SECURITY AND EXCHANGE COMMISSION AND SECURITY AND EXCHANGE

BOARD OF INDIA: A COMPARATIVE STUDY ON INSIDER TRADING

5.2 Company Law

Submitted by:
Karunesh Shukla
SM0115017
3rd Year, 5th Semester

Faculty-in-Charge
Monomi Gohain

National Law University, Assam

Table of Contents
Table of Cases ............................................................................................................................ii
Table of Statutes ........................................................................................................................ii
Table of Abbreviations ..............................................................................................................ii
Introduction ................................................................................................................................ 1
Aim(s) ........................................................................................................................................ 3
Objective(s) ................................................................................................................................ 3
Scope and Limitations................................................................................................................ 3
Review of Literature .................................................................................................................. 3
Research Questions .................................................................................................................... 4
Research Methodology .............................................................................................................. 5
INSIDER TRADING AND ITS REGULATION IN INDIA ............................................... 6
JUDICIAL INTERPRETATION ........................................................................................... 8
A COMPARISON BETWEEN THE LEGAL SYSTEMS IN INDIA AND THE
UNITED STATES.................................................................................................................. 10
LACUNAE IN THE FRAMEWORK: THE AREAS THAT NEED A RELOOK .......... 12
Conclusion .............................................................................................................................. 14

i
Table of Cases

1. Chiarella v. United States

2. Dr. Anjali Beke v SEBI
3. Hindustan Lever Ltd. v. SEBI
4. Mrs.SadhanaNabera v. SEBI
5. Rakesh Agrawal v. SEBI
6. Samir Arora v. SEBI
7. United States v. Newman

Table of Statutes

SEBI (Prohibition of Insider Trading) Regulations, 1992 (PIT Regulations)

Securities Exchange Act,1934
Constitution of India, 1950

Table of Abbreviations

1. AIR All India Reporter

2. BBLIL Brooke Bond Lipton India Ltd

3. Anr. Another

4. Bom Bombay

5. Cal Calcutta

6. Ch. Chapter

7. CCI Controller of Capital Issues

ii
8. Cr LJ Criminal Law Journal

9. HLL Hindustan Lever Ltd

10. ILR Indian Law Review

11. Mad Madras

12. PIT Prohibition of Insider Trading

13. SEBI Security and Exchange Board of India

14. SEC Security and Exchange Commission

15. Ors. Others

16. SC Supreme Court

17. Cr LJ Criminal Law Journal

18. SCC Supreme Court Cases

19. v. Versus

iii
Abstract
The growth of business in India after the reforms in 1993 led to many structural changes, one among the
prominent one was the formation of SEBI to regulate the markets in India. Insider Trading generally
refers to trading by a person based on inside information. Even though economists around the world have
not yet reached a consensus on whether banning insider trading enhances market efficiency or not, the
regulators all over the world have been attempting to curb insider trading for a long time now. Insider
trading has been a controversial issue in India as well and is closely monitored by the Securities and
Exchange Commission. Section 16 of the 1934 Act prevents short-term trading and other transactions in
a corporation’s securities by corporate insiders. In this research paper an effort is made to compare the
legal framework in India to the one present in the United States for the regulation of matters relating to
insider trading. In addition to this the areas of the regulations which suffer from certain lacunae will also
be recognised. A study of how the court has over the years interpreted various cases relating to insider
trading will also be considered, thereby creating a clear view as to how and what changes must be
incorporated in the present law in order to have a more advanced system of regulation like that in the
USA.

