Presentation Transcript

1. June 7, 2013

   Insider TradingRegulations & Practices

2. Introduction Why to curb insider trading Regulatory aspects of insider trading Case Studies Challenges Way forward Structure of Presentation
3. Subsequently, India came out with Securities and Exchange Board of India (Insider Trading) Regulations, 1992, which were drastically amended in 2002 and renamed as SEBI (Prohibition of Insider Trading) Regulations, 1992 EVOLUTION OF INSIDER TRADING REGULATIONS IN INDIA
4. Insider trading essentially denotes an act of an insider dealing in a company’s securities while in possession of unpublished price sensitive information about the company. Introduction
5. WHO ARE INSIDERS? Any person who may be connected with the company or deemed to have been connected with the company, and who is reasonably expected to have access to unpublishedprice sensitive informationor who has received or has had access to such unpublished price sessitive information.
6. Prohibition of Insider Trading is required to make Securities Market: Fair & Transparent To have a level playing field for all the participants in the market For free flow of information & avoid information asymmetry To prevent insiders from making a huge profit or save tremendous loss when the public cannot react to this information Why to curb insider trading?
7. It could be director of company, or is deemed to be a director of the company by virtue of sub-clause(10) of Section 307 of the Companies Act 1956 He or she could be officer or professional of the company or holding a business relationship with the company and who may be reasonably expected to have access to UPSI Connected person means any person who is a connected person six months prior to an act of insider trading Who can be a connected person ?
8. COMPANY UNDER SAME MANAGEMENT INTERMEDIARY/STOCK EXCHANGE/ CLEARING HOUSE OR EMPLOYEE/DIRECTOR THEREOF MEMBER OF BOARD OF DIRECTORS OF PUBLIC FINANCIAL INSTITUTION EMPLOYEE OR OFFICIAL OF SRO MEMBER OF BOARD OF TRUSTEES OF MUTUAL FUND BANKER OF COMPANY RELATIVES OF THE ABOVE CONCERN.FIRM,TRUST,HUF,COMPANY OR AOP WHEREIN ANY OF THE CONNECTED PERSONS HAS MORE THAN 10% OF THE HOLDING OR INTEREST Deemed to be connected persons
9. The price sensitive information is defined in Regulation 2(h)(a) of the prohibition of Insider Trading “It means any information which relates directly or indirectly with the company & which if published is likely to materially affect the price of the security’s of the company” Unpublished information means Means information which is not published by the company or its agents Speculative reports in print or electronic media shall not be considered as published information What is price sensitive information???
10. Periodical financial results Intended declaration of the dividend(both interim & final) Issue of securities or buy-back of securities Any major expansion plans or execution of new projects Amalgamation & mergers or takeovers Disposal of the whole or substantial part of the undertaking Any significant changes in policies, plans or operations of the company Information deemed to be price sensitive
11. Regulation 3 No insider should deal in security, while possession of UPSI He/she should not communicate o procure the UPSI to others Regulation 3B This regulation enables a company to defend itself in a proceeding involving insider trading if it can prove that there is “Chinese Wall” within the company Regulation 3 and 3(B) of Prohibition of Insider Trading
12. Initial Disclosure Buying the stake greater than the 5% of the paid up capital of the company ,the acquirer should inform the Stock Exchange within two working days of acquiring the stake. The new director should disclose all its trade position in Equity or derivatives with in two working days of his appointment. Disclosures for prohibition of insider trading
13. Continuous Disclosure If the shareholder holds more than 5% and change his holding by 2% or more. Any change of promoter/director/officer beyond Rs. 5 Lacs or 25000 shares or 1% of total shareholding or voting rights whichever is lower. Additional Disclosures All holdings in securities of that company Periodic statements of all transactions Annual statement of all holdings Any other disclosure of company to stock exchange Continued…….
14. A compliance officer is required to be appointed by the company. There should be pre-clearance of trade by the officer of designated employees. Designated employees include : Employees from top three tiers of management. Employee designated by the company from time to time to whom the trading restriction shall be a applicable. Trading window ,is closed at the time of UPSI activities like Results, Issue of securities etc. Trading window is opened 24 hours after the information is made public There are several forms in accordance with disclosures & code of conduct. Model Code of Conduct for Prevention of Insider Trading
15. All directors/officers/designated employees who buy or sell any number of shares of the company shall not enter into opposite transaction during the next six months following the prior transaction All directors/officers/designated employees shall not take positions in derivative transactions in shares of company at any time In case of subscription in IPOs, the above entities shall hold their investments for a minimum period of 30 days. The holding period starts when securities are actually alloted Continued…….
