SLATE. All you wanted to know about insider trading

Looking for a tip-off on a listed company before it buys a firm? Or a preview on its awesome results? Well, hold your temptations, that’s a ticket to prison. Insider trading has landed many — from former celebrity Martha Stewart to Rajat Gupta — in serious trouble. Just last week, market regulator SEBI alleged insider trading by promoters of the Murugappa Group.

Insider trading happens when those who have information that can move a company’s share price trade in the market. All listed companies have an obligation to share every piece of material information relating to their operations, immediately with shareholders. When an insider trades on information that is not available to the public, it becomes insider trading. Insiders can be employees, relatives and all those who have business relations with the company. But what if your brother-in-law tips you off on a development he heard about from the promoter’s gardener? In India, SEBI treats all such instances as insider trading. The rule on who is an insider is broad and covers even those not directly associated with a company but who may have had access to information nevertheless. This includes relatives of employees, brokers and analysts.

The information considered price-sensitive includes financial results, dividend declaration, mergers, expansion plans and management changes. SEBI can levy a penalty of three times the amount of profits made and can initiate criminal proceedings on those found guilty of insider trades.

As to company staff who may always have access to sensitive information and yet own company stock, the regulations allow them to create ‘trading plans’ that give details of when and how they will trade on the shares. This must be approved by a compliance officer, disclosed to the public six months prior to trading and cannot be deviated from.

Trading on inside information creates information asymmetry. Regulators crack down on such acts. The SEC in the US prosecuted 250 people for insider trading during 2009-14. The most high profile of these cases was the one relating to Rajat Gupta, former McKinsey boss, and Raj Rajaratnam of Galleon Funds. In 2014 alone, the SEC filed 25 insider trading cases. In India, however, SEBI’s track record has been unimpressive. Its cases against Wockhardt’s CFO and Ranbaxy’s independent director were successful, but many high profile cases such as the one against Hindustan Unilever and Tata Finance’s managing director were overturned. One possible reason for this could be that SEBI has not traditionally enjoyed access to phone calls or phone records of market players to pin them down as the SEC does. But it has been granted access to call records in the new regulations.

Unfair profits for insiders could mean losses for common investors. You should be aware of the illegality of insider trading while acting on tips too. If you are given a ‘tip’ on a company’s impending profits by your golfing buddy who claims to have got the information directly or from a ‘trusted source’, beware!

By the same token, if you have access to sensitive information that can affect stock prices, remember that you automatically become an insider.

Trading on insider information is illegal. Period.

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