A New India
Chapter 189 - 189: Insider Trading and Market Manipulation Prevention Act

Title: Insider Trading and Market Manipulation Prevention Act, 1954

Preamble:

The objective of this Act is to curb insider trading and other manipulative market practices that undermine the integrity of the securities market. By establishing clear rules and stringent penalties, this Act ensures that all participants in the securities market operate on a level playing field, with access to the same public information.

Section 1: Short Title, Extent, and Commencement

This Act shall be called the Insider Trading and Market Manipulation Prevention Act, 1954.

It extends to the entire territory of India and applies to all persons involved in the securities markets, including brokers, company officers, shareholders, and any individuals who may come into possession of non-public, price-sensitive information.

The Act shall come into force immediately upon its enactment.

Section 2: Definitions

Insider: Any person who is, or was, connected with a company (including directors, officers, employees, auditors, bankers, legal advisors, etc.), or anyone who is in possession of non-public, price-sensitive information relating to that company.

Price-Sensitive Information: Any non-public information that, if made public, would be likely to influence the price of securities, including but not limited to financial results, corporate actions, mergers, acquisitions, and management changes.

Insider Trading: The act of buying or selling securities based on material, non-public information by an insider or any person who has access to such information.

Market Manipulation: Activities that artificially affect the price or volume of securities, including front-running, pump-and-dump schemes, cornering, and churning.

Material Information: Any information that a reasonable investor would consider important in making a decision to buy, hold, or sell securities.

Connected Person: Includes any individual or firm having direct or indirect access to company information, through business relationships, personal connections, or professional duties.

Section 3: Prohibition of Insider Trading

No insider or connected person shall buy, sell, or deal in securities of a company, either directly or indirectly, on the basis of non-public, price-sensitive information.

Insiders are prohibited from communicating, tipping, or disclosing price-sensitive information to any third party who might use it for trading or investment purposes.

Any person who receives such non-public information shall be considered an insider if they act upon it for trading purposes.

Section 4: Reporting Requirements for Insiders

Insiders must report all their transactions in securities of the company to SEBI within 7 days of the trade.

Insiders who hold 10% or more of a company's shares must disclose any change in their shareholding, whether by acquisition or disposal, within 48 hours of the transaction.

Section 5: Restrictions on Trading Windows

SEBI shall prescribe trading windows during which insiders may not trade in company securities. These windows will typically be closed before major announcements, such as quarterly financial results, mergers, or other corporate actions that are likely to affect stock prices.

Insiders must also seek prior approval from the compliance officer of the company before trading during open trading windows.

Section 6: Presumed Insider Status

Any individual who is in possession of price-sensitive information shall be presumed to be an insider, unless they can demonstrate that their information came from a public source or was obtained without violating the provisions of this Act.

Section 7: Prohibition of Market Manipulation

No person shall engage, directly or indirectly, in any act, scheme, or practice designed to manipulate the market price of securities. Prohibited activities include:

Pump and Dump Schemes: Where individuals or groups artificially inflate the price of a stock through false or misleading statements, only to sell their holdings at the peak and leave investors with worthless stock.

Front-Running: Where brokers or other intermediaries execute trades based on advance knowledge of client orders to profit from price movements.

Cornering: Accumulating control of a large volume of a security to create artificial scarcity, driving up prices for the benefit of the manipulator.

Churning: Excessive trading in a client's account to generate commissions for brokers, without regard for the client's investment objectives.

The use of wash sales (transactions where there is no actual change in beneficial ownership) and matched orders (simultaneous buying and selling to create artificial trading volumes) is strictly prohibited.

Section 8: Prohibition of False or Misleading Statements

No person shall make or disseminate any false or misleading statements with respect to the market for any securities, if the intent is to manipulate the price of such securities.

Section 9: Disclosure of Price-Sensitive Information

Companies must publicly disclose any price-sensitive information that could materially affect the market price of their securities, including but not limited to:

Quarterly and annual financial results.

Corporate actions such as mergers, acquisitions, and divestitures.

Changes in senior management or board composition.

Major litigations, regulatory actions, or investigations.

Disclosure must be made immediately through a recognized stock exchange and the company's website.

Section 10: Compliance Officers and Insider Trading Policy

Every company listed on a recognized stock exchange must appoint a compliance officer responsible for overseeing compliance with this Act and reporting to SEBI.

The compliance officer shall:

Monitor insider trading activities and ensure that price-sensitive information is not misused.

Ensure that the company's Insider Trading Policy is updated and followed by all employees.

