Manipulation of bulls and bears
Sebi regulations are welcome changes to mitigate the evil. But do they prevent the wolves of Dalal Street from doing what they are good at, including insider trading?
The Securities and Exchange Board of India notified SEBI (Prohibition of Insider Trading) Regulations, 2015 under the SEBI Act, 1992, placing a legal framework for prohibition of insider trading in securities. Once the regulations kick-start on the completion of four months since its notification, the corporate policies, procedures, maintenance of records should demonstrate adherence to the rules. Sebi will monitor trades and the implementation of the codes specified in these regulations under the overall supervision of the board of directors of the listed company or the head of an organisation.
These regulations are welcome changes to mitigate the evil, but do they prevent the wolves of Dalal Street from doing what they are good at — including insider trading? An ‘insider’ is a connected person; or whoever possesses or has access to unpublished price sensitive information other than ‘generally available information’. Information likely to materially impact the price of the securities include those relating to financial results, dividends, change in capital structure, mergers, de-mergers, acquisitions, delistings, disposals and expansion of business and changes in key managerial personnel.
If an insider discloses unpublished price-sensitive information to whom they trust in a clandestine way, violating all ethical principles in reality, hoodwinking the eyes of the law but demonstrating rule compliance otherwise, it is difficult to catch that person by any regulation. An investor who is crooked knows how to outsmart regulations and leaves no proof of his connections. Immediate relatives are also presumed to be connected persons but it is deemed to be a legal fiction.
The common investor hardly makes profit in the volatile unpredictable risky markets. In the artificially-run bull and bear markets, controlled by game players, the bull is made to run fraudulently by pumping stocks of choice without any fundamental strengths. The bull stops running all of a sudden when profit is booked by the trading sharks. The common investors only face the gruesome teeth of the bear going for a bloodbath at Dalal Street, who chew up merrily their life’s hard savings.
Those who saw Martin Scorsese’s Hollywood saga on the stock market fraud, The Wolf of Wall Street, where Leonardo DiCaprio portrays Jordan Belfort, the penny stock fraudster selling broiler room penny stocks under ‘pump and dump scheme’, cannot keep wondering how Belfort is now charming salesmen as a successful motivational speaker, posing the famous question to sell him a pen.
Companies are required to develop practices based on need-to-know principles, confidentiality and non-disclosure obligations. However, stockbrokers contact potential investors known as a “sucker lists” to trade fraudulent securities using boiler room high-pressure selling tactics.
Customers get only positive information about a targeted stock advocating that that such opportunities come once in a lifetime. Boiler-room methods, though not fair practice, is difficult to stop legally. Even in the US, the North American Securities Administrators Association estimates loss of $10 billion a year, roughly one million dollar an hour to investment fraud promoted over the telephone.
If a person has traded while in possession of unpublished price sensitive information, he is required to prove his innocence. However, an insider can, as per regulation formulate a trading plan and present it to the compliance officer for approval. This enables him to trade in securities in a compliant manner granting absolute immunity from bringing proceedings for market abuse.
The board of directors of every company having listed securities must publish a code of practices and procedures for fair disclosure of unpublished price sensitive information on its official website. Companies have to designate a senior officer as a chief investor relations officer for prompt dissemination of unpublished price sensitive information.
The compliance officer must report to the board of directors and to the chairman of the audit committee. Designated persons and their immediate relatives shall not trade in securities when the trading window is closed.
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