Insider Trading: Fair Dealing In The Capital Market

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Insider trading is a crime on the faith of fair dealing in the capital market. The stringency and scope of violation and penalty differs from country to country. Trading in shares of the company by an insider is violation of law. For example, an insider may come across a corporate fraud and disclose the fraud. An insider can also create information according to his future actions.
Trading by insiders, like directors, officers and employees of the company in the shares of their own company is actually a positive feature, and companies should encourage it as this aligns its interests with those of the insiders.
What actually is prohibited is the trading by an insider in breach of a duty of confidence in the stock of a company on the basis of
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Besides internet various sources like Companies Act 2013, SEBI guidelines, etc were used.
Organization of the
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Arthur Levitt, the then Securities Exchange Commission (“SEC”) Chairman in 1998, “Insider trading has utterly no place in any fair-minded law-abiding economy”.
India’s encounter with insider trading was first seen in the 1940s. The Thomas Committee Report in 1948 cited instances of directors, agents, officers, auditors possessing strategic information regarding economic conditions of the company regarding the size of the dividends to be declared, or of the issue of bonus shares or the awaiting conclusion of a favorable contract prior to public disclosure.
Thus, Sections 307 and 308 were incorporated in the Companies Act of 1956. Section 307 provided for maintenance of a register by the companies to record the directors’ shareholdings in the company. Section 308 prescribed to the duty of the directors and persons deemed to be the directors to make disclosure of their shareholdings in the company. Thereafter, by the Companies Amendment Act, 1960 had extended this requirement to the shareholdings of a company’s managers as well. However, these provisions could not curb this practice of insider trading due to which the directors or managing agents making unfair use of inside information could go scot free.
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