insider trading a brief overview of legal regime in usa, uk, india and nepal rojina thapa
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7/31/2019 Insider Trading a Brief Overview of Legal Regime in USA, UK, India and Nepal Rojina Thapa
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I N SI D ER TR A D I N G: A BR I EF
OV ERV IEW OF LEGA L REGI M E I N
U SA , U K , I N D I A A N D N EPA L
A ut hor ess: R ojina Tha pa
K athmandu School of Law
LL.B 4 th Year
Publisher : M ir m ir e-Econom ic A r t icle Specia l
I ssue, V ol. 38, N o. 293, Jan/ F eb 2010
N epal R astr a Bank- Cent r al Bank of
N epal
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1. Introduction
Insider trading per se is obtaining information from non-public sources—private acquaintances,
friends, colleagues—and using it for purposes of enhancing one's financial advantage.
Sometimes such a practice can be conducted fraudulently, as when one who has obtained the
information has a fiduciary duty to share it with clients but fails to exercises.1
Insider trading as defined by the Black’s Law Dictionary is -“The use of material non public
information in trading the shares of the company by a corporate insider or any other person who
owes a fiduciary duty to the company”. Insider trading has been defined generally to mean
trading in the shares of a company for making a gain or for avoiding a loss by manipulation of
prices by persons who are in the management of the company or are close to them, on the basis
of undisclosed price sensitive information regarding the working of the company which they
possess but which is not available to others.2 Every country in the world with a major stock
exchange had made this practice illegal because of its potential to destroy public confidence in
the stock exchange.3 However the definition and sanction vary form state to state.
This article aims to put light on the legal regime of USA, UK, India and Nepal because USA was
the first jurisdiction to enact insider trading regulation and today it continues to lead the world inthe regulation and enforcement, UK takes into consideration Directive of the European
Parliament too that represent EC legal regime on insider dealing, India being the country whose
statutory provisions on insider trading does not have a long history nevertheless amendments are
being made to make this offence more punitive and preventive and only recently Nepal has
enacted legislation prohibiting insider dealing.
1Machan, Tibor R., ‘What is Morally Right with Insider Trading’, Public Affairs Quarterly, Vol. 10 (April 1996),
available at http://mises.org/etexts/insidertrading.pdf (accessed on 28 September, 2009).
2 Sharma, L. M., Amalgamations Mergers Takeovers Acquisitions: Principles, Practices and Regulatory Framework (1st Edn., Company Law Journal, Taj Press, 1997) 299.
3 Dignam, Alan and Lowry, John, Company Law (4th Edn., Oxford University Press, 2006) 74.
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2. Historical Development of Laws Prohibiting Insider Trading
2.1. USA
Before the adoption of Securities Exchange Act of 1934, there was no codified rule in United
States that regulated insider trading. Section 17 of the Securities Act of 1933 contained
prohibitions of fraud in the sale of securities which were greatly strengthened by the Securities
Exchange Act of 1934.4 The Securities and Exchange Act, 1934, enumerates the provisions
relating to the protection of interest of investors against Insider Trading. The 1934 Act addressed
insider trading directly through Section 16(b) and indirectly through Section 10(b). 5 In practice
Section 16 is rarely invoked. However the real role of Section 16 is to tell us what types of
persons might be covered by any inside trading inferred from Section 10b.6With the mark of
early and mid 1980s by some interesting cases on insider trading, Congress in order to curb this
practice of insider trading promulgated Insider Trading Sanction Act 1984. The major change
that this act brought was to allow the SEC to bring a civil suit directly rather than first having the
Department of justice bring a criminal suit and then a civil suit. Then in 1988 Congress enacted
another legislation to combat insider trading with much deterrent effect, which was the Insider
Trader and Securities Fraud Enforcement Act 1988.7 In the Act, ‘Congress enacted Section 20A
of the Exchange Act to provide an express right of action on behalf of “contemporaneous
traders” who were trading the same class of securities on the opposite side of transaction during
the time that the allegedly illegal inside trader(s) occurred’8. More recently, the U.S. has
developed a number of supplementary statutory rules, such as The Securities Enforcement
4 See, American Insider Trading Law, available at http://www.stocks.gl/American-insider-trading-law2.html (accessed on 1 October, 2009).