Introduction
After the liberalisation policy was taken up by India in 1991, the growth of Capital market started to
increase at a rapid speed. The already existing organisations of the time like the CCI (Controller of
Capital Issues) and the Department of Company Affairs were looking after other aspects which made the
people realised the need for a single authority to regulate and administer the security law in the country.
Keeping this point in mind SEBI (Security and Exchange Board of India) which was earlier established as
an administrative body in April 1988, was given a statutory status under section 3 of Securities and
Exchange Board of India Act, 1992 on 30th January 1992.1 This made SEBI a corporate body, thus
having a separate legal existence. The SEC on the other hand was set up in an era that was ripe for
reform. Before the great depression of 1930, there was little support for the regulation of the securities
market. People tempted by the promise of ‘rags to riches’ transformation and easy credit, most investors
gave little thought to the systematic risk that arose from the widespread abuse of margin financing and
unreliable information about securities in which they were investing.2 After the First World War a large
number of shareholders took advantage of the post-war prosperity and made their fortune, also the $50
billion in new securities that was offered during this period half had become meaningless. Moreover, the

1
Rajiv Kumar Singh, Role of Securities & Exchange Board of India (SEBI) in regulating Mutual Funds,
http://sgsrjournals.com/paperdownload/5.pdf
2
U.S. Securities and Exchange Commission, https://www.sec.gov/about/whatwedo.shtml

1
Great Depression made the people lose confidence in the market and resulted in the both the large and
small investors lose huge sums of money.

The Congress realised that it was essential to bring back the trust of the public in the capital markets and
so held hearings to identify the issues and find solutions to them. Based on the findings in these hearings,
Congress — during the peak year of the Depression — passed the Securities Act of 1933. This law,
together with the Securities Exchange Act of 1934, which created the SEC, was designed to restore
investor confidence in our capital markets by providing investors and the markets with more reliable
information and clear rules of honest dealing.3

Insider trading means the dealing in securities a company on the basis of certain confidential information
relating to the company which is not published or not in the public domain. It classically involves the
breach of a fiduciary duty by the officers of any company or by such connected persons. SEBI is the
regulatory authority in India which deals with such manipulative and deceptive trade practises. In the
USA, it is the SEC which has been entrusted with the function of regulating such mal-practises by the
persons involved in trade practises. Section 16 of the SEC act deals with matters relating to insider
trading in the United States.

This research paper will be dealing with various aspects of SEBI and the SEC and will analyse the
different functions and objectives that the carried out by both the institutions in matters of Insider trading.
It will further make a comparative analysis of both the commissions and will focus on the areas in which
the SEBI needs a relook considering the functions of SEC.

3
Ibid at 2

2
Aim(s)

The aim of this research paper is to study the role of SEBI in dealing with the matters of insider trading
in India. It will also make a comparative study of the provisions and regulations that governs insider
trading in India to that in the United States by the SEC.

Objective(s)

 To study the laws relating to regulation of insider trading in India that are regulated by SEBI.
 To analyse and compare the role of SEBI and SEC in regulating insider trading in India and USA.
 To recognise the areas of the regulations that suffer from certain lacunae and the changes that can
be made thereon.
 To study the various judicial interpretation of the courts in matters relating to insider trading in
India and to recognise the role it has played in the development of the regulations in India.

Scope and Limitations

The scope of this research paper is limited to the study of the insider trading regulations in India and it
comparison to the regulations put in place in the USA by the SEC. It will be limited to a comparative
study of the regulations of the two legal system and it point out any lacunae in the Indian law if any is
found

Review of Literature

 Sumit Agarwal & Robin Joseph Baby, SEBI ACT: A LEGAL COMMENTARY ON
SECURITIES & EXCHANGE BOARD OF INDIA ACT,1992, Taxman Publication, New
Delhi
A Legal Commentary on Securities & Exchange Board of India Act, 1992.This book serves as one of
the first comprehensive legal commentaries on the SEBI Act, 1992. The section-wise study of the
statute includes extensive reference to judicial pronouncements and their analysis, the
recommendations of various expert committees, comparative study of similar powers of other
regulators - both domestic as well as foreign. The book also chronicles the evolution of securities law
in India and provides insights on the road ahead.

