By Ruma Dubey

 “Buy ABC stock immediately, as much as you can afford as the company is going to announce a 1:1 bonus in a week’s time”

When your friend tells you this, will you ignore the ‘tip’ or go ahead and buy?  You may buy just 200 shares and feel like a King. But would your mind give a small nudge even once, telling you that you could be indulging in insider trading? No such nudge is likely to come as we do not consider this as insider trading at all! Yes, that is indeed the truth. The feeling is that being small traders, what insider trading could you possibly indulge in; isn’t insider trading done by the likes of Rajratnam and Goldman?  But if both acted on the same piece of news, though the quantity of the action might be different, how does it make him a criminal and you a smart trader?

Getting information before it becomes public is what you, me and all believe will help you make windfall gains. So when we make money by getting news of a company before it becomes public, does that tantamount to inside info? Or because we trade in small quantities, it is not really breaking the law?  Well, you can write ‘offence’ either in all caps or in italics or bold italics, but it still reads the same, ‘offence.

There is a very thin line which divides insider trading and trading on knowledge. You never know when this line is breached and you get on to the other side. But at the same time not every opportunistic behavior can be termed as insider trading. And as one can see, it is very difficult as such to discern what exactly can be called as insider trading, which is why the laws on insider trading also, world over are not as vigilant as they should be.  How does one know what info is passed on through the phone or when meeting over a cup of coffee? Investigations can happen only when it comes to light that insider trading has happened. If that itself does not get detected, how can one track this down?

Insider trading, despite all the prohibitions, is undetectable most of the times. Yet, new checks are put in place time and again, hoping to cover up the loophole. But every time a hole is covered, it opens up some more new holes in its wake. SEBI has indeed done its bit; it has put in place a set of Code of Conduct, to ensure that unsubstantiated news is not circulated to distort the prices. And the news norms on Insider Trading will be effective from tomorrow, 15^th May 2015. And we will see from tomorrow, compared to the ramshackle ‘norms’ we had is good, aligned to international standards.

Before we get into the merits and demerits of the new norms a quick look through what exactly are these new norms:

• The Justice Sodhi Committee report will replace the SEBI (Prohibition of Insider Trading) Regulations 1992.

• Definition of ‘insider’ has been made wider by including persons connected on the basis of being in any contractual, fiduciary or employment relationship that allows such person access to unpublished price sensitive information (UPSI).

• Directors, employees and all other persons in the deeming category covered under 1992 regulations would continue to be covered.

• “Immediate relatives” presumed to be connected person, with a right to rebut the presumption.

• Definition of ‘UPSI’ also clarified – information which pertains to the company as well as its securities.

• Conspicuously absent from the new norms – no inclusion of public servants in the category of ‘connected persons’.

• Companies to disclose UPSI at least two days prior to trading if such information is ultimately permitted for communication to the public.

• Introduction of “Trading Plans” on the lines of USA for insiders with required safeguards.

• No separate penalties have been prescribed under the Regulations. Reference is made however to the penalty provisions under the SEBI Act, 1992 which shall apply. As per the Act, insider trading is publishable with a penalty of Rs.25 crore or 3 times the profit made out of insider trading, whichever is higher.

Well, these in a nutshell, without getting into the nitty-gritties and legal language, are the new Insider Trading norm. A revamp has happened after 20 years and even though a small move, it is welcome. Take this as an acknowledgement that SEBI knows it needs to control this menace. The good news here is that we now have a legal definition for ‘insider’ which until now was very vague.  But leaving out public servants as was recommended by Justice Sodhi Committee was an inadvertent slip or deliberate move?

Though the definition of “insider” is given, we still do not know what exactly is “insider trading”. ‘There is no proper definition under law for ‘insider trading’, it remains vague. Yet the fact remains that despite all these measures, detecting insider trading is extremely tough and even tougher to bring the guilty to books. Remember, detecting insider trading is not about connecting the dots by going from one dot to the other but by starting at both dots and working towards the middle.