2. The core of securities regulations is the implementation of the purpose that all investors should have equal access to the rewards of participation in securities transactions. Sandeep Parekh Advocate, P.H. Parekh & Co. Visiting Faculty, IIM - Ahmedabad Insider Trading – Making the market a regulator

3. P. H. Parekh & Co.2 Favouritism and Greed 20 th Century US20 th Century US –1929 to 1933 –Ivan Boesky 21 st Century India21 st Century India –Disillusionment

4. P. H. Parekh & Co.3 Investor disillusionment 49% of the share owners had entered the market for the first time before the end of 1990 44% entered during 1991-94 6.3% during 1995-96 0.8% since 1997 Source: Society for Capital Market Research and Development survey.

5. P. H. Parekh & Co.4 Prohibition in India No insider shall –No insider shall – –Deal or Communicate –While in possession of any material unpublished price sensitive information

6. P. H. Parekh & Co.5 US Prohibition Species of Fraud.Species of Fraud. –Rule 10b-5 Three theories of insider tradingThree theories of insider trading –Classical –Misappropriation –Possession

7. P. H. Parekh & Co.6 Difference between US and Indian law USUS –Insider trading is not defined –Predicated on fraud India India –Statutory definition –Very widely worded

8. P. H. Parekh & Co.7 Control of Insider Trading Statutory prohibitionsStatutory prohibitions –Enforcement by regulator –Enforcement by SROs Encouragement of corporate governanceEncouragement of corporate governance Private remediesPrivate remedies

9. P. H. Parekh & Co.8 Enforcement by regulator SEC investigated 590 cases in 2001-2002SEC investigated 590 cases in 2001-2002 –Of which 59 were for insider trading SEBI conducted 111 enforcement actionsSEBI conducted 111 enforcement actions –Of which 16 were for insider trading –6 cases were completed –2 were referred for prosecution

10. P. H. Parekh & Co.9 Investigations by SEBI Source: SEBI Annual Report

11. P. H. Parekh & Co.10 Limitations of SEBI actions Has limited resourcesHas limited resources Cannot investigate all wrongdoingsCannot investigate all wrongdoings Has limited informationHas limited information As part of government must follow due processAs part of government must follow due process

12. What is the answer to the problem of limited enforcement?

13. P. H. Parekh & Co.12 Importance of self regulation Need to introduce prophylactic measures.Need to introduce prophylactic measures. Company signals to the market that effective self regulation is in placeCompany signals to the market that effective self regulation is in place Means of creating shareholder valueMeans of creating shareholder value

14. P. H. Parekh & Co.13 Bounties system S. 21A of the Securities Exchange Act.S. 21A of the Securities Exchange Act. Make it profitable to disclose wrongdoingMake it profitable to disclose wrongdoing Protect whistle-blowers rightsProtect whistle-blowers rights

15. P. H. Parekh & Co.14 Short swing rule Restrain short swing profitsRestrain short swing profits –Absolute liability –Designated persons incl 10% holders –Round trip trade within 6 months

16. P. H. Parekh & Co.15 Ousted InfoSpace Founder Ordered To Repay $247M To InfoSpace SEATTLE (AP)--InfoSpace (INSP) founder Naveen Jain was ordered Friday to repay $247 million to the Bellevue-based Internet company for violating securities laws on insider trading.SEATTLE (AP)--InfoSpace (INSP) founder Naveen Jain was ordered Friday to repay $247 million to the Bellevue-based Internet company for violating securities laws on insider trading. The award is believed to be one of the largest ever ordered under the Securities and Exchange Act's rule against so-called "short-swing" trading, in which company insiders trade shares within a six-month period of buying or selling them.The award is believed to be one of the largest ever ordered under the Securities and Exchange Act's rule against so-called "short-swing" trading, in which company insiders trade shares within a six-month period of buying or selling them.

17. P. H. Parekh & Co.16 Private litigation Amend law to diffuse the power to shareholdersAmend law to diffuse the power to shareholders Allow specified damagesAllow specified damages Allow other remedies expresslyAllow other remedies expressly –E.g. disenfranchisement of voting rights

18. P. H. Parekh & Co.17 Conclusion Inequities should not be shrugged off as inevitable.Inequities should not be shrugged off as inevitable. More power should be delegatedMore power should be delegated SEBI can encourage bySEBI can encourage by –Taking part in shareholder litigation –Help amend the law to give more powers to shareholders

19. P. H. Parekh & Co.18 Conclusion Encourage self governanceEncourage self governance Introduce Bounties systemIntroduce Bounties system Short swing ruleShort swing rule

20. P. H. Parekh & Co.19 P. H. Parekh & Co. Working paper of IIM-AhmedabadWorking paper of IIM-Ahmedabad –Insider Trading and Corporate Governance Newsletter on Securities RegulationsNewsletter on Securities Regulations Comments:Comments:sandeep.parekh@phparekh.com