3
The book also deals with the concepts of insider trading in India in a very lucid and exhaustive
manner. It begins from the origin of the insider laws in India, and traces it back to even how the laws
had developed in India. In addition to this, the books also deals in details with the related concepts of
insider trading like that of unpublished price sensitive information, the motive of the insider trading
in a very detailed manner. The book is also a good work on the regulations that have been taken up
by the SEBI to prevent the act on insider trading in the country. Moreover, it has also dealt with the
pre amendment and post amendment changes in the regulations and gives an idea as to the
fundamental changes that were triggered by the latest changes.
 Arun Kumar Singh, “INSIDER TRADING: COMPARATIVE ANALYSIS OF INDIA AND
USA”, SSRN Journal
Insider trading, the occurrence of which has become rampant in many industrialized countries, the
research seeks to examine the legal mechanism prevalent in India and assess the extent to which it
has been implemented by interpreting cases taken up by the Courts. The research shall further draw a
comparison between the legal frameworks of India and USA pertaining to insider trading and shall
highlight the merits and demerits of each by analysing cases which have taken place at an
international level which have led to the breach of fiduciary duties by connected persons and mis-
appropriation of large amount of funds involving Raj Rajaratnam, the billionaire founder of the
Galleon hedge fund, which is one of the most controversial and widely deliberated issues in the field
of securities regulation followed by Rajat Gupta’s scam. The research shall also analyse whether
India would benefit from assimilating certain features from the legal system of the United States, and
if so which features would help India strengthen its regulatory mechanism.

Research Questions

 What are the laws relating to regulation of insider trading in India?

 How is the SEC in the USA different from SEBI in regulating insider trading?
 Which are the areas of the regulations that suffer from certain lacunae and what changes that can
be made thereon?
 How has the courts in India interpreted matters relating to insider trading in India and how
successful has it been in development of the regulations in India?

4
Research Methodology

In this project doctrinal research was involved.Doctrinal Research is a research in which secondary
sources are used and materials are collected from libraries, archives, etc. Books, journals, articles
were used while making this project. Further, explanatory type of research was used in this project,
because the project topic was not relatively new and unheard of and also because various concepts
were needed to be explained.

5
 INSIDER TRADING AND ITS REGULATION IN INDIA

Insider Trading generally refers to trading by a person based on inside information. Even though
economists around the world have not yet reached a consensus on whether banning insider trading
enhances market efficiency or not, the regulators all over the world have been attempting to curb insider
trading for a long time now. Laws prohibiting insider trading surely seek to curb the disparity in
information, non-transparency in dealings and erosion of investor confidence, if not enhance market
efficiency.4 In other words insider trading refers to the buying or selling of securities based on
information that are privileged or confidential and are unavailable to the general public.

Insider trading has been a controversial issue in India as well and is closely monitored by the Securities
and Exchange Commission. Section 16 of the 1934 Act prevents short-term trading and other transactions
in a corporation’s securities by corporate insiders.5 In India, the menace of insidertrading was first
narrated by PJ Thomas in 1948, in his report titled ‘Report on the Regulation of the Stock Market in
India’ recognised several threats of insider trading in India. He highlighted in his report the effective
provisions that werein place in the U.S.A that were made by the Securities Exchange Act,1934. He also
mentioned the measures taken in countries like Canada and UK which were trying to make all such
transactions public. Later in 1979 the Sachar Committee recommended the amendments to the Companies
Act,1956 to restrict insider trading, which was later followed by the Patel Committee report which
recommended amendments to be made to the Securities Contracts Act, 1956. But until 1992 there was no
legal sanction on the activities concerning insider trading.

The definition of insider trading has been provided in the SEBI (Prohibition of Insider Trading)
Regulations, 1992 (PIT Regulations) framed under section 11(2)(g) of the SEBI Act. The PIT regulations
prohibit insider trading and regulate trading by insiders. In addition they also prohibit communication,
solicitation and counselling of the unpublished price sensitive information6 in a bid to enhance
transparency in the securities dealings. An insider is defined under the PIT Regulations such that the
person who receives unpublished price sensitive information is also covered within its ambit.