5See, Insider Trading – A U.S. Perspective, available at
http://www.sec.gov/news/speech/speecharchive/1998/spch221.htm (accessed on 1 October, 2009). 6 Engle, Eric Allen, ‘Insider Trading in U.S. and E.U. Law: A Comparison’ (September 22, 2008) 15, available atSSRN: http://ssrn.com/abstract=1271868.
7Sharma, Vaibhav, ‘Prohibition on Insider Trading: A Toothless Law’ (May 7, 2009). Law School Research Paper
No. 996. 27, available at SSRN: http://ssrn.com/abstract=1400824.
8 Steinberg, Mark I., Understanding Securities Law (Matthew Bender and Company Incorporated, 1989) 177.
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Remedies and Penny Stock Reform Act of 1990; Rule 14e-3 Tender Offer Rule, Regulation FD,
as well as the Sarbanes-Oxley Act of 2002.9
2.2. UK
It was only with the Companies Act 1980 that there was the first legislative intervention in the
United Kingdom to combat insider dealing10. [T]he relevant UK legislation was contained in the
Companies Securities (Insider Dealing) Act 1985 and the Financial Services Act 1986. New
legislation has altered the law on insider dealing to take account to the EC Directive on Insider
Dealing (89/592).11 A number of useful and welcome changes to the law on insider dealing in the
United Kingdom have been affected by the Criminal Justice Act, 1993. The earlier law, namely,
the Company Securities (Insider Dealing) Act, 1985, has been wholly superseded, in relation to
offences allegedly committed on or after 1 March, 1994, by Part V of the Criminal Justice Act,
1993.12 The law against insider trading has been strengthened further by Financial Services and
Markets Act 2000 (FSMA), which introduces a new offence of market abuse13. The FSMA
introduced the wider offence of market abuse; this covers ‘insider dealing’, ‘disclosing inside
information’, ‘dissemination of false’ and ‘misleading information’, ‘employing fictitious
devices’, and market distortion. All these offences encompass insider dealing.14 Recently, The
Financial Services and Markets Act 2000 (Market Abuse) Regulations 2005 has been enacted.
This implement Directive 2003/6/EC (Market Abuse Directive) of the European Parliament and
9Shen, Han, ‘A Comparative Study of Enforcement of Insider Trading Regulation between the U.S. and China’
(February 21, 2007) 11, available at SSRN: http://ssrn.com/abstract=964548.
10 In United Kingdom Insider Trading is referred as Insider Dealing.
11 Bourne, Nicholas, Company Law (Cavendish Publishing Ltd, Reprinted 1994) 153.
12 Sharma, supra note 2, 306.
13 Part VIII of FSMA contains the provisions relating to market abuse and section 118 (1) defines the specificoffence of market abuse.
14Adungo, Brian Ikol, ‘The New European Union and United Kingdom Regimes for Regulation of Market Abuse’
(January 8, 2009), available at SSRN: http://ssrn.com/abstract=1324678.
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of the Council which introduces a common EC legal regime on insider dealing and market
manipulation.15
2.3. India
The history of Insider Trading in India relates back to the 1940’s with the formulation of
government committees such as the Thomas Committee of 1948, which evaluated inter alia, the
regulations in the US on short swing profits under Section 16 of the Securities Exchange Act,
1934. Thereafter, provisions relating to Insider Trading were incorporated in the Companies Act,
1956 under Sections 307 and 308, which required shareholding disclosures by the directors and
managers of a company.16The need for curbing insider trading was felt as early as 1978 when the
Sachar Committee appointed to recommend reforms in the Companies Act.17 The final report of
the committee recommended amendments to the Companies Act 1956, so as to restrict or
prohibit the dealings of employees / insiders. Sachar committee report, was followed by the Patel
Committee in 1986, the main recommendations of this committee was to amend the Securities
Contract (Regulation) Act, 1956, so as to empower the securities exchange to curb insider
trading and unfair stock deals. The final report forming the base of the Securities and Exchange
Board of India (Insider Trading) Regulations 1992 was the Abid Hussain Committee report in
1989. Then the Indian regulatory authorities came with a drastically amended and renamed SEBI
(Prohibition of Insider Trading) Regulations 1992 Act in 2002. A new section has been added to
the SEBI (Amendment) Act in 2002, which prohibits manipulative and deceptive devices.18
Later, SEBI (Insider Trading) (Amendment) Regulations, 2002 and SEBI (Prohibition of Insider
Trading) (Second Amendment) Regulations, 2002 has been enacted.
