Many of us keep hearing the word "insider trading" very often. But, what exactly is insider trading?
The unpublished and price sensitive information of a company used by the trader to trade for his personal gains can be termed as insider trading.
Trading in stocks of the company when the material information is still non-public, while other investors are not aware is unfair and would affect the sentiment of the investor. Such trading is called insider trading and is considered illegal under SEBI Insider Trading Regulation Act 1992.
However, once the information is made public, investing based on the information, is not illegal.
Who is an insider?
A person who 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with the company or is deemed to have been connected with the company and is reasonably expected to have access to unpublished price sensitive information in respect of securities of a company, or has received or has had access to such unpublished price sensitive information.
The inside trader can be a merchant banker, share transfer agent, registrar to an issue, debenture trustee, broker, portfolio manager, Investment Advisor, sub-broker, Investment Company or an employee thereof, or is member of the Board of Trustees of a mutual fund or a member of the Board of Directors of the Asset Management Company of a mutual fund or is an employee thereof who have a fiduciary relationship with the company, banker or relative of the company.
What is price sensitive information?
Price sensitive information means any information which relates directly or indirectly to a company and which if published is likely to materially affect the price of securities of company.
The following shall be considered to be price sensitive information :-
1 Periodical financial results of the company;
2 Intended declaration of dividends (both interim and final);
3 Issue of securities or buy-back of securities;
4 Any major expansion plans or execution of new projects.
5 Amalgamation, mergers or takeovers;
6 Disposal of the whole or substantial part of the undertaking
7 Significant changes in policies, plans or operations of the company.
Any employee/officer/director who trades in securities or communicates any information for trading in securities in contravention of the code of conduct may be penalised and appropriate action may be taken by the company, which may include wage freeze, suspension, for future participation in employee stock option plans, etc. The action by the company shall not prevent SEBI from taking any action in case of violation of SEBI.