4
Sumit Agarwal & Robin Joseph Baby, SEBI ACT:A LEGALCOMMENTARY ON SECURITIES &
EXCHANGE BOARD OF INDIA ACT,1992, 1st ed., p.p. 303
5
http://www.business.illinois.edu/broker/pdf/insider.pdf
6
AO Order No. PB/ AO-15/2011, In respect of Mr. Naval Choudhary, dated 28.02.2011 where the
communication of information by husband to his wife as an insider was penalised

6
Insider trading is however considered to lawful when the insiders of the company who are in possession
of price sensitive information, buy or sell securities of their own company within the confines of
company’s policy and regulations governing this trade.7

An insider is defined under regulation 2(e) of the PIT regulations as:

Insider means any person who:

(i) Is or was connected with the company or is deemed to have been connected with the company and
is reasonably expected to have access to unpublished price sensitive information in respect of
securities of a company, or
(ii) Has received or has had access to such unpublished price sensitive information.

A person to be qualified within the first clause regulation 2(e) must fall within the definition of a
‘connected person’ as provided under regulation 2 (c) or a ‘person deemed to be a connected person’
within the scope of Regulation 2(h). A connected person is defined as defined under regulation 2(c)
includes firstly, a director or a person deemed to be a director or secondly, any person who (a) occupies
the position of an officer of the company, (b) occupies the position of an employee of the company (c)
any person who holds a position involving a professional or business relationship between himself and the
company, whether temporary or p`ermanent and who may reasonably be expected to have access to
unpublished price sensitive information in relation to that company. It has been further clarified that a
connected person means a person who is a ‘connected person’ within the scope of the definition for a
period of six months prior to an act of insider trading.8 The definition of a person ‘deemed to be a
connected person’ have been defined in a very wide manner bringing into its ambit a wide group of
associated individuals. Also, the definition of the connected persons has been furthered widen after the
2002 amendment which bought intermediaries within the ambit of such persons. Any member of the
Board of Directors, an employee of a self-regulatory organisation recognised or authorized by Board of
regulatory body, a relative of the aforementioned persons, banker of the company have all been included
under the definition of a connected person after the 2002 amendment. It also now includes any firm, trust,
Hindu Undivided family, company or association of persons under regulation 2(h). A person to be
qualified as an insider will also have to fulfil clause second of the regulation, i.e., he has to have access to
unpublished price sensitive information. Exclusion of the second clause may further the definition of term
‘insider’ beyond desirable limits.

7
ThummuluriSiddaiah, FINANCIAL SERVICES, 2nd ed., 2011, pg 226
8
Arun Kumar Singh and Anil Kumar, Insider Trading: Comparative Analysis of India and USA,
http://dx.doi.org/10.2139/ssrn.2552418

7
 JUDICIAL INTERPRETATION

In the case of Hindustan Lever Ltd. v. SEBI9which was one of the earliest cases of insider trading in India
it was fiercely contested as to whether a person obtained certain information through such connections or
not. In this case Hindustan Lever Ltd (HLL) was alleged to have been involved in insider trading when it
purchased 8 lakh shares of Brooke Bond Lipton India Ltd (BBLIL) from Unit Trust of India (BBLIL) on
the basis of unpublished price sensitive information regarding the impending merger of HLL and BBLIL.
Both HLL and BBLIL were two subsidiaries of a common parent and one dealt in the shares of the other.
The information of the proposed merger was therefore known to core team. The SAT set aside the
contention of SEBI on the ground that the knowledge of the merger was generally known. The significant
outcome of this case was however the amendment made to the SEBI regulations, which made any
information known to the media unqualified as unpublished price sensitive information. It is also to be
considered here that this case was prior to the 2002 amendment. Relying on the post 2002 definition, in
the case of Dr. Anjali Beke v SEBI10 a person who received information from the Managing Director of
the Company was held be practising insider trading by the SAT.