15Financial Services and Markets Act 2000 (FSMA): Recent developments, Bulletin number 43 from HM Treasury,
available at http://www.hm-treasury.gov.uk/fsma_bulletin_43.htm (accessed on 3 October, 2009).
16Chahar, Himanshu and Sodhi, Sumeer, Insider Trading: A Critical Analysis, available at
http://www.legalserviceindia.com/article/l199-Insider-Trading.html (accessed on 25 September, 2009).
17 Sekhar, K., Guide to SEBI Capital Issues, Debentures and Listing (2nd Edn., Wadhwa and Company LawPublishers, 1996) 357.
18Bose, Suchismita, ‘Securities Market Regulations: Lessons from US and Indian Experience’ (2005). The ICRA
Bulletin, Money & Finance, Vol. 2, No. 20-21, Jan-Jun 2005. 93, available at SSRN:http://ssrn.com/abstract=1140107.
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2.4. Nepal
It was only through the Securities Act, 2007 that Insider Dealing has been defined and made an
offence in Nepal. Other jurisdiction came to this problem much earlier on as mentioned above.
However Section 127(h) of Company Act 1996 prescribed punishment with fine not exceeding
twenty thousand rupees or with imprisonment for a term not exceeding two years or with both
where any director or secretary of a company dealt the share in contrary to the said Act, making
it way too vague to prohibit insider trading.
3. Definition of the term ‘Insider Trading’
3.1. USA
The first country to tackle insider trading effectively was the United States.19 [T]he American
legislature refuses to define insider trading. The term 'insider' is not defined by statute in the
context of the U.S. prohibitions against insider trading. In fact, section 10(b) and Rule 10b-5 (or
any of the federal statutes, rules, or regulations) do not define 'insider trading' or 'inside
information' (or 'misappropriation,' for that matter).20 The American case law, which nonetheless
is highly developed, is based on the general antifraud provisions of the Securities and Exchange
Act.21 In a series of administrative decisions and injunctive proceedings, commencing in 1961,
the SEC greatly broadened the applicability of Rule 10b-5 as a general prohibition against any
trading on “inside information” in anonymous stock exchange transactions as well as in face-to-
face dealings.22Under current United States law, there are three basic theories under which
19
Davies, Paul L., Gower’s Principles of Modern Company Law (6
th
Edn., Sweet and Maxwell, 1997) 444.20
Engle, supra note 6, 27.
21Parekh, Sandeep, ‘Prevention of Insider Trading and Corporate Good Governance’ (January 2003). Indian
Institute of Management, Ahmedabad Working Paper No. 2003-01-03. 7, available at SSRN:http://ssrn.com/abstract=653741 or DOI: 10.2139/ssrn.653741.
22 Ratner, David L., Securities Regulation: In a Nut Shell (3rd Edn., Minn. West Publishing Co., 1988) 140.
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trading on inside information become unlawful. The disclose or abstain rule 23 and the
misappropriation theory24 were created by the courts under Section 10(b) of the Securities
Exchange Act of 1934 and Rule 10b-5 hereunder. Pursuant to its rule-making authority under
Exchange Act Section 14(e), the Securities and Exchange Commission (SEC) adopted Rule 14e-
3 to proscribe insider trading involving information relating to tender offers.25
Section 10(b)26 of the Act provides, that it shall be unlawful for any person, directly or indirectly,
by the use of any means or instrumentality of interstate commerce or of the mails, or of any
facility of any national securities exchange (. . .) (b) To use or employ, in connection with the
purchase or sale of any security registered on a national securities exchange or any security not
so registered, or any securities-based swap agreement (as defined in section 206B of the Gramm-
Leach-Bliley Act), any manipulative or deceptive device or contrivance in contravention of such
rules and regulations as the Commission may prescribe as necessary or appropriate in the public
interest or for the protection of investors.
23Disclose or abstain theory was originated in the case of Cady Roberts & Co, where rule 10b-5 was applied, which
held that insiders and those who would come to be known as "temporary" or "constructive" insiders, who possessmaterial non-public information, must disclose it before trading or abstain from trading until the information ispublicly disseminated. Several year’s later in a landmark case dealing with insider trading, SEC v Texas Gulf
Sulphur Co, court upheld the ruling of Cady, Roberts & co. and further built upon the, disclose or abstain rule, byincluding the tipper as being liable under rule 10b-5. See for detail, Sharma, supra note 7, 27-28. See also,Bainbridge, infra note 25, 2-3.
