This article on ‘INSIDER TRADING‘ is written by Tanaya Khilari, a 3rd year student from SIES college, Navi Mumbai and an intern at Legal Upanishad.
In this article, we will be discussing the topic of insider trading individually, insider trading in the banking industry, its causes, and its effects. The article focuses on the provisions enacted to regulate the same, whether the remedies are helpful, and also the regulations for the same. Insider trading is banned along with its regulation being initiated by the SEBI i.e. Securities and exchange board of India. When insiders having access to important information use it for their benefit it is considered insider trading and it is highly discouraged in India. SEBI excepts the banks and financial institutions to be fair in their conduct and a violation of the same is considered punishable.
WHAT IS INSIDER TRADING?
The practice of insider trading has been in existence since the trading of securities has been in practice and became prevalent among investors worldwide. Insider Trading means dealing in a company’s securities while having possession of confidential information relating to the institution. This information is information that is not disclosed to the public and can have an impact on the trading and prices of securities. This unpublished information can be termed as Unpublished Price Sensitive Information. This information can be used to make personal gains or avoid potential losses.
BANKING INDUSTRY AND THEIR INVOLVEMENT IN TRADING INDUSTRY:
Ever since the financial system has been introduced banking is the most essential segment in the financial system of India. It has been playing a vital role in the economic growth of the country. Banks as money changers are the institution that transfers funds from the ultimate saver to the ultimate user of funds. However, this can be considered as a traditional functioning of the banks. In the modern economy not only do banks provide financial services but are also diversifying themselves into the trading securities with many banks being registered on the NSE and BSE.
Another important segment of banks in the trading industry can be considered through underwriting issues of securities- an important aspect in the listing of a company on the stock exchange. With such a vast spread of the banking industry in the trading industry, there are meant to be some negative aspects too which is more prominently known as INSIDER TRADING.
REGULATION OF INSIDER TRADING:
As known from the explanation above insider trading is considered an illegal activity. The regulation of insider trading is initiated by SEBI in the securities and the financial market. There is no absolute ban on investing in stocks or securities however speculative trading which includes derivative trading is not allowed. Investments in shares, debentures, mutual funds can be made by the banking employees.
However frequent buying and selling of these are considered speculation which can be due to holding of any UPSI. Hence for reducing the bleak outcome of insider trading on the financial economy SEBI issued and notified the SEBI (Prohibition of Insider Trading) Regulations, 2015 on 15th January 2015 based on the recommendations of the Sodhi Committee and it repelled the previous SEBI (Prohibition of Insider Trading) Regulations 1992.
SEBI PROVISIONS 2015:
Regulation 9 of the SEBI ( Prohibition of Insider Trading ) Regulations 2015 requires these banks to enact a protocol to regulate, supervise and give a regular report of trading by its designated employees and immediate relatives of these persons including the directors, CEO, etc. towards the accomplishment of these regulations. This regulation aims to put a stop to Insider Trading in banks’ securities by forbidding or limiting in dealing, conveying, or counseling on issues concerning insider trading to the employees or their close relatives or immediate contacts.
BANKS WANTING TO BE EXEMPT FROM REGULATIONS:
Debt finance deals, for long as well as short-term funding in the markets happen far more regularly than big dealings like mergers and amalgamations. In this due procedure, companies might reveal to banks and institutions including and also information that is not yet communicated to other shareholders and the public which can be the main source for insider trading. Due to this recently, some banks had a conversation with SEBI to exempt them from these insider trading regulations.
Banks have argued that holding unpublished price-sensitive information and extending debt finance as part of their normal business, cannot still be exempted from the provisions.
The reason is that even though the banks hold price-sensitive information in their normal course of business, it is their prime responsibility to protect this information and not let the employees use it for their benefit by buying or selling the securities to earn profits. Even though the information is of a nature that needs to be disseminated to the employees for the course of dealings the bank needs to maintain a code of conduct mentioning the applicability upon the classes of employees.
It should mention the penalty and disbarment procedure in case of insider trading in addition to the SEBI ( Prohibition of Insider Trading ).
Even though provisions are in place to curb insider trading the banks can take initiative to reduce the same through their methodology. This includes educating the employees about the negative effects of insider trading and the penal provisions surrounding them. When earnings reports come out, restricting employees trading is an effective method to reduce violating provisions. This prevents them from gaining any profit from these transactions.
The banks must be diligent with self-certification and not rely only on the marketing intermediaries for the regulating of transactions. Many more methods along with these suggestions can help curb it to a great extent.
A debate yet is still ranging whether it is moral or immoral for markets. The main debate being that insider trading is inequitable and demoralizes common people from participating in markets making it troublesome for companies to gain capital is contradicted by critics saying that it provides useful information to markets and may provide a kind of stability in trades not causing the markets to be suddenly bullish or bearish. It is just delaying the inevitable leading to investing errors.
Many authors including Robert T. Kiyosaki also mentioned in his book that insider trading at a potential level is good and despite the strict regulations it is still prevalent among rich people. Many companies have also appointed watchdogs for the same and act quickly to investigate the same. However, as mentioned earlier curbing insider trading is impossible as there are supporters as well adversaries to the same. Insider trading should be adopted or not is a topic for debate but it is more essential to curb its negative effects. The stock market witnesses trading by the middle as well as the rich class.
Even though the rich class might benefit from this trading method, it is a disadvantage to the working middle class as they not been a part of the inner circle do not know about the new information available and in the process might suffer huge losses. In the age of manipulation and corruption, this can take a country’s economy to a downfall hence it is imperative to curb this insider trading even though it is beneficial to a particular class.
1) Garbriel G. Ramirez, Kenneth K. Yung. Firm Reputation And IT: The Investment Banking Industry. https://www.jstor.org/stable/40473296
2) Andrew Sebastian. January 21, 2022. How This Trading Is Prevented in Corporations. https://www.investopedia.com/articles/investing/092616/how-insider-trading-prevented-corporations.asp
3) Sugata Ghosh, Reena Zachariah (2016). Banks, financial institutions may be flouting insider trading norms. https://economictimes.indiatimes.com/industry/banking/finance/banks-financial-institutions-may-be-flouting-insider-trading-norms/articleshow/51114805.cms