Overhauling rules to protect investors from 'insiders'

Dec 16 2013, 08:54 IST
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Insider trading has often been pointed out as a prime reason for the dwindling confidence of minority shareholders in the stock markets. Insider trading has often been pointed out as a prime reason for the dwindling confidence of minority shareholders in the stock markets.
SummaryWith new securities bill, Sebi hopes to encourage minority investors who fear insider trading.

It is an irony that minority shareholders who are critical for the stability, liquidity and depth of the securities market are always the most vulnerable lot and various interest groups try to unethically benefit at their cost. While they are at a disadvantage to the institutional investors on account of their relative incompetence in investing, they also at times feel themselves cheated at the hands of promoters, senior officials of the company or other individuals who have access to unpublished price sensitive information. The menace, popularly known as ‘insider trading’ has often been pointed out as a prime reason for the dwindling confidence of minority shareholders in the stock markets.

Last week a committee appointed by the Securities and Exchange Board of India (Sebi) in March 2013, came out with its recommendations to replace the two-decade-old norms on ‘insider trading’ and thereby plugging loopholes in the regulations and providing the much-needed confidence to small investors — that their interests are being protected.

However, framing of new laws can only be the beginning as experts say that Sebi will have to improve on investigations to establish criminality in the court of law.

Important proposals

In a major move, the committee that was assigned with the task of framing new norms to address insider trading, has proposed to bring government officials framing policies and even judges, who have access to price-sensitive information, within the purview of insider trading norms and has recommended that they should not be allowed to trade in the stock when in possession of such information.

“A new feature of the Proposed Regulations is that of treating public servants and persons holding statutory positions that are reasonably expected to have access to UPSI (unpublished price sensitive information) as connected persons and thereby prohibit them from trading when in possession of UPSI,” said the report.

The committee has argued that a judge who are hearing arguments of a case and will pronounce the judgement is a connected person and similarly a public servant involved in policy framing will also qualify as a connected person.

“Therefore, the restrictions on trading that would apply to connected persons would apply to such persons as well,” it added.

In another major recommendation, the committee has proposed to broaden the definition of ‘insider’ and said that it will presume immediate relatives (who are either financially dependent or consult an insider when trading in securities) as connected persons. It also stated

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