Presentation on Insider Trading

BY:
Ankit Fating
Rishu Bharadwaj
What is Insider Trading?
 Insider trading is the trading of a corporation's stock or
other securities (e.g. bonds or stock options) by
individuals with potential access to non-public
information about the company.

 In other words, It is the act of buying & selling a

company’s stock on the basis of inside information
about the company.
 Who is an Insider?
 SEBI regulation, 1992: Insider is any person who is or was
connected with the company and who is reasonably
expected to have access to unpublished price sensitive
information about the stock of that particular company, or
who has access to such unpublished price sensitive
information.

 Types of insiders :
 Primary Insider (Corporate officers, Directors, Employees)
 Secondary Insider (Friends, Business associate, Family members)
What is Price Sensitive Information?

 Any information, which relates directly or indirectly to a

company and which if published is likely to materially
affect the price of securities of company.

 The following shall be deemed price sensitive

information:

 Periodical financial results of the company;

 Intended declaration of dividends (both interim and final);

 Issue of securities or buy-back of securities;

Contd…
 Any major expansion plans or execution of new projects;

 Amalgamation, mergers or takeovers;

 Disposal of the whole or substantial part of the undertaking

 Significant changes in policies, plans or operations of the

company.
How does insider trading work?
Adverse effects of Insider Trading.

• Violates transparency, which is the basis of a capital

market.

• Unfair and disruptive to a properly functioning market.

• Tends to reduce the size of the market.

• Decline in the liquidity of the stocks.

• A declines the market ability to spread risk.

SEBI’s efforts to curb insider trading :

 Close period/closed trading window

 Pre-clearance of trades

 Compliance Officer

 Other restrictions
Instances of insider Trading:
 Tata Finance Ltd. Insider Trading

 ENRON Case

 UTI US-64 Case

 Reliance Industries Ltd Insider (RPL-RIL 2007)

 The Case of insider trading (HLL-BBLIL Merger)

 Insider Trading: Pre-9/11 Attack

Tata Finance Ltd. Insider Trading
 Dilip Pendse was the managing director of TFL and came
across price sensitive information in middle of March
2001.

 His wife Nalini Pendse and a company controlled by her

sold 40,000 shares of TFL.

 Both are deemed to be insiders because of their

relationship with Dilip Pendse.
Contd…
 SEBI argued that the shares were sold in end of March 2001 when the
insiders had access to privileged price sensitive information.

 Nalini Pendse and the associated company asserted that they sold the
share in Sept of 2000 to a broker, who bought on its own account and sold
them in Sept 2000 in a back to back transaction to a third party.

 Evidences of Insider Trading:

• The broker issued contract notes were not evidently back-dated.

• A stamp of the exchange on the contract notes.

• Covering letter etc.

Contd..
• The shares were delivered only in late March 2001 to the broker
and the broker made the payment also in late March (when the
parties were in possession of inside information).

Results:

• TFL sustained losses running into hundred of crores of rupees.

• SEBI has imposed a penalty of Rs 1.50 lakh on Dilip S Pendse

for indulging in insider trading in the company's shares.
Enron ethics breakdown case
• Enron was America’s energy based company founded in the year
1985.

• It was ranked 6th largest energy company in the world and rated as
“America's Most Innovative Company” for six consecutive years by
Fortune Magazine (1996 -2001) based on its acclaimed Corporate
Governance principles.

• Using the internet to promote trading, Enron became the most

successful player in the futures game; 90% of Enron’s income came
from trades

• Enron took advantage of the dot.com boom and traded internet

bandwidth. The value of Enron’s online transactions was huge ($880
billion)
Key Players in ENRON scandal:

• Kenneth Lay
 Founder & CEO of ENRON
 Quit as CEO in February 2001, returned in August
2001until he resigned on Jan. 23, 2002
 Quit the Enron board altogether on Feb. 4.
 Sherron Watkins said Lay was "duped" by top
executives

• Jeffrey Skilling
 Enron's chief executive in the first half of 2001
 Between January and August 2001 he sold off about
$20 million in Enron stock
 Resigned after the close of markets on Aug. 14 2001
 Being charged with conspiracy, fraud and insider
trading.
• David Duncan
 Enron's chief auditor at Anderson
 Accused of ordering the shredding of thousands of
Enron-related documents in an effort to hide them from
Securities and Exchange Commission investigators.

