Insider Trading and Market Abuse

In one line

Insider trading is no longer a Companies Act offence at all: it lives in s.15G of the SEBI Act and in the prohibition of insider trading regulations, which forbid an insider from communicating unpublished price sensitive information except for legitimate purposes and from trading while in possession of it, with a presumption against him once possession and trading are shown.

In exam wording: under section 15G of the Securities and Exchange Board of India Act 1992, an insider who deals in securities of a body corporate listed on any stock exchange on the basis of any unpublished price sensitive information, or communicates such information to any person except as required in the ordinary course of business or under any law, or counsels or procures any other person to deal on the basis of it, is liable to a penalty not less than ten lakh rupees, extending to twenty-five crore rupees or three times the amount of profits made out of insider trading, whichever is higher.

Why the law has this at all

Insider trading is not fraud in the classical sense. The insider tells his counterparty nothing false; often he deals on an anonymous exchange and never meets him. The wrong has to be located somewhere else, and three explanations are offered, each of which produces a slightly different rule.

The property theory. Price sensitive information belongs to the company, and an insider who trades on it converts the company's property to his own use. This explains why the duty is owed by the connected person, and why communication is prohibited as well as trading.

The equality of access theory. The market works only if participants believe they are dealing on equal informational terms. An insider trades with an advantage no counterparty can obtain, and if that is tolerated the ordinary investor withdraws. This explains why the Indian definition of insider reaches anybody in possession of the information, however he came by it, and not merely the fiduciary.

The fiduciary theory, dominant in the United States, locates the wrong in a breach of duty owed to shareholders or to the source of the information. Indian law has deliberately not confined itself to it, and saying so is the mark of an LL.M. answer rather than an undergraduate one.

The Indian regime follows mainly the second. That is why the onus structure in regulation 4 is what it is, and why the definition of insider is drafted the way it is.

Why the Companies Act no longer deals with it

The 2013 Act, as enacted, contained two provisions on this subject.

Section 194 prohibited forward dealings in the securities of a company by a director or key managerial personnel. It was omitted by s.64 of the Companies (Amendment) Act 2017 with effect from 9 February 2018.