INSIDE "INSIDER TRADING"

"Information is the most expensive commodity on the wall street." - Warren Buffet

Insider trading has become a prominent term not only in the financial parlance but also in common man's life given it's conspicuousness in the recent high profile cases such as the satyam fraud, mark Cuban (owner of dallas maverick's basketball team) case and Lehman brothers bankruptcy.

In fact the central agencies all over the world have often been grappling with the problem of insider trading and looking for ways to curb it. Insider trading has also changed definitions since it was first recognized as a major problem during the great depression of 1929-33. However the U.S. could come out with a separate law prohibiting the practice of insider trading only in 1961. India was even more late and came out with the sebi(insider trading) regulations only in the year 1992.

An insider can be defined as a person who is deemed to have been connected with the company or who is expected to have access to non-public information (information that is with a select group of people concerned with the company and is not yet out in the market). Any transaction by an insider based on such non-public information can be termed as a violation of insider trading prohibition act.

But the very idea of what actually do we mean by insider trading and who can be accused of violating the insider trading norms is very vague even in the minds of corporate honchos. And this very vagueness has often resulted in the exoneration of traders who are actually guilty of insider trading just because they are able to find loopholes in the norms which even regular amendments have also not been able to take care of. Adding to the woes is the frequent conviction of innocent traders who do not intend any violation but become a victim of the draconian rules in the sebi act.

Like in the famous rakesh agarwal vs. SEBI case, even though mr. agarwal was proved guilty of buying shares on non-public information and prior to the acquisition of his co. ABA industries by bayer A.G and then selling it in the open offer made by bayer A.G(thereby reaping huge profits), he was acquitted by SAT(securities appellate tribunal) on the ground that he did it in the interests of the company by helping bayer A.G in acquiring at least 51% stake through the open offer(a prerequisite imposed by bayer A.G for acquisition).Likewise in the case of hindustan lever's purchase of brooke bond lipton's shares just a fortnight prior to the acquisition of brooke bond lipton by hindustan lever, where a fiduciary irresponsibility is clearly visible, the latter was acquitted by SAT.

On the other hand infosys, almost ironically fined it’s CEO kris gopalakrishnan last year just because Mr. gopalakrishnan had inadvertently failed to notify the company within one working day of his change in shareholding which had resulted from the inheritance of some infosys shares from his mother, although no financial profit was intended.

That "actions will be judged according to intentions (Prophet Muhammad)" doesn't seem to apply here at least after the stern amendments in sebi regulations in 2002.