24 In the case of United States v. O'Hagan, 117 S. Ct. 2199 (1997), The Court held that ‘The "misappropriationtheory" holds that a person commits fraud "in connection with" a securities transaction, and thereby violates 10(b)and Rule 10b-5, when he misappropriates confidential information for securities trading purposes, in breach of aduty owed to the source of the information. Under this theory, a fiduciary's undisclosed, self-serving use of aprincipal's information to purchase or sell securities, in breach of a duty of loyalty and confidentiality, defrauds theprincipal of the exclusive use of the information. In lieu of premising liability on a fiduciary relationship betweencompany insider and purchaser or seller of the company's stock, the misappropriation theory premises liability on a
fiduciary-turned-trader's deception of those who entrusted him with access to confidential information’. See, InsiderTrading – A U.S. Perspective, available at http://www.sec.gov/news/speech/speecharchive/1998/spch221.htm(accessed on 3 October, 2009).
25Bainbridge, Stephen M., ‘Insider Trading: An Overview’, 1-2, available at SSRN:
http://ssrn.com/abstract=132529 or DOI: 10.2139/ssrn.132529.
26Section 10(b) is codified at 15 U.S.C. § 78j (b).
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SEC Rule 10b-527, promulgated pursuant to section 10(b) of the 1934 Act, makes unlawful for
any person, directly or indirectly, by the use of any means or instrumentality of interstate
commerce, or of the mails or any facility of any national securities exchange, to engage in any
act, practice, or course of business which operates or would operate as a fraud or deceit upon any
person in connection with the purchase or sale of any security.
3.2. UK
The definition of the criminal offence of insider dealing under Criminal Justice Act 1993 is very
similar to the definition of the civil offence of insider dealing under FSMA 2000, although there
are some subtle differences in the wording and both sets of rules must therefore be considered
when analyzing if insider dealing has occurred.
3.2.1. Criminal Justice Act 1993
The offence of insider dealing is defined in the Criminal Justice Act 1993, s. 52 using a number
of technical terms.28A person has information as an insider if it is and he knows that it is inside
information from an inside source, if he has it through being a director, employee or shareholder
of an issuer of securities or having access to the information by virtue of his employment, office
or profession.29 A person deals in securities if he acquires or disposes of the securities (whether
as principal or agent).or he procures, directly or indirectly, an acquisition or disposal of the
securities by any other person.30
27 SEC Rule 10b-5 is codified at 17 C.F.R . § 240.10b-5.
28Mayson, Stephen W. et. al., Company Law (First Indian Reprint, Universal Law Publishing Co. Pvt. Ltd., 2000)
359.
29 CJA 1993, s 57 defines ‘Insiders’.
30 Ibid, s 55(1) defines “Dealing” in securities.
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The Criminal Justice Act 1993 creates one offence of insider dealing which may be committed in
three different ways. Insider dealing will primarily be committed31 where an insider, whilst in
possession of inside information, deals in securities which are price-affected in relation to that
information, in circumstance where he either acquires or relies on a professional intermediary or
is himself acting as a professional intermediary disposes of such securities on a regulated
market.32 The offence of insider dealing will also be committed where an insider in possession of
inside information encourages another person, including a company, to deal in price-affected
securities, even if that other person does not know that the securities are price-affected and where
an insider discloses inside information to another person, including a company, otherwise that in
the proper performance of the functions of his employment, office or profession. 33
3.2.2. Financial Services and Markets Act 2000
As per Section 118(2) of FSMA, Insider dealing occurs where an insider deals, or attempts to
deal, in a qualifying investment or related investment on the basis of inside information relating
to the investment in question.34
Section 118B of FSMA defines Insider as ‘any person who has inside information (a) as a result
of his membership of an administrative, management or supervisory body of an issuer of
qualifying investments, (b) as a result of his holding in the capital of an issuer of qualifying
investments, (c) as a result of having access to the information through the exercise of his
employment, profession or duties, (d) as a result of his criminal activities, or (e) which he has
obtained by other means and which he knows, or could reasonably be expected to know, is inside
information.
