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Investors seek stringent action against 'insiders'

DUBAI - ESCA rules prohibit individuals from trading in securities based on non-public information which one was able to obtain based on his position; uses rumours concerning purchase or sale of securities; takes advantage of non-public information which could influence the price of a security for his personal benefit.

Further, the authority's rules and regulations require that holdings of insider parties and their immediate family members in listed companies must be disclosed to the authority. Any changes in such holdings must be communicated to the authority.

Trading on insider information (information which is not disclosed to the public) violates the principle of full, true and plain disclosure, as well as the principle that all investors must share equally in the risk and opportunity. Insider trading generally refers to the purchase or sale of securities while in possession of material non-public information concerning such securities, or "tipping" such information (providing the information to a third party to their trading benefit, or so they can trade on behalf of the insider,) where the trader or tipper breaches a fiduciary duty or a duty arising out of trust or confidence.

“Those who trade on insider information have a clear advantage over other investors who do not have access to the same information. Legitimate investors will likely be unwilling to trade in a market where they perceive that other investors may have an advantage over them,” said a DFM investor.

Analysts said the ESCA move on price rigging is praise worthy and added that the market watchdog should impose hefty fines perpetrators of insider activity.

Under US securities law of 1934, insider trading can occur when a person, who possesses material non-public information, trades securities or communicates such information to others who trade. The person who trades violates the law if he has a fiduciary duty or other relationship of trust and confidence not to use the information.

The most common examples of insider trading involve corporate officers and directors; they owe a duty not to trade the securities of their own companies or not to disclose any material non-public information they possess. Trading is also prohibited when a person, who receives information through a confidential relationship, uses the information for his own trading or gives tips to others. People who receive information in confidence can include a broad range of persons involved in the securities markets. From time to time, the US-SEC has charged investment bankers, lawyers, employees, accountants, bank officers, brokers, and financial reporters with misappropriating information and violating insider-trading prohibitions.

The prohibition of insiders taking any advantage in share dealing started with the crash of 1929 in the USA. The fall in share prices raised public concern about the abuse of insider trading and how this affected the average investor. In most developed and emerging markets, the insider laws are different shades of the US laws.

In 1960s Pakistan issued several laws along with the present securities law as an ordinance. A partial version of the US law was adopted. In India, the Securities and Exchanges Board of India's (SEBI) Insider Regulations Act of 1992 is specific about the role of insider in giving sensitive information to outsiders. However, the US laws are far more encompassing as it has also introduced the concept of misappropriating inside information.