Insider trading is considered an unethical practice as it involves selling the stocks and securities of a public company by a person who has the access to the non-public information about the company. It is grossly unfair to other investors who do not have access to such information. Insider trading tends to raise the cost of stock tips and thus triggers economic slowdown. Insider trading for employees are allowed in some places as long as it is not based on information that is not under public domain. Insider trading is even considered illegal in many countries. It is not that only the director of a company can be convicted of insider trading; broker and family members too who have utilized the exclusive information can be convicted. If the information that has been utilized for insider trading becomes public, it is no longer considered as illegal. It is, however, possible for insiders to trade but only through information which is in the public domain.
Insider trading simplified
Insider trading refers to the act of performing a trade based on information that is not publicly available. Such an act is considered illegal, as well as unethical, and is punishable under the Prohibition of Insider Trading Regulation Act, enacted by SEBI all the way back in 1992. Company executives often have advanced knowledge of the decisions that a business is going to take, and can predict whether the prices of the best share tips will rise or plummet as a result. This information cannot be made available to the general public, and since market share trading should be performed only on the data that everyone can have access to, the SEBI made insider trading illegal. For close to 2 decades, only the executive level officials of a business were considered insiders, but the SEBI made a revision in the law in 2013, that now includes all officers who have access to unpublished classified information. This new change is expected to curb insider trading in India considerably and will make the act punishable for people who could earlier get away with it.
Closing in on inside traders
SEBI has gone to great lengths to ensure that there are no loopholes that allow insider trading. Not only are the executives and upper tier employees of a company who potentially have access to insider information required to provide their trading plans in advance, relatives and professional contacts of these individuals are also covered by the purveys of the insider trading prohibition law.
The regulations also include a clause that requires every listed company to create a code of conduct. This is applicable to market intermediaries as well, and all such organizations are required to put in place a system that monitors its employees for such activities. Similarly, trades performed by company stakeholders and their families will need to be evaluated and verified by the company, and hence all trades must be internally submitted to the company for verification.
These steps, and more will hopefully curb the demon of insider trading in India, and give market traders a fair chance to conduct their business.