By its own inherent attribute the capital market is volatile. It exhibits patterns of violent changes even in the short-term and this acts as a boon for speculators, since volatility throws both risk and reward. The price changes in the market occur on account of the impact of emerging news about major events affecting the country's economy or the fortunes of business enterprises. Since the Government is responsible for ushering steps towards orderly development of the country and the growth of its economy, any adverse development on the stability of the government in a democratic setup also affects the market adversely and violently. But these changes are externally oriented and event-driven. These are outside the scope of anyone of the market players inside.

On the other hand market scams and market crisis are created by internal operators in the security market, i.e. brokers or high net worth investors. This is termed as market manipulation. In this way simple gossiping or rumour-mongering can turn the market panicky. SEBI is vested with powers to take action against these malpractices relating to securities market manipulation and against those spreading misleading statements to induce sale/purchase of securities. This is discussed in more detail in another article titled Fraudulent and Unfair Trade Practices

Insider Trading is another virus that could damage the market. This is a market infection prevailing worldwide in almost all countries. According to definition of SEBI an "insider" means any person who, is or was connected with the company or is deemed to have been connected with the company, and who is reasonably expected to have access, connection, to unpublished price sensitive information in respect of securities of a company, or who has received or has had access to such unpublished price sensitive information. Obviously an insider, who has deep insight into the affairs of the corporate body and holding knowledge about "price sensitive information" relating to the performance of the corporate body that could have a decided impact on the movement of the price of its equity, is at a vantage position with regards to a prospective trading in the shares of the company to the detriment of the remaining investors.

"Insider trading" is a term that most investors have heard and usually associate with illegal conduct. But the term actually includes both legal and illegal conduct. The legal version is when corporate insiders-officers, directors, and employees-buy and sell stock in their own companies. When corporate insiders trade in their own securities, they must report their trades to the U.S. Securities and Exchange Commission (SEC) .

"Illegal insider trading refers generally to 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. Insider trading violations may also include "tipping" such information, securities trading by the person "tipped," and securities trading by those who misappropriate such information.

Examples of insider trading cases that have been brought by the Securities Exchange Corporation (SEC) are cases against:

• "Corporate officers, directors, and employees who traded the corporation's securities after learning of significant, confidential corporate developments;

• "Friends, business associates, family members, and other "tippees" of such officers, directors, and employees, who traded the securities after receiving such information;

• "Employees of law, banking, brokerage and printing firms who were given such information to provide services to the corporation whose securities they traded;

• Government employees who learned of such information because of their employment by the government; and

• "Other persons who misappropriated, and took advantage of, confidential information from their employers.

"Because insider trading undermines investor confidence in the fairness and integrity of the securities markets, the SEC has treated the detection and prosecution of insider trading violations as one of its enforcement priorities."
[Source: Website of U.S Securities & Exchange Commission (SEC)

In simple terms ‘insider trading’, means selling or buying securities of a listed corporate on the basis of unpublished price sensitive information by the privileged few such as a director, member of management, an employee of the firm or advisor, agent, consultant or any other person who have access to such unpublished price sensitive information which if published could lead to a fall or rise in the prices of securities of the company. If insiders withhold information in order to profit from trades on the basis of price sensitive information, there will be less information available to the market thereby impairing the efficiency of the market. Since, trading in capital market across the world is based on transparent flow of information, insider trading undermines investor confidence in the fairness and integrity of the securities market. Therefore, preventing such transactions is an important obligation for any capital market regulatory system. For instance, prior knowledge of a bonus issue would result in the insider acquiring a significant exposure in particular scrip, knowing that his holding would increase significantly after the bonus is announced.
[Source: Website of Manupatra Information Solutions Pvt. Ltd.]

If a privileged few holding unpublished price sensitive information were to unethically secure undue financial gain by its application to the detriment of several thousands of other investors not having access to such source of information, the resulting situation would undermine the confidence of the ordinary investor, in the integrity of the market. Stock markets are a success precisely because they enjoy the highest level of confidence. Investors put their capital to work - and put their fortunes at risk - because they trust that the marketplace is honest. One of the main reasons that capital is available in such quantities in the stock markets is basically that the investor trusts the markets to be fair. Fairness is a major issue. Insider-trading is therefore not only unethical but also destructive of investor-confidence in the market with the effect of undermining the health of the market as a whole.

An essential part of the regulation of the securities market world over is the vigorous enforcement of laws against insider trading. The enforcement program includes both civil and criminal prosecution of insider trading cases. Insider trading regulations seek to create a "level playing field" in securities markets. No one dealing in the markets should have information that is not available to other market participants. It is irrelevant how the individual has come by the inside information. If known, all dealing is prohibited

Taking this fact into account the SEBI through Regulation has prescribed several "do-s" and "don'ts" with reference to these "insiders". The effect of the regulatory measure is to prevent insiders from trading in the shares of the company under their superintendence or control to earn an unfair benefit for themselves to the disadvantage of the other bonafide shareholders.

In India SEBI has codified Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992, to check the menace of insider-trading. In its efforts to curb insider trading, the Securities and Exchange Board of India enacted regulations requiring that corporate deals be reported to stock exchanges within 15 minutes of finalizing

For quick and easy detection and identification of violators against the regulations prohibiting insider trading, SEBI is vested with the powers of a civil court in respect of discovery and production of books, documents, records, accounts, summoning and enforcing attendance of company/person and examining them under oath. SEBI can also levy fines for violations related to failure to submit information.

Preventive & Educational Measures

Punitive measures deal with a situation after the event. The need is to prevent insider-trading and educate the investor properly. Preventive measures are effective with nearly 75% of investors who are by nature law-abiding. SEBI, therefore in addition to the provisions empowering itI to inflict penalties on violators who defy the regulations and indulge in the antisocial and unethical trade-gains to the detriments of other honest investors, has also formulated the following positive guidelines for the benefits of listed companies and other corporates to safeguard themselves and maintain proper accountability. These are -

• Punitive

  1. Insider Trading & Measures by SEBI to Curb the same - SEBI (Prohibition of Insider Trading) Regulations, 1992

• Preventive

  1. Model Code of Conduct for Prevention of Insider Trading for Listed Companies

  2. Model Code of Conduct for Prevention of Insider Trading for Other Entities

  3. Code of Corporate Disclosure Practices for Prevention of Insider Trading

The gist of the provisions in all these codification are discussed in the next four articles