31
Primary offence of Insider Dealing is defined under s 52(1) (3) of Criminal Justice Act 1993.32 Thorne, James, Butterworths Company Law Guide (4th Edn., Butterworths LexisNexis, 2002) 340.
33 Ibid, 341; CJA 1993, s 52(2)(a) restricts ‘encouraging another to deal’ and s 52(2)(b) restricts ‘disclosure of insideinformation’.
34See also, Schedule 2, Regulation 5, The Financial Services and Markets Act 2000 (Market Abuse) Regulations
2005.
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Section 118C (2) of FSMA defines Inside Information, in relation to qualifying investments, or
related investments, which are not commodity derivatives, as information of a precise nature
which (a) is not generally available, (b) relates, directly or indirectly, to one or more issuers of
the qualifying investments or to one or more of the qualifying investments, and (c) would, if
generally available, be likely to have a significant effect on the price of the qualifying
investments or on the price of related investments.
Section 118C (3) of FSMA defines Inside Information, in relation to qualifying investments or
related investments which are commodity derivatives, as an information of a precise nature
which (a) is not generally available, (b) relates, directly or indirectly, to one or more such
derivatives, and (c) users of markets on which the derivatives are traded would expect to receive
in accordance with any accepted market practices on those markets.
Section 118C (4) of FSMA defines Inside Information, in relation to a person charged with the
execution of orders concerning any qualifying investments or related investments, inside
information includes information conveyed by a client and related to the client's pending orders
which (a) is of a precise nature, (b) is not generally available, (c) relates, directly or indirectly, to
one or more issuers of qualifying investments or to one or more qualifying investments, and (d)
would, if generally available, be likely to have a significant effect on the price of those
qualifying investments or the price of related investments.
3.3. India
The term ‘insider trading’ has not been defined in the SEBI Act or these regulations. The
definition of Insider Trading can be ascertained from a combined reading of the definition of
‘insider’ and ‘dealing in securities’, in the definition clause.35 According to Regulation 2(d) of
Securities and Exchange Board of India (‘Prohibition of’36 Insider Trading) Regulations, 1992,
Dealing in securities means ‘an act of subscribing, buying, selling or agreeing to subscribe, buy,
sell or deal in any securities by any person either as principal or Agent’ and according to
Regulation 2(e), Insider means ‘any person who, is or was connected with the company or is
35 Sekhar, supra note 17, 359.
36 Inserted by the SEBI (Insider Trading) (Amendment) Regulations, 2002.
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deemed to have been connected with the company, and who is reasonably expected to have
access to unpublished price sensitive information in respect of securities of a company, or who
has received or has had access to such unpublished price sensitive information’.
Chapter 2 of the SEBI (Prohibition of Insider Trading) Regulations, 1992 deals with the
prohibition of insider trading. Prohibition on insider trading had been divided into two
categories:
A. dealing in securities of a company listed on any stock exchange when in possession of any
unpublished price sensitive information either on his behalf or on behalf of any other person. 37
B. communicating or counseling or procuring directly or indirectly any unpublished price
sensitive information to any person. This will not include communication of such information as
required in the ordinary course of business or profession or employment or under any law. 38
SEBI (Insider Trading) (Amendment) Regulations, 2002 added Regulation 3A that prohibits
company from dealing in the securities of another company or associate of that other company
while in possession of any unpublished price sensitive information but Regulation 3B39 provides
certain cases where Regulation 3A does not apply.
3.4. Nepal
Section 91(1) of Securities Act, 2007 provides that ‘if any person deals in securities or causes
any other person to deal in securities on the basis of any insider information or notice that are
unpublished or communicates any information or notice known to such a person in the course of
the discharge of his or her duties in manner likely to affect the price of securities such a person
shall be deemed to have been committed an insider trading in securities’ thereby prohibiting
dealing in securities, causing any other person to deal in securities and communicating any
37 SEBI (Prohibition of Insider Trading) Regulations, 1992, Regulation 3(i).
38 Ibid, Regulation 3(ii).
39 Regulation 3B has been inserted by SEBI (Prohibition of Insider Trading) (Second Amendment) Regulations,2002.
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information or notice in a manner likely to affect the price of securities. In an explanation to this
section, "insider information or notice" had been defined as ‘any such specific kind of
information or notice not published by a body corporate issuing any securities as may be capable
of affecting the price of such securities if such information or notice is disclosed.’