16. PROMPT DISCLOSURE TO STOCK EXCHANGE TIMELY REPORTING OF SHAREHOLDINGS /OWNERSHIP AND CHANGES IN OWNERSHIP NORMS FOR ANALYSTS AND INSTITUTIONAL INVESTORS ONLY PUBLIC INFORMATION TO BE PROVIDED PREFERABLY RECORD THE DISCUSSION BE CAREFUL WHILE HANDLING UNANTICIPATED QUESTIONS SIMULTANEOUS RELEASE OF INFORMATION CODE OF CORPORATE DISCLOSURE PRACTICES
17. Regulation 4A deals with the power to make inquiries and inspection SEBI can also appoint the outsider auditor for the enquiry & auditor would have the same power as the SEBI possess. Before undertaking any investigation SEBI shall give a reasonable notice to insider for that purpose. Where SEBI is satisfied that in the interest of investors or in public interest no such notice should be given, it may by an order in writing direct that the investigation be taken up without such notice. Investigation of Insider Trading
18. Regulation 4A If the SEBI suspects that any person has violated any provision of these regulations, it may make inquiries with such persons. The SEBI may appoint officers to inspect the books and records of insider(s) for the purpose of inspection. The SEBI can investigate and inspect the books of account, either records and documents of an insider on prima facie. SEBI can investigate into the complaints received from investors, intermediaries or any other person on any matter having a bearing on the allegations of insider trading. SEBI’s Power to make inquiries and inspection
19. PENAL PROVISIONS FOR INSIDER TRADING
20. Case studies
21. Classical theory Misappropriation theory Theories of Insider trading
22. UNITED STATES SE Act, 1934 Penalty: Civil penalties such as payment of fine upto 3 times the profit earned or loss avoided and Criminal Prosecution
23. In Re Cady, Roberts and Co. Robert Gintel was a broker and partner of Cady, Roberts and Co. Cowdin was a Director of Curtiss-Wright Corp (CWP) and an associate at Cady, Roberts. Gintel received inside information about CWP from Cowdin and used that information to sell shares of CWP. Held, violation. Reasoning - Individuals who are outside the company could also be considered as ‘Insiders” and found guilty of insider trading if they have a “special relationship” with the company Case studies - USA
24. Winans was a reporter for the Wall Street Journal and one of the writers of a daily column which discussed selected stocks and gave information about those stocks. The contents of the column were the Journal's confidential information. Winans passed on the contents of the column to a few people before its publication. Those people traded in the stocks and made profits, which was shared with Winans. Held, Violation. Reasoning - (1) Winans had knowingly breached a duty of confidentiality by misappropriating pre-publication information. (2) The deliberate breach of Winans' duty of confidentiality and concealment of the scheme was a fraud and deceit on the Journal. (3) The contention that the newspaper is the only alleged victim of fraud and has no interest in the securities traded was rejected. David Carpenter, Kenneth P. Felis and R. Foster Winans Vs. United States
25. Grand Metropolitan PLC (Grand Met) retained the law firm of Dorsey & Whitney to represent it regarding a potential tender offer for the Pillsbury Company's common stock. Respondent O'Hagan, a Dorsey & Whitney partner, who did no work on the representation, dealt in the shares of Grand Met. Held, violation. Reasoning - (1) A person who trades in securities for personal profit, using confidential information misappropriated in breach of a fiduciary duty to the source of the information can be held liable. (2) A company's confidential information qualifies as property to which the company has a right of exclusive use; the undisclosed appropriation of such information constitutes fraud akin to embezzlement. United States Vs. O'Hagan
26. In the Galleon cases, the SEC had charged number of defendants for widespread and repeated insider trading in the securities of around 15 companies generating illicit profits totaling nearly $90 million Raj Rajaratnam was arrested for insidertrading and conspiracy ; was found guilty and sentenced to jail Number of other defendants also found guilty Investigation relied inter-alia on telephonic evidence UNITED STATES VS. RAJ RAJARATNAM
27. HLL-BBLIL MERGER RAKESH AGARWAL vs. SEBI RAJIV GANDHI VS SEBI Reliance Industries Ltd vs SEBI Case Studies – INDIA
28. HLL-BBLIL MERGER CASE
29. Focus on legal controversy involving BBLIL’s merger with HLL. SEBI, suspecting insider trading, conducted enquiries. In August 1997, SEBI charged HLL of insider trading by using Unpublished Price-Sensitive Information. HLL bought 8 lakh shares of BBLIL from UTI at Rs 350.35 per share (At a premium of 9.5% of the ruling market price of Rs 320) just two weeks before the formal announcement knowing that the HLL and BBLIL were going to merge. SEBI held that HLL was using unpublished, price-sensitive information to trade, and was therefore guilty of insider trading. HLL–BROOKBOND LIPTON INDIA LTD
