Insider trading is the buying , selling or dealing in securities of a listed company by a director , member of management , employee of the company , or by any other person such as internal auditor , advisor , consultant , analyst etc, who has knowledge of material inside information which is not available to general public.
Why forbid insider trading?
The ideal securities market is one which allocates the capital in the economy in a proper manner. This function is enabled by "market efficiency", the situation where the market price of each security accurately reflects the risk and return in its future. The primary function of regulation and policy is to foster market efficiency, hence we must evaluate the impact of insider trading upon market efficiency.
When insider trading happens, they speed up the flow of information and forecasts prices.This is possible by the insiders as they are in comfortable position to make forecasts about the risk and return of the shares and bonds of their company. This would lead to perceiving the market prices to be "too low" or "too high". When they trade on the secondary market, they serve to feed their knowledge into prices, thus making markets more efficient.
What is the regulation?
Securities and Exchange Board of India(SEBI) has formulated Prohibition of Insider Trading regulations.
The regulations also explains about the disclosure norms to be followed. The details of insider trading by any corporates can be obtained by logging into bseindia.com, where disclosures made by the Company can be seen.
Latest Headlines
On May 10, 2011,SEBI has embarked upon a programme to increase surveillance and prevent insider trading. The regulator has also formed a committee to reach out to new retail investors, while introducing new products and working out risk mitigating measures.
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