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Sandeep Parekh Advocate, P.H. Parekh & Co. Visiting Faculty, IIM - Ahmedabad

Insider Trading – Making the market a regulator. The core of securities regulations is the implementation of the purpose that all investors should have equal access to the rewards of participation in securities transactions. Sandeep Parekh Advocate, P.H. Parekh & Co.

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Sandeep Parekh Advocate, P.H. Parekh & Co. Visiting Faculty, IIM - Ahmedabad

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  1. Insider Trading – Making the market a regulator The core of securities regulations is the implementation of the purpose that all investors should have equal access to the rewards of participation in securities transactions. Sandeep Parekh Advocate, P.H. Parekh & Co. Visiting Faculty, IIM - Ahmedabad

  2. Favouritism and Greed • 20th Century US • 1929 to 1933 • Ivan Boesky • 21st Century India • Disillusionment P. H. Parekh & Co.

  3. Investor disillusionment • 49% of the share owners had entered the market for the first time before the end of 1990 • 44% entered during 1991-94 • 6.3% during 1995-96 • 0.8% since 1997 Source: Society for Capital Market Research and Development survey. P. H. Parekh & Co.

  4. Prohibition in India • No insider shall – • Deal or Communicate • While in possession of any material unpublished price sensitive information P. H. Parekh & Co.

  5. US Prohibition • Species of Fraud. • Rule 10b-5 • Three theories of insider trading • Classical • Misappropriation • Possession P. H. Parekh & Co.

  6. Difference between US and Indian law • US • Insider trading is not defined • Predicated on fraud • India • Statutory definition • Very widely worded P. H. Parekh & Co.

  7. Control of Insider Trading • Statutory prohibitions • Enforcement by regulator • Enforcement by SROs • Encouragement of corporate governance • Private remedies P. H. Parekh & Co.

  8. Enforcement by regulator • SEC investigated 590 cases in 2001-2002 • Of which 59 were for insider trading • SEBI conducted 111 enforcement actions • Of which 16 were for insider trading • 6 cases were completed • 2 were referred for prosecution P. H. Parekh & Co.

  9. Investigations by SEBI P. H. Parekh & Co. Source: SEBI Annual Report

  10. Limitations of SEBI actions • Has limited resources • Cannot investigate all wrongdoings • Has limited information • As part of government must follow due process P. H. Parekh & Co.

  11. What is the answer to the problem of limited enforcement?

  12. Importance of self regulation • Need to introduce prophylactic measures. • Company signals to the market that effective self regulation is in place • Means of creating shareholder value P. H. Parekh & Co.

  13. Bounties system • S. 21A of the Securities Exchange Act. • Make it profitable to disclose wrongdoing • Protect whistle-blowers rights P. H. Parekh & Co.

  14. Short swing rule • Restrain short swing profits • Absolute liability • Designated persons incl 10% holders • Round trip trade within 6 months P. H. Parekh & Co.

  15. Ousted InfoSpace Founder Ordered To Repay $247M To InfoSpace • SEATTLE (AP)--InfoSpace (INSP) founder Naveen Jain was ordered Friday to repay $247 million to the Bellevue-based Internet company for violating securities laws on insider trading. • The award is believed to be one of the largest ever ordered under the Securities and Exchange Act's rule against so-called "short-swing" trading, in which company insiders trade shares within a six-month period of buying or selling them. P. H. Parekh & Co.

  16. Private litigation • Amend law to diffuse the power to shareholders • Allow specified damages • Allow other remedies expressly • E.g. disenfranchisement of voting rights P. H. Parekh & Co.

  17. Conclusion • Inequities should not be shrugged off as inevitable. • More power should be delegated • SEBI can encourage by • Taking part in shareholder litigation • Help amend the law to give more powers to shareholders P. H. Parekh & Co.

  18. Conclusion • Encourage self governance • Introduce Bounties system • Short swing rule P. H. Parekh & Co.

  19. P. H. Parekh & Co. • Working paper of IIM-Ahmedabad • Insider Trading and Corporate Governance • Newsletter on Securities Regulations • Comments: sandeep.parekh@phparekh.com P. H. Parekh & Co.

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