Maintain a record of all employees and insiders who have access to price-sensitive information.

Section 11: Blackout Periods

Companies must establish blackout periods during which insiders are prohibited from buying or selling securities. These periods must cover the time leading up to major announcements or corporate actions.

The compliance officer is required to notify all insiders about the blackout periods in advance.

Section 12: Investigatory Powers of SEBI

SEBI has the power to investigate and take action against any individuals or entities suspected of violating this Act.

SEBI may require access to the records of brokers, dealers, and companies, including trading logs, communications, and financial reports.

SEBI may also summon individuals for questioning or request documentation from third parties involved in the suspected illegal activity.

Section 13: Administrative Penalties

For violations of insider trading and market manipulation regulations, SEBI may impose:

A financial penalty up to three times the profit made or loss avoided by the insider, or Rs. 1 crore, whichever is higher.

Suspension of the violator's right to trade on any stock exchange.

Debarment of individuals from holding directorship or key managerial positions in any publicly traded company.

Disqualification of brokers or intermediaries from operating in the securities market.

Section 14: Criminal Penalties

In cases of willful or fraudulent insider trading or market manipulation, criminal penalties shall apply, including:

Imprisonment of up to 10 years.

A fine not less than Rs. 5 lakh, which may extend up to Rs. 10 crore.

Repeat offenders may face additional fines and lifetime bans from participating in the securities market.

Section 15: Civil Liability

Investors who suffer losses due to insider trading or market manipulation may file a civil lawsuit against the perpetrator for damages.

Companies involved in market manipulation may be required to compensate shareholders who have been adversely affected by illegal activities.

Section 16: Establishment of Market Surveillance Division

SEBI shall create a Market Surveillance Division responsible for monitoring securities markets in real-time to detect suspicious trading patterns, market manipulation, and insider trading.

The division will use advanced technology to identify anomalies in trade volumes, price movements, and market behavior.

Section 17: Whistleblower Protection

Whistleblowers who report instances of insider trading or market manipulation shall be protected from retaliation, including termination, demotion, or harassment.

SEBI shall establish a confidential whistleblower hotline where individuals can report suspected violations.

Whistleblowers may be eligible for a monetary reward of up to 10% of any fines collected as a result of their disclosure.

Section 18: Right to Appeal

Any person aggrieved by an order or decision made by SEBI under this Act has the right to appeal to the Securities Appellate Tribunal (SAT).

The appeal must be filed within 60 days from the date of receiving the order. The SAT will have the authority to:

Uphold, modify, or annul SEBI's decision based on the merits of the case.

Conduct hearings and allow parties to present evidence and arguments.

Section 19: Procedure for Appeals

The SAT shall follow a summary procedure for adjudicating appeals, ensuring that matters are resolved efficiently and promptly.

The SAT may issue interim orders to maintain the status quo during the pendency of the appeal.

Section 20: Delegation of Powers

SEBI may delegate specific functions and powers under this Act to its officers or other regulatory authorities, ensuring that these delegates operate within the prescribed framework and report back to SEBI.

Section 21: Rulemaking Authority

SEBI shall have the authority to make regulations to carry out the provisions of this Act. These regulations will cover:

Detailed guidelines on the conduct of insiders and connected persons.

Procedures for the investigation and handling of violations.

Framework for disclosures related to price-sensitive information.

Section 22: Maintenance of Records

All companies and intermediaries must maintain comprehensive records of transactions, communications, and compliance documents for a minimum of five years. These records must be available for inspection by SEBI upon request.

Section 23: Coordination with Other Regulatory Bodies

SEBI shall coordinate with other regulatory bodies, including the Reserve Bank of India (RBI) and the Ministry of Finance, to ensure comprehensive oversight of financial markets and to share information on violations and enforcement actions.

Section 24: Awareness and Education

SEBI shall undertake initiatives to educate investors about their rights, the importance of transparency in the securities markets, and the implications of insider trading and market manipulation. This will include public awareness campaigns, seminars, and educational resources.

Section 25: Amendments to the Act

This Act may be amended from time to time to incorporate new provisions that reflect changes in market practices, technological advancements, and evolving legal frameworks in line with global best practices.

Section 26: Repeal of Previous Laws

Any previous legislation or rules pertaining to insider trading or market manipulation that conflict with this Act are hereby repealed. However, actions taken under those laws prior to this Act's enactment shall not be invalidated.

Section 27: Savings Clause

Any action taken, investigation initiated, or proceeding instituted prior to the commencement of this Act shall be deemed valid and shall continue under the provisions of this Act.