A person who is an employee of a company or a relative of an employee may possess information about the company which when comes in public can make the stock price move (either way). This information can be used (it has been used in the past) by that person to his undue advantage and in the process hurt other investors.
Though the Securities and Exchange Board of India (Sebi) has framed laws to curb the practice of insider trading, the menace continues. Now, to make existing laws stricter, the capital market regulator has widened the definition of insider trading.
Now, insiders will include persons (other than employees) who are connected to an insider through a contract, trust or relationship and are privy to unpublished price-sensitive information. Besides, the onus now is on the 'accused' to prove his innocence.
"In case of connected persons the onus of establishing, that they were not in possession of unpublished price sensitive information should be on such connected persons," said Sebi.
"This is one of the most important shift from existing laws. Earlier, it was Sebi's responsibility to prove the guilt of an insider trading accused. Given the fact that Sebi lacks the wherewithal to prove guilt, it is a big step forward," says Puneet Agarwal, senior member, research team, Cian Analystics.
New Sebi norms try to align insider trading rules with international practices. Accordingly, they bar sharing of unpublished price-sensitive information with anyone unless it is necessary to do so for business transactions or on account of any legal obligation. The new norms also require companies to disclose price-sensitive information at least two days before trading.
This means a company can make disclosure, say only after Friday closing, so that investors have two days (Saturday and Sunday) to absorb the information. Insiders, who have access to price sensitive information all round the year, will also have to formulate pre-scheduled trading plans.
The new norms also bar directors from taking call and futures bets on the company's shares.
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