What does insider trading actually mean?
Insider trading in simplistic terms means having access to sensitive company data and than buying or selling shares on the basis of that information to make money.
Let's cite examples. Say, as the director of a company you would have access to the quarterly results of a company. You would know well in advance that the profits of the company have doubled and once the results are announced to the exchange the share prices would surely rally.
So, if you buy the shares at Rs 100, before the results you may easily be able to sell it at a significantly higher price, as the share is sure to rally after the quarterly results. This means you had access to information and you used that to make gains.
SEBI definition of insider
The Securities and Exchange Board of India (SEBI) defines an insider as any person who:
was connected with the company or is deemed to be connected to the company and is reasonably expected to have access to unpublished price sensitive information. It could also mean any person who has received unpublished price sensitive information.
Whatever the definition that SEBI might have, the idea is very clear - an individual should not have bought or sold a stock after having access to data.
What is price sensitive information?
Any information that could drive the price of the stock higher or lower would be considered as price sensitive information. Some classic example would be:
a) A rights issue.
b) Quarterly statement of results.
c) Other fund raising plans, like a qualified institutional placement.
d)Takeovers, mergers, amalgamation.
e) Buyback of shares.
f) Sale of an undertaking
g) Changes in some policies, plans or operations of the company.
Investigations into insider trading
It is the duty of the board of directors to take appropriate measures to investigate into insider trading, if it suspects an individual or individuals have engaged in insider trading. The Board could also appoint an auditor for the purpose of investigation into the books of accounts and affairs of an insider.
Insider trading is generally applicable to listed companies whose shares are traded on the stock exchanges. In all cases prices sensitive information like those mentioned above have to be notified first to the exchanges, who genereally tend to upload them on their website, which is than made public.
Insider trading is a strict offense in India, and many individuals have been accused in the past and debarred from dealing in securities in insider trading allegations. In the 1990s, information leaked through brokers and sub brokers, though such insider gossip and leaked information is much lesser now. The Securities and Exchange Board of India tends to take strict action and remedial measures and is more active than the erstwhile CCI in curbing insider trading.