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What is Insider Trading?

Insider Trading

Wikipedia defines Insider trading as the trading of a public company's stock or other securities (such as bonds or stock options) by individuals with access to non-public information about the company. In various countries, insider trading based on inside information is illegal. This is because it is seen as unfair to other investors who do not have access to the information.

The authors of one study claim that illegal insider trading raises the cost of capital for securities issuers, thus decreasing overall economic growth. However, some economists have argued that insider trading should be allowed and could, in fact, benefit markets.Noted economist Milton Friedman has been quoted as saying "You want more insider trading, not less".

Trading by specific insiders, such as employees, is commonly permitted as long as it does not rely on material information not in the public domain. However most jurisdictions require such trading be reported so that these can be monitored. In the United States and several other jurisdictions, trading conducted by corporate officers, key employees, directors, or significant shareholders must be reported to the regulator or publicly disclosed, usually within a few business days of the trade.

The rules around insider trading are complex and vary significantly from country to country and enforcement is mixed. The definition of insider can be very wide and may not only cover insiders themselves but also any person related to them such as brokers, associates and even family members. Any person who becomes aware of non-public information and trades on that basis may be guilty. Insider trading is prohibited and is considered an offence.

The SEBI (Prohibition of Insider Trading) Regulations, 1992 prohibit an insider from dealing (on his own behalf or on behalf of others) in listed securities when in possession of ‘unpublished price sensitive information’ or communicate, counsel or procure directly or indirectly any unpublished price sensitive information to any person who while in possession of such unpublished price sensitive information should not deal in securities. Price sensitive information is any information, which if published, is likely to materially affect the price of the securities of a company.

Such information may relate to the financial results of the company, intended declaration of dividends, issue of securities or buy back of securities, amalgamation, mergers, takeovers, any major policy changes, etc. SEBI, on the basis of any complaint or otherwise, investigates/ inspects the allegation of insider trading. On the basis of the report of the investigation, SEbI may prosecute persons found prima facie guilty of insider trading in an appropriate court or pass such orders as it may deem fit. based on inspection, an adjudicating officer appointed by SEbI can impose monetary penalty.

In order to strengthen insider trading regulations, SEbI mandated a code of conduct for listed companies, its employees, analysts, market intermediaries and professional firms. The insider trading regulations were amended to include requirements for initial and continual disclosure of shareholding by directors or officers, who are insiders, and substantial shareholders (holding more than 5% shares/voting rights) of listed companies. The listed companies are also mandated to adopt a code of disclosure with regard to price sensitive information, market rumours, and reporting of shareholding/ownership, etc.

As a stock research house we also try to get some valuable inputs but steer clear of getting any inputs which may tantamount to be ing called as insider trading as we always believe in ethical trading.

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