Section 91(2) of Securities Act 2007 provides that ‘notwithstanding anything contained in sub-
section (1), any transactions already carried on shall not be deemed to be affected at all merely
by the reason that an insider trading has been committed’ thus making the transaction out of the
purview of the Acts on the ground of retrospective effect.
Securities Act 2007 under section 92 provides persons likely to be involved in insider trading are
(a) a director, employee or a person, who can obtain any information or a notice in the capacity
of a shareholder of that body corporate, (b) a person who can obtain any information or a notice
in the capacity of a professional service provider to that body corporate, (c) a person who can
obtain any information or a notice having a direct or indirect contact with the person or source as
specified in clauses (a) and (b).
4. Penalty
4.1. USA
Section 21(A)40 of the Securities Exchange Act 1934 provides the civil penalty for insider
trading, which states in the pertinent part: The amount of the penalty which may be imposed on
the person who committed such violation shall be determined by the court in light of the facts
and circumstances, but shall not exceed three times the profit gained or loss avoided as a result of
such unlawful purchase, sale, or communication.
40Section 21(A) is codified at 15 U.S.C. § 78u-1.
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Section 3241 of the Securities Exchange Act 1934 provides that any person who willfully
violates any provision of this chapter (other than section 78dd-1 of this title), or any rule or
regulation hereunder the violation of which is made unlawful or the observance of which is
required under the terms of this chapter (…), shall upon conviction be fined not more than
$5,000,000, or imprisoned not more than 20 years, or both, except that when such person is a
person other than a natural person, a fine not exceeding $25,000,000 may be imposed; but no
person shall be subject to imprisonment under this section for the violation of any rule or
regulation if he proves that he had no knowledge of such rule or regulation.
4.2. UK
The UK was the first European country to make insider dealing a criminal offence. 42 The
contract is unaffected as in Percival v Wright 43. The sanctions are criminal, the maximum
sentence being seven years’ imprisonment and/or a fine of unlimited amount.44 Section 52(1) of
the 1993 Act defines the central offence which it creates in the following terms: “An individual
who has information as an insider is guilty of insider dealing if, in the circumstances mentioned
in subsection (3), he deals in securities that are price-affected securities in relation to the
information.”45 If a defendant is convicted of insider dealing then, if it is a summary conviction,
he/she is liable to maximum fine of £5,000 or imprisonment for no more than 6 months or both.
46
For conviction on indictment the punishment is an unlimited fine or imprisonment for a
maximum of seven years, or both.47
41Section 32 is codified at 15 U.S.C. § 78ff.
42Mayson, supra note 28, 359.
43[1902] 2 Ch 421where the court held that ‘the directors of the company are not trustees for individual
shareholders, and may purchase their shares without disclosing pending negotiations for the sale of the company’s
undertaking’.
44 Keenan, Denis, Smith and Keenan’s Company Law (12th Edn., Pearson Education Ltd, 2002) 242.
45 Davies, supra note 19, 455.
46 Thorne, supra note 32, 351; CJA 1993, s 61(1)(a).
47 Ibid; CJA 1993, s 61(1)(b).
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The Criminal Justice Act 1993 imposes criminal liability for insider dealing, but did not provide
a civil remedy for the company or unsuspecting outsider. Part VIII of the FSMA was enacted to
complement the criminal offence of insider dealing provided by Part V of the 1993 Act. 48 The
Financial Services and Markets Act 2000 provide a significantly broad regulatory regime for
financial services in the UK. The Act introduced civil/administrative sanctions to complement
the criminal sanctions contained in Part V of the Criminal Justice Act, 1993.49 As a result of the
difficulty in prosecuting individuals under the criminal regime the government introduced a civil
offence of ‘market abuse’ contained in s118 of the FSMA.50
If the FSA51 is satisfied that a person is engaging in, or has engaged in market abuse, or has
required or encouraged another person to do, it may impose an unlimited civil fine; make a
public statement that the person has engaged in market abuse; apply to the Court for an
injunction to restrain threatened or continued market abuse; require a person to disgorge profits
made or losses avoided as a result of market abuse; require the payment of compensation to
victims.52
4.3. India
India through Securities and Exchange Board of India (Insider Trading) Regulations 1992,
prohibited this fraudulent practice and a person convicted of this offence is punishable under
Section 24 and Section 15G of the SEBI Act 1992.53 The Act now permits SEBI to
48Alexander, Kern. ‘Insider Dealing and Market Abuse: The Financial Services and Markets Act 2000’ (December
2001). ESRC Centre for Business Research, University of Cambridge, Working Paper No. 222, available athttp://ideas.repec.org/p/cbr/cbrwps/wp222.html (accessed on 12 October, 2009).
