Insider tradingInsider trading is about the buying or selling of securities by someone who has information that is not available to the public.
Insider trading is about the buying or selling of securities by someone who has information that is not available to the public. This practice is illegal in different parts of the world. In 2014, the European Union (EU) agreed to introduce the maximum prison sentence of four years for serious cases of market manipulation and insider dealing, and at least two years for improper disclosure of insider information. Likewise, insider trading is an offence in India, and offenders face up to five years in prison.
The stock market in Nepal does not have a long history. It has not spread throughout Nepal, and is still limited to the Kathmandu Valley. Discussions are going on about online trading mechanisms, something which should have been done a long time ago. Applications Supported by Blocked Amount (ASBA) is something very new here. When the US was working on the Securities Exchange Act of 1934 for the Securities and Exchange Commission, or when Japan came up with the Financial Markets Abuse Act for Financial Services Agencies in 1988 under which employees could only trade on information reported by at least a couple of media sources, Nepal’s stock market had not even been born.
The Nepal Stock Exchange opened its trading floor only in the beginning of 1994. It has now been 24 years since the establishment of the stock market, but no strong initiative seems to have been taken by the concerned authorities with regard to insider trading. The Securities Board of Nepal (Sebon) has said that it will take necessary actions to prevent insider trading or any other offence relating to transactions in securities in order to protect the interest of investors, but no strong measure has been seen so far. Stakeholders have been strongly criticising the stock market regulator for its failure to control insider trading where speculators gain a profit by leaking internal information about the company. They have long been asking Sebon to take the necessary steps as soon as possible.
Lacking the will
Last July, Sebon pretended to be serious about introducing a code of conduct for market participants to curb insider trading after assuming that there were companies who leaked information through brokers in order to benefit influential market players. However, no serious action has been taken since then. All Sebon did was warn listed companies to work as per the guideline. It is not that we lack policies. The Securities Act of 2007 has mentioned that a person conducting insider trading face a fine equal to the amount in controversy or imprisonment for one year or both. So, anyone dealing in securities or making anyone deal in securities on the basis of any sort of information which is not available to the public is liable to be punished.
Listed companies have been known to leak information through brokers, which is a breach of the code of conduct. However, laws against insider trading have not been implemented. Developing countries are under pressure to make their markets attractive to foreign and domestic investment, but insider trading acts as a hindrance to such investments. Who would want to invest in an environment where there is no secrecy?
Insider trading affects small investors and markets to a large extent. Someone in a high position will know that the company will be passing a decision to issue bonus shares or rights shares. So, even before the meeting is held, they will buy large quantities of shares in the market. And after the annual general meeting endorses the decision, share prices soar. The person who had knowledge about the company’s plan and bought a lot of shares will make a massive profit. He or she will also know when prices are about to fall, and thus can sell shares and avoid losses.
In order to prevent insider trading, Nepal should first define who is an insider. In China, when an executive quits, he or she is no longer an insider. In the UK, any person having information from within the company in question is considered an insider. In India, even family members are defined as insiders. Only when an insider has been clearly defined can actions against insider trading be implemented. It is the regulatory body who has to monitor what is happening. Insider trading is widespread in Nepal, and the board needs to spend time and resources to prevent it. This will make share trading outside the capital city fair and trustworthy, otherwise new and small investors and those from outside the Valley will always feel that they are being cheated, and that the share market is not a fair and honest market.
Regmi is a business development analyst