One of the most significant case in relation to insider trading in India is the case of Rakesh Agrawal v.
SEBI11 in which Mr.Rakesh Agarwal who was the Managing Director of ABS Industries Ltd was alleged
to have been involved in insider trading while having access to price sensitive information regarding the
merger of ABS Industries Ltd. to Bayer AG. After investigation SAT found that the intention behind
acquiring of the share was only to facilitate the entry of Bayer and not to gain unfair personal gain. SAT
held that although it was true that in the process the shares purchased at a lower price fetched a higher
price when offered in the public offer, this gain was only incidental, and certainly not to cheat. Thus, SAT
held that Rakesh Agrawal was not guilty of insider trading. SEBI appealed from the decision of SAT to
the Hon’ble Supreme Court which has settled the matter by its consent order whereby Mr.Rakesh
Agrawal has agreed to pay Rs. 48,00,000 towards the settlement. Also with respect to the prosecution
initiated by SEBI in 2001, the offence was compounded by payment of Rs. 4,90,000 by the accused to
SEBI.12

In the case of Samir Arora v. SEBI13 the court stressed on the fact that where an employee through his
position in a company cannot be reasonably expected to have access to unpublished price sensitive

9
[1998] 18 SCL 311 (SAT).
10
Appeal No. 148/2005
11
[2004] 49 SCL 351 (SAT).
12
Arun Kumar Singh and Anil Kumar, Insider Trading: Comparative Analysis of India and USA,
http://dx.doi.org/10.2139/ssrn.2552418
13
[2005] 59 SCL 96 (SAT)

8
information it is necessary to prove that such employee has in fact received such information and in the
failure to do so, the person cannot be held liable for insider trading. A similar case was the case of
Mrs.SadhanaNabera v. SEBI14where in the absence of any documentary evidence to show the
accessibility of an auditor to unpublished price sensitive information, the auditor was not held to be an
‘insider’.

At present the question relating to what would constitute insider trading can be found by the perusal of
Regulations 3, 3A, 3B and 4 conjointly. According to Regulation 4 any insider who deals in securities in
the violation of Regulations 3 or 3A shall be guilty of insider trading. Regulation 3 prohibits certain
actions: it provides that no insider shall, firstly, either on his own behalf or on behalf of any other person,
deal in securities of a company listed on any stock exchange when in possession of any unpublished price
sensitive information; or secondly, communicate or counsel or procure directly or indirectly any
unpublished price sensitive information to any person who while in possession of such unpublished price
sensitive information shall not deal in securities.15 In addition to this, section 3A also restricts any
company from dealing with the securities of another company or associate of that other company when in
possession of any unpublished price sensitive information.

14
Appeal No. 26/2007, SAT order dated 19.02.2008
15
Arun Kumar Singh and Anil Kumar, Insider Trading: Comparative Analysis of India and USA,
http://dx.doi.org/10.2139/ssrn.2552418

9
A COMPARISON BETWEEN THE LEGAL SYSTEMS IN INDIA AND THE UNITED STATES

Before a comparative analysis of Security Exchange Commission of U.S.A and SEBI is carried out, it
must be kept in mind that the legal framework of USA dealing with insider trading is much older than the
Indian framework. While the United States’ framework is about eight decades old, the Indian regulatory
framework in only about two decades old. The most notable difference between the two regimes in case
of insider trading is that in India there is no separate legislation to govern such cases and is governed
wither by the SEBI (Prohibition of Insider Trading) Regulations, 1992 and certain provisions of the SEBI
Act, 1992, whereas in the United States of America there are the provisions of the Securities Exchange
Act,1934which specifically deals with the cases of insider trading. Thus, on the very onset it can be made
out that USA have a much more specified and structured system to deal with the issues arising out of
fraud or insider trading.

