An insider is any officer, director or owner of 10 percent or more of a class of a company’s securities. An insider has access to internal information of a company that is not unknown to public. Insider trading takes place when an insider discloses price sensitive information disguised from public to a selected influencing market player.
Introduction to Insider Trading
Insider Trading is one of the menacing acts in the share market that puts small investors in jeopardy. Insider trading is generally deemed to be illegal act, but the term actually includes both legal and illegal conduct, depending on the policy of the state. According to Securities and Exchange Commission (SEC), “Illegal Insider Trading refers generally to buying or selling a security, in the breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, non-public information about the security.” Nevertheless, legal version of insider trading has also been defined by SEC as “corporate insiders—officers, directors and employees—buy and sell stock in their own companies.” Meanwhile, insider trading means trading in shares of a company for making a gain or for avoiding a loss by manipulation of prices by person who are in the management of the company or by having access to undisclosed price sensitive information putting selected noteworthy market player in an advantageous position.
Insider Trading in Nepalese Stock Market
Nepalese stock market is shrouded of multitudinous practices of insider trading putting the small investors in peril. Insider trading is the cold fact about the Nepal’s hot stock market. The burgeoning stock index has lured many small investors to enter in the share market. Meanwhile, the illegal practice of gaining the crucial undisclosed information about the company by prominent investors and manipulating the actual market scenario have crumbled the faith of small investors from the stock market forcing them to get away from the share market. This formidably forbidden act by the insider and dominant market player has impinged the true market index affecting freely fluctuating share prices.
Insider Trading is adversely affecting the market scenario disguising the true market figure. Many of the shares are overprices creating artificial flow of investors interrupting the free operation of share market. Securities Board of Nepal (SEBON), the apex regulator of Securities Markets, has been persistently seeking for appropriate mitigating measures to curb growing insider trading. SEBON is working to introduce a code of conduct for stock market participants to curb insider trading. According to SEBON officials, “companies are leaking information through stockbrokers, benefiting selected influential market players and putting small investors at risk.”
Examples of Insider Trading in Nepal
2016: Everest Bank Limited: The board members of Everest bank Limited were found leaking price sensitive information such as distribution of bonus share and right shares to their relatives during the trading hours before the information is publicized. According to Nagarik News, “The board members were passing information to their relatives regarding the distribution of 70 percent bonus share and 30 percent right share, during the trading hours from the rest room in the amidst of meeting, providing them a clue to purchase shares, which brought about sudden price rise of Rs. 89 per share, while the price of a share hiked to Rs. 3900 per share.
2016: Nepal Life Insurance Company Limited: The board members were found leaking information regarding the distribution of 30 percent bonus share and 100 percent right share to their relatives, which created swift rise in the demand of share rising the price of a share by Rs. 59.
SEBON on its way to curb Insider Trading
SEBON has been persistently working to formulate strict codes to eliminate insider trading and implementing severe punishment to those breaching the rules of engagement. SEBON has been contemplating on effectively implementing Securities Act (2007), which lucidly states, “a person who commits an insider trading upon being convicted of the offense of insider trading will 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.” The regulatory body of securities market has been endeavoring to reduce insider trading and promote fair competition in share market. Consequently, SEBON has warned three merchant bankers and 19 stock brokers for dealing in insider trading of securities. Moreover, Nepal Stock Exchange (NEPSE) has issued directive to listed companies to not to disclose any decision within the trading hours that can influence the share price.
Conclusion
Share market is highly fluctuating market and highly liquid market with daily turnover of more than a billion rupees. Such a huge marketplace is driven by few dominant market players. Some of the predominant market players create an artificial market prices that disguises small investors entrapping them in the whirlpool of never-ending market games. Insider trading is one of the most practiced market games that puts dominant market player in lucrative position while plunging other investor in deficit. The crumbling faith of investors can be regained through strict regulation and perfect monitoring of illegal acts such as insider trading.
References
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