Black’s Law dictionary defines insider trading also known as insider dealing (the terms are used often interchangeably throughout the article) as “the use of material nonpublic information in trading of the shares of the company by a corporate insider or any other person who owes a fiduciary duty to the company.”
The understanding of insider dealing circles around buying and selling of securities on the basis of insider information that is not disseminated to the general public. The insider information is sensitive in a sense that that information determines the present and future dealings in the securities market.
Securities Act, 2063, the governing law for insider trading in Nepal defines insider dealing as dealing in securities or causing any other person to deal in securities on the basis of any insider information or notice that are unpublished which is likely to affect the price of securities.
Who can be the actors involved in insider dealing?
- A director/employee or any other person of a company who can obtain any information or a notice in the capacity of a shareholder of that company,
- Apart from the member of the company, a professional service provider to that company can obtain any information or a notice who have access to the insider information or notice not published by any other corporation.
- A person who has direct/ indirect contact with a director, employee or service provider who can access the information of the company.
What actually is public information in Insider dealing?
Punishment for insider dealing
In the Nepalese legal scenario, the offense relating to insider dealing is regarded as a criminal act and is a state party case. The punishment for insider dealing is:
- Fine and imprisonment
Sec 101 of Securities Act provides that a person who commits an insider trading shall be liable to the punishment with a fine equal to the amount in controversy or with imprisonment for a term not exceeding one year or with both punishments once the accusation is proved.
2. Disqualification to hold a position
If a director, general manager or any other person holding the equivalent office is convicted and punished with the punishment for insider dealing, such person shall be disqualified for becoming a director, general manager or an office equivalent in any public limited company or a body or a period up to 10 years from the date of such punishment.
Insider Dealing & Corporate Governance
Corporate governance is about ensuring transparency, accountability and responsibility in the actors of the company especially promoters, shareholders and the directors. An effective and transparent regulation of the company is must in order to ensure prevention of fraudulent activities in the company including insider dealing. Though the Company Act,2063 doesn’t explicitly provide any legal standing on insider dealing, it has obliged the directors to disclose if he/she has made any dealing in the shares or debentures of the company or of its holding or subsidiary company within 15 days after assuming the office of director. This is one of the mechanisms to make the directors liable for violating company laws including insider dealing.
The effects of insider dealing in corporate governance are summarized as:
- Damages market integrity and healthy competition
Insider trading favors selected few people,who are party to such dealing, with material information about the company that are non-public. Such availability of non-public information damages the integrity of the market. In addition to the distortion of the company’s integrity, insider dealing results in unfair market competition. As an obvious aftermath of insider trading, investors hold non-public information about the company which helps them avoid losses and benefit from gains with which they tend to eliminate the risk that investors without such undisclosed information are exposed to. This disables healthy competition in the securities market.
2. Paralyzing capital market
Insider dealing disguises the true market operations and instigates in disabling investors to have fair information and notice about securities. Creating artificial market prices as a result of insider dealing paralyzes the capital market. This might indirectly lead to the downfall of a highly fluctuating market, thereby affecting the economy of the country. If insiders start to withdraw (pull themselves back ) from the market, upon obtaining crucial information about the upcoming downfall of the company, small investors will have to bear the loss which will force them to leave the market and thus paralyzes the capital market.
3. Suppress small investors
It is evident and safe to argue that the access to non-public information about securities and other inside information is generally gained by large investors through their influences. They tend to invest in it prior to it being notified to the public. This in turn brings high fluctuation in the securities market. As a result, the investment of small investors, who conduct securities trading through published market information falls at risk. This demotivates such small investors and suppresses their shares. The illegal practice of gaining the crucial undisclosed information about the company by prominent investors and manipulating the actual market scenario grinds the faith of small investors from the stock market forcing them to get away from the share market.
Few Instances of Insider dealing in Nepal
- Restriction to Pragyan securities from stock trading
In 2017, alleging Pragyan securities for involving in malpractice that resulted in insider dealing, SEBON barred Pragyan Securities from stock trading after the brokerage was found leaking confidential information to its clients. Company was alleged of sharing the information about securities that was not yet made public. As per sec 101 of Securities Act, 2063, Pragyan securities was made liable to pay RS 75,000 fine.
2. Restriction to Everest Insurance in share trading
In 2017, SEBON restricted Everest Insurance company ltd. to engage in share trading contending that the company leaked information regarding bonus share, right share before its announcement.
3. Everest bank Limited
In 2016, The board members of Everest Bank limited were alleged of leaking information to their relatives regarding the distribution of bonus share and right share, providing them a clue to purchase shares, which brought about sudden price rise influencing stock market.
Unpublished inside information plays a crucial role in making differences in the stock market. However, such information is often prone to be disclosed by the person engaged or anyway associated with the company.
It is reported that since the past few years, insider dealing has been severely affecting the stock market. The prominent reason behind it is the lack of concrete law addressing insider dealing. The existing regulations for checking malpractice is weak and is unable to address growing effects of such dealing in the state economy. Addressing this loophole in law, Securities Board of Nepal (SEBON), the apex regulator of the share market, is drafting the Insider Trading Regulation that has strengthened the penalties for people who interfere with and leak the confidential and sensitive information about the company which ultimately distorts the securities market.