The next important aspect of both jurisdictions which must be compared would be whether or not it is
essential for there to be a breach of fiduciary duty for there to arise a liability for insider trading.16 In the
USA there has been a demise of fiduciary principles in cases of liability in insider trading is concerned.
In the case of Chiarella v. United States17 in which the decision of the Supreme Court has often been
termed as the ‘classical theory’ of insider trading is a case where the court focused on the need of a
fiduciary breach for insider trading. In fact they made fiduciary duty as a sine qua non for the
establishment of fraud or insider trading under Rule 10b-5. However, after the Dirks Case there was a
change in the way courts looked at insider trading as it decided that people who use material information
even without the intention to make profit can be held responsible. In this case, the judge in formulated the
famous concept of ‘constructive insiders’ meaning who receive sensitive confidential information in the
process of providing services to the corporation. This was contained in what is now popularly known as
‘Dirks footnote 14’. Even before this case in 1981, the Second Circuit Court adopted the
“misappropriation” theory, holding in the case of United States v. Newman that a person with no fiduciary
relationship to an issuer nonetheless may be liable under Rule 10b-5 for trading in the securities of an
issuer while in possession of information obtained in violation of a relationship of trust and
confidence.18A similar movement of affixing liability even in cases where there is no breach of fiduciary
duty has also been taking place in India after the 2008 amendment. Before such amendment, the need for

16
Ibid at 15
17
445 U.S. 222 (1980).
18
Comparative study of the Insider Trading regulations prevailing in the different countries e.g. USA & UK
https://www.wirc-icai.org/downloads/BFSIcM-Comparative-study-of-the-Insider-regulation.pdf

10
establishing a fiduciary duty breach was implicit to establish the violation of insider trading regulations in
India.19

Another very significant issue surrounding insider trading in USA and India is the extent of liability of a
person who has made certain transactions based on misappropriated data. As discussed earlier, the
misappropriation theory is the most widely accepted theory in the USA whereas in India it can be
observed that the SEBI has followed a much wider approach. It is evident from Regulation 2(e)(ii) that
the liability of people have been expanded by SEBI to any person who may have received any
unpublished price sensitive information. The joint reading or Regulation 2(e)(ii), regulation 3 and
regulation 4 makes it clear that any person who is a ‘receiver’ of any unpublished price sensitive
information who deals with securities may be held liable for insider trading even in situations where he
has not breached any duty to the company or the source of the information.

Another significant area of controversy in both the legal regimes of India and the United States is the
‘possession v. use’ i.e. whether liability for insider trading may be affixed if there is a trade while the
insider was in possession of the relevant information or whether it is essential to prove that the relevant
information was actually used in the trade.20 While in USA it is not necessary to prove any relationship
between the misappropriated information and security dealings, in India through Regulation 3 the system
of ‘possession’ in followed where the insider is prohibited form dealing with securities when in the
possession of unpublished price sensitive information.

Section 15G of the SEBI Regulations provides a civil penalty of twenty five crore rupees or three times
the amount of profits made out of insider trading whichever is higher. The criminal prosecution for
insider trading is envisaged in clause 1 of Section 24 which provides for a punishment of a maximum of
ten years imprisonment, or a maximum fine of 25 crores or both. Clause secondly of section 24 also
provides that in case of the failure of the civil penalty imposed, he may be punished for a period of ten
years but which shall not be less than one month and a fine which may extend to twenty five crores or
both. While the criminal liability incorporated under Section 32(a) of the Securities Exchange Act, 1934
the USA is similar to that in India as even in USA, the punishment is for 20 years, or a fine of $5,000,000
or both, except that if not a natural person, a fine upto $25,000,000 may be imposed.21 The position of the
Securities Exchange Act, 1934 can be best described through the landmark judgment of Raj Rajaratnam, a
New York hedge fund manager who was charged with fourteen counts of securities fraud and conspiracy
by the Justice Department in USA.
19
Rakesh Agrawal v. SEBI, [2004] 49 SCL 351 (SAT).
20
Arun Kumar Singh and Anil Kumar, Insider Trading: Comparative Analysis of India and USA,
http://dx.doi.org/10.2139/ssrn.2552418
21
Securities Exchange Act Of 1934,https://www.sec.gov/about/laws/sea34.pdf

