Tittle :Insider trading in Malaysia; towards an improved regulation

Journal :Research Paper

Author/s :Rokiah Kadir and Suriyani Muhamad

Year : 2012

Main Issue/s :Gauge the issue of insider trading in Malaysia by assessing some selected statutory provisions under the relevant law and examining the issues of enforcement and prosecution.

Country/ies Involved:Malaysia

Statutes :Companies Act 1965

Summary/DiscussionINTRODUCTIONInsider trading is buying or selling of shares by people who knows or is in possession of certain information about the shares and the information is not yet release. Insider trading regulation is necessary as it is potential to diminish or increase investors confidence. The information that is not release is such a nature because if known to the public would impact on the price of the shares. So, the insider uses the non-public information to derive profit or avoid loss by selling or buying securities. The reason is to preserve market efficiency and promote fairness among all shareholders. All investors should have equal access to material corporate information and directors of company or corporate executives are likely of this offence because having control of companys property. Therefore, they are in position to explore and exploit to their advantage information about the company operations which are secret outside the board room. Violation of confidential information by insiders is one of the corporate governance issues affecting security industry. So, various theories have been cited to justify formulation of policies and regulations against insider trading.SCOPE OF THE STUDY, METHOD AND LITERATURE REVIEWS.Include qualitative analysis involving the analysis of relevant statutes, law reports as well as documents in the Parliament, Security Commission and Polis Diraja Malaysia.

RESULT AND DISCUSSION.The number of countries adopting insider trading regulation keeps increasing and Malaysia has long joined those countries which have resorted to legislation in order to combat insider trading. The insider trading regulation can also promote wide distribution of shares ownership, more accurate share prices and improved liquidity. Malaysia has taken wise move when it chooses to legislate against insider trading. However, the question of how far the regulation addresses the issues and problems insider trading give rise to remain unclear and is an area this paper undertakes to analyse. Various analyses has been attempted to explain the rationales underlying prohibition of insider trading. The crucial issue is the promotion of fairness. An executive or director should not use corporate information for personal gain, as the trading would give rise to unfairness to investors who are not insiders, or have no excess to the information. Unless, the information made is available to general public. This rationale seems to have been endorsed under section 89E of the Securities Industry Act 1983 through its definition of an insider as a person who possesses information that is not generally available, which becoming generally available a reasonable person would expect it to have a material effect on the price or the values of securities and know or ought reasonably to know that the information is not generally available. So, it is obvious that the definition of insider is provided in a way that the focus is on the unavailability of the information to the investing public. Insider trading would encourage informational disadvantage and this is in turn can lead to lack of confidence in the market, reduce the liquidity, slow down the share offering and raise the cost of capital. Investors generally will not trade if they feel that they have been disadvantaged. Next, the prohibition of insider trading can also be substantiated on the basis of the fiduciary obligations of officers to the company. The officers hold the position of trust and therefore should not be allowed to take advantage from the positions. However, the fiduciary justification may have a drawback in that people who are not fiduciaries such as those who are external to the company can escape legal ramifications, thus leaving the security market susceptible to abuse. Section 132(2) only prohibits an officer or agent of the company or officer of the Stock Exchange from engaging in the prohibited conduct. In the same manner section 132A only holds an officer, agent or employee of a corporation of officer of the Stock Exchange liable for insider trading and section 132B extends the prohibition on abuse of information to officers as well as previous officers. The justification underlying the prohibition of insider trading may also be derived from the concept that information constitutes property rights which solely belongs to the company. Sections 132(2), 132A and 132B under the Companies Act 1965 do not address the issue of insider trading satisfactorily. Two issues deserves comment in this respect, first, requiring the acquisition of the confidential information which must be virtues of the traders position in the company is too restrictive. Second, section 132A shed some light on the example of price-sensitive information, it is not clear if the matters are to be confined to only these two categories.The Companies (Amendment) Act 2007 unfortunately retains the undesirable position under the old law. The requirement pertaining to the manner the information must be acquired remains under section 132(1G(c). There is nevertheless some improvement with regard to the second comment above. The Securities Industry Act 1983 has brought about some changes pertaining to this issue. The provision though does not settle the issue once and for all. This may give rise to a question whether the definition would also cover imprecise information in order to constitute the offence. The answer is probably in the affirmative due to the generality of the phraseology employed.On the issue of the persons whom the law holds as liable for insider trading offences, section 132B provides a slightly broader definition than sections 132(2) and 132A. Section 132B expands the scope of the prospective offender to include persons who hold former official capacity in the company or the Stock Exchange. These people are literally the insiders to the company. While the widening of the scope to include ex-staff registers some improvement, the measure is far from being sufficient. It is the misusing of the confidential information with the purpose to gain profit or avoid loss that forms the reason behind the provisions in question. The loopholes if go unaddressed will certainly defeat the spirits of the law against the prohibition of the offence.Section 89E (1) of the Securities Industry Act 1983[2] improve the matter in relation to listed companies by declaring a person to be an insider if the person possesses information that is not generally available which on becoming generally available a reasonable person would expect it to have a material effect on the price or the value of securities and knows or ought reasonably to know that the information is not generally available. The definition is wide enough to cover not only those who have employment, business or professional connection with the company but also those who are without. Considering that it is inherently unfair for a person to take advantage of such information, the non-relevance of the connection in the definition of insider is a commendable move by the Parliament. With this provision it is a settled position in Malaysia now that with regard to listed corporations insiders will include the traditional insiders, shareholders and any person who has access to inside information.On the issue of the prohibited conduct and its punishment, section 89E of the Securities Industry Act 1983 makes dealing in shares an offence. On the issue of punishment subsection (4) states that contravention of the provision containing these prohibited activities is an offence and is liable on conviction to a fine of not less than RM1 million and to imprisonment for a term not exceeding ten years. The mandatory imprisonment especially is meant to scare the criminals and deter prospective offenders in the future from utilizing corporate information for personal gains. The one million ringgit fine alone might not be a deterrent punishment if the traders view the fine as an offset against the more lucrative gain from the dealings.

An alternative device to the criminal sentencing in regulating insider trading will be the civil sanction. The civil sanction is provided under section 90A of the Securities Industry Act 1983[3] allowing a person who suffers loss or damages by reason of the insider trading to recover the amount of loss or damages by instituting civil proceedings against the other person, whether or not the other person has been charged with an offence in respect of the contravention or, whether or not a contravention has been proved in a prosecution. Rules regulating insider trading also found its way into the Bursa Malaysia under Main Market Listing Requirement. Section 9.19 of the Bursa Malaysia under Main Market Listing Requirement lists down circumstances in which a listed company must make the announcement to the Exchange. The absence of this qualification in the new provision of section 132(1G(c)) under the 2007 Amendment, which prohibits a director from using any information to gain benefit, raises a question whether the amended provision provides an extra protection to the investors.CONCLUSIONIt is a well-recognized fact that legislation can be an effective tool to create an encouraging business environment. The purpose of this paper which is to analyse the frequently reiterated issue of insider trading in Malaysia raises a number of issues. It identifies problematic and unsatisfactory provisions and analyses the potential outcomes of the provisions and the difficulties brought about if the problems remain unaddressed. These issues if left unattended would create a disadvantage for business firms in Malaysia as they do not promote competitive capital market in the region. Specifically, the provision on the manner the information must be obtained is not a creditable solution-requiring the acquisition of the confidential information which must be by virtues of the traders position in the company is too restrictive, and hence is not necessary if greater protection is to be granted to investors. This requirement may be seen to have a bearing with the definition of insider trader which hinges closely on the concept of fiduciary obligations.