Insider trading in India -essay

Insider trading in India -essay

 Insider trading is the practice of using information that has not been made public, to execute trading decisions. It gives traders an unfair advantage over others and most forms of insider trading are illegal. It is a malpractice wherein trade of a company’s securities is undertaken by people who by virtue of their work have access to the otherwise non-public information which can be crucial for making investment decisions.

What are the arguments against the practice of insider trading?

 If a select few people trade on material non-public information, the integrity of the markets will be damaged, and investors will be discouraged from partaking in them. Insiders with non-public information will be able to avoid losses and benefit from gains. Effectively eliminating the inherent risk that investors without the undisclosed information take on by investing in the markets. If those investors, who do not have the access to the information in question, begin to withdraw from the markets, there would be no other investors for those partaking in insider trading to sell to or buy from, and insider trading would effectively eliminate itself. It robs the investors who do not have non-public information of receiving the full value for their securities.

what needs to be done to regulate and stop insider trading?

The rules of the SEBI imply that, If found guilty of insider trading, a person could be sent to prison for up to 10 years or be required to pay a fine of up to Rs.25 crore or thrice the amount of profits made as happened in harshad mehta case.The definition of “connected persons” now covers anyone who has a connection with accompany that is expected to put the person in possession of insider information, including public servants such as judges and bureaucrats who may be aware of a judgment or policy which, when made public, may impact the price of shares of the company. So this is the best to keep a check and balance on the policy makers as well.

The new regulations brought by SEBI also requires companies to come up with codes for governance, regulating, monitoring and reporting trading by employees or connected persons, and fair disclosure of material information, such as financial information, key business decisions, etc., by the company.