11
Rajaratnam, was found guilty on all fourteen counts on May 11, 2011,and had allegedly cultivated a
network of executives at, Intel, McKinsey, IBM, and Goldman Sachs. These insiders provided him with
material non-public information. PreetBharara, the government’s attorney, argued in the case that Raj
Rajaratnam had made approximately $60 million in illicit profits from inside information. There were
many players i.e Raj Rajaratnam was the manager of the hedge fund Galleon Group, which managed $6.5
billion at its height. Rajat Gupta is a former director at Goldman Sachs and head of McKinsey consulting.
On September 23, 2008, Warren Buffet agreed to pay $5 billion for preferred shares of Goldman Sachs.
This information was not announced until 6 p.m., after the NYSE closed on that day. Before the
announcement, Raj Rajaratnam bought 175,000 shares of Goldman Sachs. The next day, by which time
the infusion was public knowledge, Rajaratnam sold his shares, for a profit of $900,000. In the same
period of time financial stocks as a whole fell. Rajat Gupta had called Rajaratnam immediately after the
board meeting at which Warren Buffet’s infusion had been announced, and told him of the money
Goldman expected to receive. This information was material to the price of Goldman stock, thus inciting
Rajaratnam to make the trade, something he would otherwise not have done. By buying 175,000 shares of
Goldman stock immediately before the market closed on September 23, 2008, Rajaratnam inflated its
price, making this reflect the then-unknown fact that Berkshire Hathaway would invest $5 billion in the
bank. It is clear that Rajaratnam’s actions caused Goldman Sachs stock to more accurately reflect its true
value.22

A comparison of the system of regulation in USA and India make it evident that the system of regulation
in the USA is much older, aggressive and systematic than the one followed in India. Because of fact that
the laws relating to fraud and insider trading were introduced in the USA much earlier, the SEC has
evolved over time through various judicial interpretations into a much more aggressive regulatory body.
In India on the other hand the problem with the Insider trading laws are not the Regulations in place but
their execution. While SEBI has been given wide powers to inspect information and witnesses along with
the power to summon them, it has been seen that its rulings have been overruled several times by the SAT
due to lack of evidence.23

LACUNAE IN THE FRAMEWORK: THE AREAS THAT NEED A RELOOK

22
http://sevenpillarsinstitute.org/case-studies/raj-rajaratnam-and-insider-trading-2 (last visited on 12/10/2016)
23
Samir C Arora v. SEBI, 2004 http://www.sebi

12
The regulatory laws in India suffers from some significant lacunae which calls for immediate attention of
the law makers. The definition of the word ‘insider; under Regulation 2(e) suffers from ambiguity. The
section talks about two elements to be fulfilled for qualifying a person as an insider: (a) proof of a
connection with the entity concerned (b) a reasonable belief of his having had access to unpublished price
sensitive information. In addition to this, subsection (ii) of section 2 says that inorder to qualify as an
insider although a relationship with the company is not essential, it is essential to actually prove receipt of
the information. The definition of the word is such that it has widened the scope to such an extent that
even outsiders are bought within the ambit of an insider under the SEBI regulations.

There also seems to be disconnect in Section 15G of the SEBI Act which provides the penalty for insider.
There is a grey areas which appear to emerge from clauses (i) and (iii) of this provision, where the
liability is said to have arisen when an insider or a person to whom he has communicated unpublished
price sensitive information to deals in securities, ‘on the basis of’ such information.24 The phrase ‘on the
basis of’ which was used in Regulation 3 was however replaced by amendment in 2002 amendment and
was substituted with the phrase ‘when in possession of’. However, a similar amendment has not been
made in Section 15G which has given rise to an anomalous situation making it unclear as to when the
liability arises.

Another very significant issue is relating to the scope and ambit of unpublished price sensitive
information. The issue of such information was discussed at length in the case of Hindustan Lever Ltd. v.
SEBIin which the information which was speculated by the media was not held to be unpublished price
sensitive information. Though the amendment in 2(k) had somewhat managed to reduce this controversy,
the point of conflict had come with the decision of SAT in the Samir Arora case. Though in the present
case it was held that the information which was incorrect cannot be regarded as unpublished price
sensitive information, going by the definition of Regulation 2(k) it merely states about any information
that has not been published by the company irrespective of whether it is correct or not correct. This shows
that there is a fundamental contradiction of principles in the decision of the SAT and the SEBI
Regulations.

