Supallab Chakravorty, who is presently enrolled in NUJS, Kolkata, to pursue a diploma in entrepreneurship administration and business laws, talks about insider training in this blog post.
Insider trading is the practice of trading in a company’s bonds and securities by people who have access to sensitive, price-sensitive information that the public would not otherwise be aware of. It is against the fiduciary responsibility principles for someone to have accepted a duty in place of their own and, in accordance with that duty, been granted privileged access. The Securities and Exchange Board of India (SEBI) must receive an annual report from a firm detailing any stock transactions by corporate officers, directors, or other individuals with access to privileged information and an obligation to disclose such information to the public.
Issues are not limited to insiders alone; they also include insiders “tipping” friends and family about such price-sensitive knowledge, which can affect the value of shares or securities that are traded publicly. However, friends and relatives do not fit the criteria of an insider, which presented a challenge for the prosecution of such individuals. Right now, anyone receiving is expected to fulfill the same obligations that an insider would. To put it plainly, nobody should trade shares while abusing access to confidential information. As a result, the definition of an insider has expanded, and everyone dealing securities needs to exercise caution to avoid becoming involved since price-sensitive knowledge may have an impact. To be charged with insider trading and found guilty, the individual must have used price-sensitive information, though, as a necessary prerequisite.
In summary, insider trading refers to the trading of stocks and securities of a publicly or privately listed company by directors, workers, or employees who possess insider knowledge, as well as any other individual, such as an internal auditor, financial advisor, lawyer, consultant, data analyst, etc., who may have knowledge of or be in a position to obtain insider information of a price-sensitive nature that is not generally available to the public. Because insider trading undermines investors’ trust in the fairness and integrity of the securities markets, exchange commissions around the world view prohibiting such transactions as a fundamental duty to manage the capital market system.
The original purpose of the SEBI Act, 1992, which was passed with the goal of preventing and controlling insider dealing in securities and company shares, was to set down the SEBI (Insider dealing) Regulations, 1992. The SEBI (Prohibition of Insider Trading) Regulations, 1992 as amended were also attempted to be incorporated into the Companies Act, 2013, but SEBI has notified the SEBI (Prohibition of Insider Trading) Regulations, 2015 (the “Insider Trading Regulations”), which significantly alters the law on insider trading. Therefore, albeit belatedly, Section 195 of the corporations Act, 2013 endeavors to encompass private, public, and listed corporations under its jurisdiction.
An insider is who?
Neither of the Companies Acts defines an insider. Nonetheless, the Indian legal system’s concept of an insider is based on a combination of three definitions found in the Insider Trading Regulations. As per the regulation, an insider can be someone who possesses or has access to “unpublished price sensitive information” or who is one of the following two types of people: i) a linked person. Examining the concept of “connected person,” we can observe that the rule is reducing it from an objective meaning to a more subjective one by disclosing a list of individuals who will be deemed to have the same duty of care as insiders.
(i) Any individual who is or has been, either directly or indirectly, involved in a company within the six months preceding the relevant act in any capacity, such as through regular communication with its officers, or through a contractual, fiduciary, or employment relationship as a director, officer, or employee of the company, or who holds any position involving a professional or business relationship between himself and the company, whether temporary or permanent, that allows such individual, either directly or indirectly, access to price-sensitive information that is not published, or is reasonably expected to allow such access.
(ii) Unless the opposite is proven, individuals falling under the following categories will be considered connected individuals, without affecting the generality of the previous sentence:
(a) a close relative of one of the related individuals listed in subparagraph (i); or
(b) a holding company, a subsidiary, an associate firm, or
(c) a director or employee of an intermediary as defined in section 12 of the Act; or
(d) an asset management firm, trustee company, investment company, or a director or employee of any of these; or
(e) a representative of a corporation, clearing house, or stock exchange; or
(f) is an employee of the asset management company of a mutual fund or a member of the board of directors or trustees of the mutual fund; or
(g) an employee or a member of the board of directors of a public financial institution as that term is defined in Companies Act, 2013 Section 2 (72); or
(h) a representative or staff member of a self-regulatory group that the Board has approved or acknowledged; or
(i). one of the company’s bankers; or
(j). a business, trust, Hindu undivided family, organization, or group of people in whom a company’s director, a close relative, or a banker has more than 10% of the holding or interest;
However, the definition relies on the rebuttable presumption of law to include individuals, such as immediate relatives or those mentioned above, within the purview of the duty of care. These individuals may not appear to hold a position with the company, but they nevertheless maintain regular contact with it and have ready access to information that is price-sensitive. Unpublished price sensitive information is defined by the regulation as any information relating to a company or its securities, directly or indirectly, that is not generally available but upon becoming generally available, is likely to materially affect the price of the securities. This definition should be read collectively because the act appears to be focused only on those individuals who have access to unpublished price sensitive information. Typically, this includes but is not limited to information relating to the following:
(i) monetary outcomes;
A shift in the capital structure (iii);
(iv) company expansion, sales, delistings, mergers, demergers, acquisitions, and other similar activities;
(v) modifications to important managerial staff; and
(vi) significant occurrences as specified in the listing agreement.
In addition to the meaning given by the Indian statute, studying American jurisprudence on the subject is helpful for gaining a deeper grasp of the phrase, as a significant portion of current insider trading regulations originate from U.S. The United States, through its exchange regulator, the Securities and Exchange Commission, was the first nation to combat insider trading. The Insider Trading Sanctions Act, 1984 (the “Sanction Act”) gives it the authority to punish individuals involved in insider trading with civil and criminal penalties in addition to criminal prosecutions.
A firm’s officers, directors, or anybody in possession of at least 10% of the stock securities of the company are considered “insiders” under the Sanction Act. An insider is considered criminally liable if they use confidential knowledge in a way that goes against the fiduciary duty that the corporation has placed in their hands. The Sanction Act provides a numeric definition of an insider, but court rulings establish a subjective definition that holds all persons in possession of price-sensitive information accountable under the Sanction Act.
In a landmark ruling on insider trading, the U.S. Supreme Court rendered a decision in Dirks v. SEC. The Court held that if a tip recipient had reason to believe that disclosing such information would violate another’s fiduciary duty and if the tip recipient stood to gain personally from acting on the information, then the prosecutor could hold the tip recipient liable for violating insider trading laws. The case also gave rise to the constructive insider rule, which designates professionals who regularly work for a company as insiders if they have access to confidential information.
The press note on “Trading “by” material non-public information in insider trading cases” has been put into effect by the recent rise of the misappropriation theory of insider trading. This theory allows for the criminal prosecution of anyone who trades any stock based on misappropriated information. The prosecution was formerly limited to insiders and only allowed to proceed if the insider’s company’s stock had been exchanged. Nonetheless, insider trading policy violators have not been given a broader term by the court or the media. Even though it might be challenging to collect evidence of insider trading, the SEC keeps a close eye on trade and aggressively monitors any questionable conduct. However, a defendant may raise an affirmative, pre-planned trade defense.
In a number of cases, such as Tellabs, Inc. v. Makor Issues & Rights, Ltd., the U.S. Supreme Court clarified 10(b) and held that in order to prove fraud, the prosecutor must make a strong assumption that the defendant acted with the necessary mental state. The Hon’ble Court defines a “strong inference” as the presentation of “cogent and compelling evidence.” 
The main lesson to be learned from this essay is that one must exercise reasonable caution when handling a company’s stocks and securities to avoid breaking any laws pertaining to insider trading. Because anyone, even corporations and their directors, may unnecessarily become involved in legal processes due to the expanding definition of insider. It is significantly more difficult to prove your way out of such proceedings in such circumstances.