Insider Trading: A Few Observations

Citation

Yadav, S.S. and Shankar, R. (2013), "Insider Trading: A Few Observations", Journal of Advances in Management Research, Vol. 10 No. 1. https://doi.org/10.1108/jamr.2013.42610aaa.001

Insider Trading: A Few Observations

Article Type: Editorial From: Journal of Advances in Management Research, Volume 10, Issue 1.

Many contemporary problems bring new opportunities to researchers. In the past, a new management theory or a new implementation framework had a genesis in the management challenges of those times. We believe that it is true even now. Therefore, we will discuss one of the issues that has been in the news in the recent past. It is insider trading as it led to trials and convictions in the US Courts of Law. What is insider trading? Broadly, it refers to malpractices of those who are directly related to a company or a body corporate. These persons use their position to get price sensitive information related to the value of company shares, etc. which is not published. An “insider” is a person who is or was connected with the company and is expected to have access to unpublished price sensitive information. “Insider Information” is the information which is not in public domain. This information can be used to influence an investor's decision to purchase, sell or hold a security. Insider trading is an offence since the unpublished information obtained through one's position in, or contacts with, a company is used to make personal gains or to prevent losses by buying or selling or holding the securities of that company. The examples of the price sensitive information include periodical financial results of the company, intended declaration of dividend, any plan to issue or buy back shares, major expansion plan, possible mergers and acquisitions and any significant changes in policies, etc.

Insider trading is sought to be prohibited on the basis of fundamental principle of equity and objectivity. In simple terms, it means that the persons who are in possession of unpublished price sensitive information by virtue of their position will not make personal gains or enable others to make gains by trading shares, based on this knowledge.

Though, now, a majority of countries in the world have insider trading laws, it is very difficult to enforce them. The difficulty lies in making distinction between trades effected on the basis of legitimate information and trades done on using illegal (insider) information. In USA, there have been some cases where courts have conclusively proved the offenses of insider trading. There, the scope of the insider trading has been widened. The individuals, not connected to a company, but who have traded based on non-public information, howsoever obtained are also regarded as insiders. Also, the cases where an insider, not trading himself, has enabled someone else to trade, based on such information, fall under the offense of insider trading. Recently, a well-known corporate personality was found guilty since he passed on the insider information to the managers of a hedge fund and the latter made huge profit by trading on the shares of the company whose information was passed on. One can only guess that many cases of insider trading must be going unnoticed, leave aside their being proved.

Be that as it may, one can legitimately ask a philosophical question: why does insider trading or for that matter, any financial offense happen? The answer is unequivocal: it is greed, that is, a desire for more and more, and being not content with what one gets in a legitimate manner. There is a verse in scriptures, indicating how one can be happy with the wealth one has. It goes like this: “Dharmaya, Yashase, Arthaya, Kamaya, svajanaya cha; panchdha vibhajan vittam, ihamutra cha modate.” That is, one should divide what one earns in five parts (not necessarily in equal parts): spend one part on virtuous/charitable acts anonymously, spend another part on philanthropy to enhance one's standing or prestige, save another part for future, spend still another part for one's own comfort -and well-being, and lastly give one part to the people who are relatives and who belong to one's entourage. By doing so, one ensures one's happiness not only in this life but even beyond!

In fact, much of the financial offenses, or what are referred to as white collar crimes, would not happen if people could somehow grapple with this monster, called greed. Generally such offenses are committed by those who are already rich. Therefore, effective way to control them is to control greed.

However, as long as people are not guided by this philosophy, the legal processes will continue to grapple with these offenses. Some researchers may dwell on this issue by developing case studies and doing empirical research. We believe that such contemporary problems are right fertile ground where new idea of academic research can germinate so that convincing solutions can emerge.

Surendra S. Yadav and Ravi ShankarDepartment of Management Studies, Indian Institute of Technology Delhi, Hauz Khas, New Delhi, India