Insider Trading: The Definitions

In one line

An insider is a connected person, or anybody in possession of or having access to unpublished price sensitive information; such information is anything about a company or its securities that is not generally available and would materially affect the price if it were; and no insider may communicate it, and nobody may procure it, except in furtherance of legitimate purposes, the performance of duties or the discharge of legal obligations.

In exam wording: regulation 2(1)(g) defines an insider, 2(1)(d) a connected person, 2(1)(n) unpublished price sensitive information, 2(1)(e) generally available information, 2(1)(l) trading; and regulation 3 prohibits communication and procurement.

Why the law has this at all

A stock market works because buyers and sellers face the same uncertainty about what a share is worth. When one side knows the results are about to be announced and the other does not, the trade is not a bargain between equals; it is a transfer from the uninformed to the informed.

The harm is not to the individual on the other side of the trade, who would probably have sold anyway, but to the market itself. If outsiders believe insiders are dealing on what they know, they demand a discount for the risk, and every company pays for it in the price of its capital.

Hence the design of these Regulations, which is worth stating before any definition.

Define the information first, in regulation 2(1)(n), by a price test, not by a list. The list that follows is illustrative.

Define the person widely, in regulation 2(1)(g), so that it catches anybody in possession, however he came by it, and not only the company's own officers.

Prohibit two things separately. Communicating it, and trading on it. Regulation 3 does the first; regulation 4, in the next chapter, does the second. A director who tells his broker and never trades has still broken the law.

And leave a lawful channel, "in furtherance of legitimate purposes, performance of duties or discharge of legal obligations", because a company must be able to tell its auditors, its bankers and its advisers.

Some words this chapter uses

Trading is defined in regulation 2(1)(l) and is wider than buying and selling. A trading day is a day on which the recognised stock exchanges are open. An intermediary is one specified in section 12 of the Securities and Exchange Board of India Act, 1992. Legitimate purposes are to be defined by the Board of a listed company in its Code of Fair Disclosure and Conduct. A rebuttable presumption is one the person may displace by proof.

Where the law now lives

Section 195 of the Companies Act, 2013, which prohibited insider trading, was omitted with effect from 9 February 2018. So was section 194, on forward dealings.