49Adungo, supra note 14.
50 Dignam and Lowry, supra note 3, 75.
51The Financial Service Authority (FSA) is the UK’s single financial services regulator, established by the FSMA.
The FSA has powers to prosecute the offence of insider dealing and to impose ‘civil’ penalties for market abuse.
52Lewis, Morgan, A Summary of the Financial Services Authority’s Market Abuse Regime in the United Kingdom,
available at http://www.morganlewis.com/pubs/FSA-Market%20Abuse.pdf (accessed on 5 October, 2009).
53See, Sharma, supra note 7, 36.
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simultaneously initiate criminal prosecution.54 The regulation does not contain any provision
prescribing penalty for insider trading. Generally the penalty provision as contained in section 24
of the SEBI Act provides that55 without prejudice to any award of penalty by the Adjudicating
Officer under this Act, if any person contravenes or attempts to contravene or abets the
contravention of the provisions of this Act or of any rules or regulations made hereunder, he
shall be punishable with imprisonment for a term which may extend to ‘ten years, or with fine,
which may extend to twenty-five crore rupees or with both’56. Section 15G provides for insider
trading penalty of ‘twenty-five crore rupees or three times the amount of profits made out of
insider trading, whichever is higher’57.
4.4. Nepal
A person who commits an insider trading a referred to in Section 91 shall, upon being convicted
of the offense of insider trading, 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.58
5. Conclusion
In as early as 1934, US legislation by making the use or employ of manipulative and deceptive
device unlawful for the protection of investors initiated to combat insider trading. After half a
century, Insider Trading Sanction Act 1984 and Insider Trader and Securities Fraud Enforcement
Act 1988 were aptly promulgated to curb insider trading. It is apparent that enactments of UK
legislation on insider trading have been made to take account of the EC Directive. The law on
Insider Trading of India evolved as a summation of the recommendations made by several
committees that culminated as SEBI (Insider Trading) Regulations 1992. Regular amendments of
54Bose, supra note 18, 97.
55 Sekhar, supra note 17, 364.
56SEBI (Amendment) Act, 2002 substituted it for ‘one year, or with fine, or with both’.
57SEBI (Amendment) Act, 2002 substituted it for ‘not exceeding five lakh rupees’.
58 Securities Act 2007, s 101.
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legislation in these countries are further bringing obnoxious practices with in the purview of law.
The law on insider trading in Nepal is in nascent state compared to these countries.
There is no statutory definition of insider trading in USA, unlike UK and India where the
conjunctive reading of ‘insider’ and ‘dealing in securities’ connotes insider trading, thus
judiciary has played important role in forming large part of law. In UK according to CJA 1993
dealing or encouraging to deal in price affected securities or disclosing of the inside information
amounts insider dealing and according to FSMA 2000 dealing or attempting to deal in a
qualifying investment or related investment amounts to insider dealing. In India, dealing in
securities when in possession of any unpublished price sensitive information or communicating,
or counseling or procuring unpublished price sensitive information amounts insider trading. In
Nepal, dealing or causing any other person to deal in securities on the basis of any insider
information or communicating any information in a manner likely to affect the price of securities
amounts insider trading.
In these countries both the civil and criminal penalty is provided to deter the menace of insider
dealing. Both in USA and India, only civil penalty is provided for insider trading and together
the criminal penalty is imposed on the violation of any provisions of Securities Exchange Act
1934 and SEBI Act 1992 or any rules or regulations made hereunder in case of USA and India
respectively. In UK, CJA 1993 provided only criminal penalty for insider dealing but later
FSMA 2000 introduced civil/administrative sanction for market abuse under which insider
trading is included as one of the offence. Like in UK, criminal penalty is provided by Securities
Act 2007 for insider trading in Nepal but there is no civil penalty regime.