The degree of mensrea is which is required to establish the charge of insider trading is another very
significant aspect that has been bought into concern. The failure to establish the requisite mensrea is a
major dilemma for enforcing agencies, especially given the covert nature of the offence of insider trading.
A clear example is the Rakesh Agrawal Case wherein it was held to establish a violation of Regulation 3
it was necessary to prove an element of ‘deceit’ or ‘manipulation’, which the SEBI was unable to prove in

24
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13
the facts of that case25. The SAT had rejected the contention made by the SEBI that it was not necessary
to establish a profit motive to establish the charge of insider trading making it clear that although not
contemplated directly, the establishment of the mental element is of prime importance in case of
establishing the offence of insider trading.

Conclusion

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A study of the regulatory mechanisms of India and America depicts a clear picture of the level of
evolution of the law and the areas which needs focus. The laws of United States were introduced as
early as in 1934 and gone over several changes to be a position where it is much better equipped than
the regulations in India. The biggest disadvantage in India is the absence of a specific law to deal with
insider trading unlike the USA the provisions of Securities Exchange Act,1934 deal with the these
aspects. Moreover, the problem with the cases of insider trading is the establishment of the mental
element along with the establishment of the facts in order to prove whether the access to such
unpublished price sensitive information was possible for the person in question. The changes made to
the act in 2002 made it mandatory for the directors and other officers of the company and other related
persons are subjected to mandatory disclosures. It is a fact that the SEBI is not having enough powers
for more exhaustive and efficacious investigation of cases involving Insider Trading. As witnessed in
US, empowering the regulator would definitely be helpful in imparting justice and convicting every
such violator of the Insider Trading regulations by providing greater degrees of positive evidence
supporting every such conviction thus proving every case beyond reasonable doubts. Because despite
of not having to prove the connection of the accused with the company, most of the cases are not
established owing to the lack of evidence gathered against the accused. This is the peculiar problem
faced in countries like India.

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List of Books

 Sumit Agarwal & Robin Joseph Baby, SEBI ACT:A LEGALCOMMENTARY ON

SECURITIES & EXCHANGE BOARD OF INDIA ACT,1992, 1st edition
 ThummuluriSiddaiah, FINANCIAL SERVICES, 2nd edition., 2011

List of Articles

 Arun Kumar Singh and Anil Kumar, Insider Trading: Comparative Analysis of India and
USA, http://dx.doi.org/10.2139/ssrn.2552418
 Bekaert, G. and C. Harvey, 1997, Emerging equity market volatility, Journal of Financial
Economics 43, 29-77.
 Dutta, P. and A. Madhavan, 1995, Price continuity rules and insider trading,
Journal of Financial and Quantitative Analysis 30 , 199-221.
 Dye, R., 1984, Insider trading and incentives, Journal of Business 57, 295-313.
 Engle, R., D. Lilien and R. Robins, 1987, Estimating time varying risk premia
in the term structure: The ARCH -M model, Econometrica 55, 391- 407.
 Fishman, M. and K. Hagerty, 1992, Insider trading and the efficiency of stock
prices, Rand Journal of Economics 23, 106-122.
 Handbook of World Stock, Derivative and Commodity Exchanges, 1998,
International Financial Publications, London.
 Harvey, C., 1991, The world price of covaria nce risk, Journal of Finance 46,
111-157.
 Rajiv Kumar Singh, Role of Securities & Exchange Board of India (SEBI) in regulating
Mutual Funds, http://sgsrjournals.com/paperdownload/5.pdf
 U.S. Securities and Exchange Commission, https://www.sec.gov/about/whatwedo.shtml
 http://www.business.illinois.edu/broker/pdf/insider.pdf

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