30. In March 1998, SEBI passes an executive order in this regard SEBI directed HLL to pay UTI Rs 3.4 Crore in compensation, and also initiated criminal proceedings against the five directors of HLL and BBLIL. HLL appealed against the SEBI verdict to the Union Ministry of Finance. HLL contended that before the transaction, the merger was the subject of wide speculation by the market and the media. After the formal announcement, press articles mentioned that the merger was no surprise to anyone. HLL–BROOKBOND LIPTON INDIA LTD
31. HLL pointed out that the share price of BBLIL moved up from Rs 242 to Rs 320 between January and March, before the transaction, indicating that the merger was “generally known information”. HLL contended that to be considered as an insider, it should have received information “by virtue of such connection” to the other company. According to HLL, it was an initiator and the transferee, and it was the “primary party” to the merger and no primary party to the merger can be considered an insider from the point of view of insider-trading. HLL argued that only the information about the swap ratio could be deemed to be price-sensitive and that this ratio was not known to HLL or its directors before the purchase of shares from UTI. HLL–BROOKBOND LIPTON INDIA LTD
32. HLL also argued that the news of merger was not price sensitive as it had already been announced by the media before the official announcement. HLL claimed that the purpose of the purchase of shares was to enable Uniliver to acquire 51% shares of BBLIL. In July 1998, the Appellate Authority of the Finance Ministry dismissed the SEBI order. HLL–BROOKBOND LIPTON INDIA LTD
33. RAKESH AGARWAL vs. SEBI
34. One of the most famous case highlighting the vulnerability of the SEBI’s 1992 regulations. Rakesh Agarwal, MD of ABS Industries Ltd was involved in negotiations with Bayer A.G, regarding their intention to takeover ABS. As per SEBI, RakeshAgarwal had access to the Unpublished price-sensitive information. SEBI alleged that prior to the announcement of acquisition, RakeshAgarwal, through his brother-in-law, had purchased shares of ABS and tendered the said shares in the open offer made by Bayer. RAKESH AGARWAL vs. SEBI
35. Rakesh Agarwal contended that he did this in the interest of the company. Pursuant to Bayer’s condition to acquire at least 51% shares of ABS, he, through his brother-in law bought the shares and later sold them to Bayer. The SEBI directed RakeshAgarwal to “deposit Rs 34,00,000 with Investor Education & Protection Funds of Stock Exchange, Mumbai and NSE. SAT held that the SEBI order directing Agarwal to pay Rs 34 lakh couldn’t be sustained, on the grounds that Rakesh Agarwal did that in the interests of the company. The matter was later settled on consent basis and Mr. Rakesh Agarwal paid Rs 48 lakhs RAKESH AGARWAL vs. SEBI
36. Rajiv Gandhi (RG) was the CFO and Company Secretary of Wockhardt Limited. Sandhay Gandhi (SG) and Amishi Gandhi (AG) were the spouse and sister of RG. SG & AG traded in the shares of Wockhardt Limited. Having regard to date and time of trades, their close relationship with one another, it was alleged that they were insiders and that their trades were executed on the basis of the UPSI. Held, Violation Reasoning – Appellants failed to rebut the presumption on which the allegation was made and not even attempted to offer an explanation as to the basis which prompted them to trade Adjudicating order imposed a penalty of Rs, 5 lac each on the Company Secretary Mr. Rajiv B. Gandhi and two relatives, For separate proceedings under Sec. 11B of SEBI Act 1992 initiated against them, they have consented to pay Rs. 5 lac and undergo a voluntary debarment for 18 months and agreed to refrain from acting as the compliance officer of a listed co. for 18 months. Rajiv B. Gandhi Vs. SEBI
37. Reliance Petroinvestments Ltd. was alleged to be in possession ofunpublished price sensitive information (hereinafter referred to as "UPSI") while trading in the scrip of IPCL prior to announcement of declaration of interim dividend and amalgamation of IPCL with Reliance Industries Ltd. Imposed penalty of Rs. 11 crores. Reliance Industries Ltd vs SEBI
38. Challenges
39. INSIDER TRADING– Emerging Issues Non availability of telephone/e-mail records Multiple layers of Bank Transactions Delay in submission of information by banks/Clients Inadequate information in bank statements Inadequate data to prove connections Requirement for information from Other/ Foreign Regulators
40. INSIDER TRADING – Emerging Issues Easy availability of “front entities” Easy to float a company without much finance and infrastructure i.e. Fly-by-night companies. Principle of Natural Justice” i.e. inspection of documents, cross examination, etc. Use of Benami SIM cards Dependence on suspect for information Issue of regulatory jurisdiction/ overlap – because of cross-market and cross-time zone and cross-region dependencies (such as derivatives with an underlying assets trading elsewhere)
41. Committee set up by SEBI to review insider trading regulations New Regulation for Insider Trading soon Stricter disclosure requirements on connected persons to company Way forward