What is Insider Trading?
In 2012,the whole time member of SEBI (‘WTM’) passed an order against certain relatives of Mr. Ramalinga Raju and entities belonging to the promoter group of Satyam Computers with regard to violation of Section 12A of the Securities and Exchange Board of India Act, 1992 (‘SEBI Act’), Regulations 3 and 4 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003 (‘PFUTP Regulations’) and Regulation 3 of the SEBI (Prevention of Insider Trading) Regulations, 1992 (‘PIT Regulations’). The order was passed under Section 11(1), 11(4) and 11(B) of the SEBI Act.
A penalty of Rs.65 lakh was imposed on T.A.N Maruti, the former head of investor relations at Satyam Computer Services Ltd, for insider trading in the company’s shares in 2008.With the ever-increasing stakes, the importance of having an Insider Trading Management system becomes all the more important.
Firstly, we must define as to what Insider Trading actually is? Insider trading can be defined as a malpractice wherein trade of a company’s securities is undertaken by people who by virtue of their work have access to the otherwise not- public information which can be crucial for making investment decisions. The SEBI mandates that,
- There must be a clear Identification and classification of Insider and their holding details
- A Code of conduct must be published and acknowledged by insiders
- Initial and continual Declarations must be made
- An organization must receive a clear intimation of the Blackout Period.
- A Trading window must be set up
- Formulate a Trading plan including submission, approval, and tracking
- There must be Pre-clearance of trades & declaration
- Ensure the prevention and monitoring of contra trade
- Data must be retained for a period of 5 years
Why does one need Insider Trading Management System (ITMS)?
In the wake of an increase in instances of Insider Trading, a tool like ITMS enables compliance with Insider Trading regulations and ensures that no irregularities or deviations occur. As opposed to manually monitoring compliance, system guarantees;
- System alerts
- Smooth workflow for declaration/trading plan approvals
- Pre-Trade clearance using approval workflow and tracking
- Exception handling workflows
- System driven Alerts and notifications.
- Intelligent analytics and real-time reporting
- A Centralised data repository for easy retrieval of information.
Benefits of an Insider Trading Management system
The Insider Trading Management System (ITMS) helps organizations easily capture details about “Insiders” and their relatives as per their policy definition. A workflow enabled pre-dealing approval as well as post trade update mechanism brings efficiency to request handling. A workflow enabled pre-dealing approval as well as post trade update mechanism has been designed to bring efficiency to request dealing. Further, a configurable “Trading Window” and automated alerts and notifications add flexibility to the system.
Most importantly, an Insider Trading analytical utility helps compliance officers quickly identify deviations/violations from actual trading logs with ease. One can safely assume that an Insider Trading Management System is a requisite for ensuring compliance with Insider Trading regulations. With regard to all benefits that ITMS has to offer, it is safe to conclude that an Insider Trading Management System is pre-requisite for safeguarding oneself against Insider Trading.