• Andrew Fastow
 Former Chief Financial Officer of Enron
 The mastermind behind the deceptive accounting
practices.

• Sherron Watkins
 Known as the "Enron whistle-blower"
 Was Enron's vice president of corporate development.
 Wrote a letter to Kenneth Lay about “suspicions of
accounting improprieties"
What went wrong?
• Enron began tweaking the numbers in their financial
statements with accounting techniques to hide their losses

• Enron created partnerships, and then passed the assets

(losses) to these partnerships which eliminated the losses
from their balance sheets.

• Andrew Fastow (CFO) created the partnerships.

• Condor and Raptor were two major partnerships

• Sherron Watkins, the Enron “Whistleblower” noticed the fuzzy

accounting that had been used in relationship to the Condor
and Raptor partnerships and wrote a letter to Kenneth Lay and
Arthur Anderson warning him that the Enron was unstable.
Contd…
• Aug 14, 2001 Jeff Skilling resigned, Kenneth Lay became CEO once
again.

• Stock prices began to fall, as investors were uncertain about the

company’s stability.

• This started a chain reaction: Enron had hedged against its own
stock, so as long as the stock price was declining, it could not
recover its losses.

• December 2001, Enron filed for chapter 11 bankruptcy

• It’s share price had collapsed from about $95 to under $1.
 UTI US-64 case
• UTI was established through a Parliament Act in 1964, to
channelize the nation’s savings via mutual fund schemes.

• In 1998, investors of Unit Trust of India’s (UTI) Unit Scheme-

1964 (US-64) were shaken by media reports claiming that
things were seriously wrong with the mutual fund major.

• For the first time in its 32 years of existence, US-64 faced

depleting funds and redemptions exceeding the sales.

• Analysts remarked that the depleting corpus coupled with the

redemptions could soon result in a liquidity crisis. Soon,
reports regarding the lack of proper fund management and
internal control systems at UTI added to the growing investor
frenzy.
• The net asset value (NAV) of US-64 also declined significantly
during 1993-1996 due to turbulent stock market conditions. A
Business Today survey cited US-64’s NAV at Rs 9.68. The
US-64 units, which were sold at Rs 14.55 and repurchased by
UTI at Rs 14.25 in October 1998, thus were around 50% and
47%, above their estimated NAV.

• Its gravity far exceeds the stock market downswing of the mid-
1990s, which wiped out Rs. 20,000 crores in savings. This has
tragically led to suicides by investors.
What went wrong?
• The US-64 crisis is rooted in plain mismanagement.

• US-64 was launched as a steady income fund. Logically, it should

have invested in debt, especially low-risk fixed-income government
bonds.

• Instead, its managers increasingly invested in equities, with high-risk

speculative returns. In the late 1980s UTI was “politicized” with other
financial institutions (FIs) such as LIC and GIC, and made to invest in
certain favoured scripts. By the mid-1990s, equities exceeded debt in
its portfolio.

• In the past couple of years, UTI made downright imprudent but heavy
investments in stocks from Ketan Parekh’s favourite K-10 portfolio,
such as Himachal Futuristic, Global Tele and DSQ.
Contd…

• These “technology” investments took place despite indications

that the “technology boom” had ended. US-64 lost half its Rs.
30,000 crore portfolio value within a year.

• According to insiders, the Finance Ministry substantially

influenced them: all major decisions need high-level political
approval.

• Today, its NAV stands at Rs. 8.30 – a massive loss for 13 million
unit-holders.
Thank you