the directors and managers
of a company. Due to inadequate provisions of enforcement in the companies Act, 1956, the Sachar Committee
in 1979, the Patel Committee in 1986 and the Abid Hussain Committee in 1989 proposed recommendations for
a separate statute regulating Insider Trading.
The Patel committee in 1986 in India defined Insider Trading as:
“ Insider trading generally means trading in the shares of a company by the persons who are in the management
of the company or are close to them on the basis of undisclosed price sensitive information regarding the
working of the company, which they possess but which is not available to others.”
The concept of Insider Trading in India started fermenting in the 80’s and 90’s and came to be known and
observed extensively in the Indian Securities market. As mentioned earlier due to inadequate provisions in the
Companies Act, 1956 and rapidly advancing Indian Securities market needed a more comprehensive legislation
to regulate the practice of Insider Trading, thus resulting in the formulation of the SEBI (Insider Trading) Regulations
in the year 1992, which were amended in the year 2002 after the discrepancies observed in the 1992 regulations
in the cases like Hindustan Levers Ltd. vs. SEBI, Rakesh Agarwal vs. SEBI, etc. to remove the lacunae existing
in the Regulations of 1992. The amendment in 2002 came to be known as the SEBI (Prohibition of Insider
Trading) Regulations, 1992.
Further, the PIT Regulations, 1992 had their challenges in their drafting, interpretation and reach. Besides, the
felt need to ensure a clear regulatory policy that is not only easily comprehendible but is also comprehensive led
to this Committee being set up under the chairmanship of Justice N. K. Sodhi, Former Chief Justice of the High
Courts of Kerala and Karnataka and a Former Presiding Officer of the Securities Appellate Tribunal. The High
Level Committee reviewed the SEBI (Prohibition of Insider Trading) Regulations, 1992 submitted its report to
SEBI on December 7, 2013.
The Committee made a range of recommendations to the legal framework for prohibition of insider trading in
India and has focused on making this area of regulation more predictable, precise and clear by suggesting a
combination of principles-based regulations and rules that are backed by principles. The Committee had also
suggested that each regulatory provision might be backed by a note on legislative intent.
Section 195 of the Companies Act, 2013 deals with the provisions on prohibition on insider trading of securities, which is as under:
Sub-section (1) lays down that no person including any director or key managerial personnel shall enter intoinsider trading:
However, nothing contained in this sub-section shall apply to any communication required in the ordinary course of business or profession or employment or under any law.
(a) “insider trading” means –
(i) an act of subscribing, buying, selling, dealing or agreeing to subscribe, buy, sell or deal in any
securities by any director or key managerial personnel or any other officer of a company either as
principal or agent if such director or key managerial personnel or any other officer of the company is
reasonably expected to have access to any non-public price sensitive information in respect of
securities of company, or
(ii) an act of counselling about, procuring or communicating directly or indirectly any non- public price
sensitive information to any person;
(b) “price-sensitive information” means any information which relates, directly or indirectly, to a company
and which if published is likely to materially affect the price of securities of the company.
Sub-section (2) provides that If any person contravenes the provisions of this section, he shall be punishable
with imprisonment for a term which may extend to five years or with fine which shall not be less than five lakh
rupees but which may extend to twenty-five crore rupees or three times the amount of profits made out of insider
trading, whichever is higher, or with both.
PROVISIONS RELATING TO INSIDER TRADING IN COMPANIES ACT, 2013
Section 195 of the Companies Act, 2013 deals with the provisions on prohibition on insider trading of securities, which is as under:Sub-section (1) lays down that no person including any director or key managerial personnel shall enter intoinsider trading:
However, nothing contained in this sub-section shall apply to any communication required in the ordinary course of business or profession or employment or under any law.
(a) “insider trading” means –
(i) an act of subscribing, buying, selling, dealing or agreeing to subscribe, buy, sell or deal in any
securities by any director or key managerial personnel or any other officer of a company either as
principal or agent if such director or key managerial personnel or any other officer of the company is
reasonably expected to have access to any non-public price sensitive information in respect of
securities of company, or
(ii) an act of counselling about, procuring or communicating directly or indirectly any non- public price
sensitive information to any person;
(b) “price-sensitive information” means any information which relates, directly or indirectly, to a company
and which if published is likely to materially affect the price of securities of the company.
Sub-section (2) provides that If any person contravenes the provisions of this section, he shall be punishable
with imprisonment for a term which may extend to five years or with fine which shall not be less than five lakh
rupees but which may extend to twenty-five crore rupees or three times the amount of profits made out of insider
trading, whichever is higher, or with both.
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