The SEBI is empowered to take necessary measures to prohibit insider trading in securities. In view of its implications for the healthy growth of the securities market, the SEBI has evolved a regulatory framework to prevent and cure the menace of insider trading which is briefly outlined as follows:
Prohibition on Insider Trading:
Any insider who (1) either on his own behalf or on behalf of any person deals in securities of a listed company (2) communicates to any person, with/without his request, except as required in the ordinary course of business or under any law; and (3) counsels or any other person to deal in securities on the basis of any unpublished price sensitive information is guilty of insider trading.
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to have been connected with the company and who is reasonably expected to have access, by virtue of such connection, to unpublished price-sensitive information in respect of securities of the company, or who has received or has had access to such unpublished price sensitive information.
Unpublished price-sensitive information means any information which relates to the following matters or is of concern, directly or indirectly to a company and is not generally known or published by such company for general information, but which if published or known, is likely to materially affect the price of securities of that company in the market: (1) financial results (both half-yearly and annual) of the company; (2) intended declaration of dividends (both interim and final); (3) issue of shares by way of public, rights , bonus etc; (4) any major expansion or execution of new projects; (5) amalgamation, mergers and takeovers; (6) disposal of the whole or substantially the whole of the undertaking; (7) such other information as may affect the earnings of the company; and (8) any changes in policies, plans or operations of the company.
Connected person means a person who is a director/deemed to be a director of the company or occupies the position of an officer including its auditor or an employee of the company or holds a position involving a professional/business relationship with the company or who may reasonably be expected to have access to unpublished price sensitive information in relation to that company.
Deemed to be connected person includes company under the same management /subsidiary company; an official/member of a stock exchange/clearing house or a dealer in securities; merchant banker/share transfer agent/registrar to issue, debenture trustee, broker, portfolio manager, investment advisor, sub-broker, trustee of a mutual fund, member of board of directors of an asset management company of a mutual fund or their employees; member, board of directors/employee of public financial institutions; official / employee of a self regulatory organization, recognized/authorized by a regulatory body; a relative of the aforesaid persons and, finally banker of the company.
On a complaint from investors, intermediaries and any other person or on its own to protect the interest of the investors in securities, the SEBI can conduct an investigation into cases of insider trading by an investigating authority/qualified auditor. According to the procedure laid down in this regard, investigation can be conducted by giving reasonable notice to the insider or in the interest of the investors or in public interest, without any notice. The insider, i.e. the person being investigated, has to produce books of accounts/ documents furnish required information/statements, allow access to his premises extend reasonable facility for examining book/records/data and also provide their copies which is mandatory. The examining authority is empowered to examine/record statements of directors/partners/employees etc., who have also to extend all assistance in connection with the investigation.
On the basis of the findings of the inspection report, the SEBI is empowered to give such directions to protect the interest of the investors, and in the interest of the securities market and for compliance with the provisions of the SEBI Act rules and regulations as it deems fit for the following purposes: (1) direct the insider not to deal in securities in any particular manner; (2) prohibit him from disposing off any securities acquired in violation of these regulations and (3) restrain him from communicating/counseling any person to deal in securities.
The SEBI has also the right to initiate prosecution against the violation of the insider trading regulations. Any person contravening the provisions is liable to pay a penalty of fine and/or imprisonment.