Justice K.S. Radhakrishnan has held in a recent case that:
“SEBI, the market regulator, has to deal sternly with companies and their Directors indulging in manipulative and deceptive devices, insider trading etc. or else they will be failing in their duty to promote orderly and healthy growth of the Securities market. Economic offense, people of this country should know, is a serious crime which, if not properly dealt with, as it should be, will affect not only country’s economic growth, but also slow the inflow of foreign investment by genuine investors and also casts a slur on India’s securities market.”
Insider trading is principally the act of dealing in securities with the advantage of having asymmetrical access to unpublished information which when published would impact the price of securities in the market. The goal is to prohibit an insider from profiting while he is in the possession of critical price sensitive information with respect to a given company, which would cause a disparity by impairing the interests of a public shareholder who is not privy to such information.
The United States was the first nation to impose a prohibition on the act of insider trading. At the time, other jurisdictions like UK and Australia did not appreciate the rationale behind this move of the United States. Today most jurisdictions across the world are unequivocally unanimous in the resolve to fight insider trading to ensure a level-playing field for those trading in the securities market. The objective is to ensure investor confidence in the market and the integrity of price discovery. Having said that, the determination of the nature of an act of trading by an insider as being illegal varies across jurisdictions.
In India, insider trading is not only a tort i.e. a civil wrong but also a crime. Section 24 of the SEBI Act criminalizes insider trading, punishable with imprisonment of up to ten years, or with fine of up to INR 25 crores, or both. Further under Section 15G of the SEBI Act, SEBI can impose a penalty of twenty-five crore rupees or three times the amount of profits made out of insider trading, whichever is higher, for insider trading.
A recently published article on the same subject by Agama Law Associates is available here.