[Economy Q] What is Insider trading

[Economy Q] What is Insider trading

S.Sudipta asked,

Recently got a news Reliance is accused of insider trading!! Can U tell me what is insider trading??

 

Answer:

Insiders (employees and board members) have advance knowledge of Company's accounts, secrets, financial statements, future plans of merger & acquistions etc. They can benefit  from this Inside information to trade and make profit in the share-market.

 

if the CEO of Company A learned (prior to a public announcement) that Company A will be taken over, and bought shares in Company A knowing that the share price would likely rise. In this case he made profit, only because he knew the inside information.

 

Insider trading is an offence punishable under the SEBI Act of 1992.

The penalty Insider trading is Rs 25 crore or three times the gain -- whichever is higher.

 

Reliance Petroleum (RPL) was set up to build a refinery in Jamnagar, no longer exists and has been merged with RIL.

In Nov.2007, RIL sold about 4% of Reliance Petroleum's equity for Rs 4,023 crore.

According to SEBI findings, the sellers had same registered address and phone numbers as RIL in Mumbai and Jamnagar; had opened their accounts with the brokers on the same day; share a common email address; and had received margin financing from two other companies promoted by Ambani Navi Mumbai SEZ Pvt. Ltd and Mumbai SEZ Pvt. Ltd.

Sebi's alleges that the company — which controlled the agents dealing on its behalf — knew that it intended to sell shares in the cash segment when it transacted in the futures segment so This amounted to insider trading.

 

RIL made 500 cr. Rupees profit from these transection. So the possible penalty (if proven) will be 500 x 3 = 1500 cr.