Legal Internship Program

DEHRADUN

PROJECT PROPOSAL

AN INSIGHT INTO
INSIDER TRADING

FACULTY GUIDE
PROJECTS GUIDE
GIREESH KUMAR J M.A. CHINASAMMY
Assistant Professor Advocate
Law Center-1, Faculty of Law Supreme Court

SUBMITTED BY
CHETAN SINHA

06LS128
ICFAI LAW SCHOOL

Chetan Sinha (06LS128)

DEHRADUN

LIST OF CONTENTS:

1. SYNOPSIS

2. GOALS

3. RESEARCH METHODOLOGY

4. RESEARCH QUESTION

5 SCHEDULE

Chetan Sinha (06LS128)

6 REFERECE

Chetan Sinha (06LS128)

AREA
SEBI (Prohibition on Insider Trading) Regulations 1992 & SEBI (Prohibition of Fraudulent and
Unfair Trade Practices) Regulations 2003.

TOPIC
An Insight of Insider Trading.

OBJECT OF TERM PAPER

SYNOPSIS

Capital markets are part of global financial systems and enable the corporate entities to utilize
public money and simultaneously provide investors another arena for investment. The growth of
capital markets is repeatedly hampered by various unlawful market activities such as insider
trading, front running, etc.

Insider trading as defined by the Black’s Law Dictionary is -“The use of material non public
information in trading the shares of the company by a corporate insider or any other person who
owes a fiduciary duty to the company.”1

Insider trading is most commonly misconceived to be illegal without exception, when there is a
perfectly legal side to the same. The buying and selling of securities on the basis of material non-
public information by an insider or a connected person is illegal insider trading. Material
information is such information which will influence the price of securities. This material
information should be unknown to the general public as this gives the person trading an unfair
advantage over the other investors. Any person in possession of the material non public
information of the company such as company officer, director, lawyer, accountant, broker,
merchant banker, beneficial owner etc is called an insider. For example the director of a company
learning that the company is having expansion plans (prior to a public announcement) buys the
shares of that company knowing that the price of the company shares will increase thus making
short swing profits. Insider trading increases the cost of capital and decreases the overall
economic growth of the country.

1
Black Law Dictionary, 7th edition

Chetan Sinha (06LS128)

Earlier, the concept of insider trading was limited to the aspect of a company insider tipping of an
outsider and the outsider using the tip and trading in the company’s shares. This constitutes a
breach of fiduciary duty owed by the insider to the company’s shareholders. This was called the
classical theory of insider trading. Later US Supreme Court in the case US v/s O’Hagan2 in 1997
extended the scope of insider trading by including the misappropriation theory which said that a
person commits insider trading when he obtains material confidential information and uses it in
securities transactions in breach of fiduciary duty or similar relationship of confidence to the
source of information but not necessarily to the shareholders of the company whose stocks are
traded.

India is a developing country and is catching up with the trends of globalization liberalization and
privatization. Insider trading not only affects investors and corporate entities but also the
development of the economy. When the cost of securities increases, it adversely affects the
growth of industries and infrastructure and hence the development of the economy. This
malpractice discourages small investors to invest in the capital market and also increases the
cost of securities for the corporate entities. We need to bring in better technology, stronger
manpower and more stringent laws to curb insider trading to increase the pace of economic
growth.

GOAL
In the new corporate and business world today where there is cut throat competition the business
persons daringly use unfair trade practices to edge over the other. This may give them advantage
for short term but in long run it affects the organization and eventually the entire industry.
Therefore companies should not concentrate on the shortcut ways and get involve in Unfair Trade
Practices.

Rules limiting insider trading may encourage investment, but they may also discourage
exploration of new less-decentralized corporate information processes, such as prediction and
decision markets. I review standard corporate information processes and insider trading rules,
outline possible improvements that prediction markets might offer, and consider ways we might
change insider trading rules to allow both more flexible innovation of information processes and
better-encouraged investment.

SEBI to investigate into cases of market manipulation and fraudulent and unfair trade practices.
The regulations specifically prohibit market manipulation, misleading statements to induce sale
or purchase of securities, unfair trade practices relating to securities. SEBI can conduct
investigation, suo moto or upon information received by it, by an investigating officer in respect
of conduct and affairs of any person buying/selling/dealing in securities. Based on the report of
the investigating officer, SEBI can initiate action for suspension or cancellation of registration of
an intermediary.
In this paper I will first summarize the key features of both our standard corporate information
institutions and current insider trading laws. I will then outline possible improvements that
2
The official website of IOSCO

Chetan Sinha (06LS128)

prediction markets might offer. Finally, I will elaborate on the barriers that current insider
trading laws impose, and consider some ways those laws might be adapted to reduce this
problem.

RESEARCH METHODOLOGY
This project involves a straightforward analytical method. The data with the very first day of the
topic being started for collection and is still in progress raw data collected from the articles of
various Jurist over the SEBI Act and other provisions, the data from the SEBI, the articles
submitted over the legal sites and the notes from the books, the ample commentaries of legal
laureates helping a lot in understanding of unaware concepts. The data once collected as an
ongoing process is then analyzed with reference to the present need of topics and then the
technical terms being transformed to a one which is compatible and simple to comprehend the
natural language. Thus the compilation of project to be processed in a way where collected data
to be modulated into an analyzed one and then with the understanding of the concepts the report
is thus will be drawn out.
The guidance from the staff members of the office is of a lot use in the making of project and
better formation of practical concepts this is helping in formation of sound organizational
relationships.
The report till time has a lot of support both from the PROJECT GUIDE and the FACULTY
GUIDE a wide discussion over the issues of the Act and provision regarding Rules of Insider
Trading has helped me a lot and believes that it would precede with many such healthy
discussions leading the project to a happy beginning.

RESEARCH QUESTIONS?
1 What is Insider Trading?
2 What are the SEBI Regulations laws and provisions for fraudulent & unfair trade practices in
India?
3 Whether Insider Trading as a Crime?
4 How to safe Price Sensitive Information to personal benefit?
5 What are the Problems that arise due to Insider Trading in cases of Securities Investment?
6 What is the Prevention of Insider Trading for Listed Companies?

SHEDULE

Chetan Sinha (06LS128)

The schedule consists of:

1. Interim report- which includes a brief introduction which thereby encompasses the
meaning, nature and scope of the aforesaid act and the section above mentioned. The
report shall be submitted from 24-9-2010 to 30-9-2010.
2. Final report- which would include detailed version and overview of all the topics covered
in the interim report along with detailed case laws and a conceptual analysis of the same.
The report shall b submitted from 13-12-2010 to 20-12-2010.

REFERENCE
1 [Link]
2 [Link]
3 [Link]
4 [Link]
5 [Link]

Chetan Sinha (06LS128)