a & r insider trading final doc

8/7/2019 A & R Insider Trading Final DOC

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Presentation on Insider Trading

BY:

Ankit Fating

Rishu Bharadwaj


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What is Insider Trading?

Insider trading is the trading of a corporation's stock or

other securities (e.g. bonds or stock options) by

individuals with potential access to non-public

information about the company.

In other words, It is the act of buying & selling a

companys stock on the basis of inside information

about the company.


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Who is an Insider? SEBI regulation, 1992: Insider is any person who is or was

connected with the company and who is reasonably

expected to have access to unpublished price sensitiveinformation about the stock of that particular company, or

who has access to such unpublished price sensitive

information.

Types of insiders :

Primary Insider (Corporate officers, Directors, Employees)

Secondary Insider (Friends, Business associate, Family members)


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What is Price Sensitive Information?

Any information, which relates directly or indirectly to acompany and which if published is likely to materially

affect the price of securities of company.

The following shall be deemed price sensitiveinformation:

Periodical financial results of the company;

Intended declaration of dividends (both interim and final);

Issue of securities or buy-back of securities;


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Contd Any major expansion plans or execution of new projects;

Amalgamation, mergers or takeovers;

Disposal of the whole or substantial part of the undertaking

Significant changes in policies, plans or operations of the

company.


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How does insider trading work?


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Adverse effects of Insider Trading.

Violates transparency, which is the basis of a capital

market.

Unfair and disruptive to a properly functioning market.

Tends to reduce the size of the market.

Decline in the liquidity of the stocks.

Adeclines the market ability to spread risk.


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SEBIs efforts to curb insider trading :

Close period/closed trading window

Pre-clearance of trades

Compliance Officer

Other restrictions


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Instances of insider Trading: Tata Finance Ltd. Insider Trading

ENRONCase

UTI US-64 Case

Reliance Industries Ltd Insider (RPL-RIL 2007)

The Case of insider trading (HLL-BBLIL Merger)

Insider Trading: Pre-9/11 Attack


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Tata Finance Ltd. Insider Trading

Dilip Pendse was the managing director of TFL and cameacross price sensitive information in middle of March

2001.

His wife Nalini Pendse and a company controlled by hersold 40,000 shares of TFL.

Both are deemed to be insiders because of theirrelationship with Dilip Pendse.


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Contd SEBI argued that the shares were sold in end of March 2001 when the

insiders had access to privileged price sensitive information.

Nalini Pendse and the associated company asserted that they sold theshare in Sept of 2000 to a broker, who bought on its own account andsold them in Sept 2000 in a back to back transaction to a third party.

Evidences of Insider Trading:

The broker issued contract notes were not evidently back-dated.

A stamp of the exchange on the contract notes.

Covering letter etc.


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Contd.. The shares were delivered only in late March 2001 to the broker

and the broker made the payment also in late March (when the

parties were in possession of inside information).

Results:

TFL sustained losses running into hundred of crores of rupees.

SEBI has imposed a penalty of Rs 1.50 lakh on Dilip S Pendsefor indulging in insider trading in the company's shares.


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Enron ethics breakdown case Enron was Americas energy based company founded in the year

1985.

It was ranked 6th largest energy company in the world and rated asAmerica's Most Innovative Company for six consecutive years byFortune Magazine (1996 -2001) based on its acclaimed CorporateGovernance principles.

Using the internet to promote trading, Enron became the most successful player in the futures game; 90% ofEnrons income camefrom trades

Enron took advantage of the dot.com boom and traded internet bandwidth. The value ofEnrons online transactions was huge ($880

billion)


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Key Players in ENRON scandal:

Kenneth Lay

Founder & CEO ofENRON Quit as CEO in February 2001, returned in August

2001until he resigned on Jan. 23, 2002 Quit the Enron board altogether on Feb. 4. Sherron Watkins said Lay was "duped" by top

executives

Jeffrey Skilling

Enron's chief executive in the first half of 2001 Between January and August 2001 he sold off about

$20 million in Enron stock Resigned after the close of markets on Aug. 14 2001 Being charged with conspiracy, fraud and insider

trading.


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DavidDuncan

Enron's chief auditor at Anderson Accused of ordering the shredding of thousands ofEnron-related documents in an effort to hide them fromSecurities andExchange Commission investigators.

Andrew Fastow

Former Chief FinancialOfficer ofEnron The mastermind behind the deceptive accounting

practices.

Sherron Watkins

Known as the "Enron whistle-blower" Was Enron's vice president of corporate development.

Wrote a letter toK

enneth Lay about suspicions ofaccounting improprieties"


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What went wrong? Enron began tweaking the numbers in their financial

statements with accounting techniques to hide their losses

Enron created partnerships, and then passed the assets(losses) to these partnerships which eliminated the lossesfrom their balance sheets.

Andrew Fastow (CFO) created the partnerships.

Condor and Raptor were two major partnerships

Sherron Watkins, the Enron Whistleblower noticed the fuzzyaccounting that had been used in relationship to the Condorand Raptor partnerships and wrote a letter to Kenneth Lay and

Arthur Anderson warning him that the Enron was unstable.


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Contd

Aug 14, 2001 JeffSkilling resigned, Kenneth Lay became CEO onceagain.

Stock prices began to fall, as investors were uncertain about thecompanys stability.

This started a chain reaction: Enron had hedged against its ownstock, so as long as the stock price was declining, it could not

recover its losses.

December 2001, Enron filed for chapter 11 bankruptcy

Its share price had collapsed from about $95 to under $1.


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UTI US-64 case UTI was established through a Parliament Act in 1964, to

channelize the nations savings via mutual fund schemes.

In 1998, investors of Unit Trust of Indias (UTI) UnitScheme-1964 (US-64) were shaken by media reports claiming thatthings were seriously wrong with the mutual fund major.

For the first time in its 32 years of existence, US-64 faced

depleting funds and redemptions exceeding the sales.

Analysts remarked that the depleting corpus coupled with theredemptions could soon result in a liquidity crisis. Soon,reports regarding the lack of proper fund management andinternal control systems at UTI added to the growing investorfrenzy.


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The net asset value (NAV) of US-64 also declined significantlyduring 1993-1996 due to turbulent stock market conditions. ABusiness Today survey cited US-64s NAV at Rs 9.68. TheUS-64 units, which were sold at Rs 14.55 and repurchased byUTI at Rs 14.25 in October 1998, thus were around 50% and47%, above their estimated NAV.

Its gravity far exceeds the stock market downswing of the mid-1990s, which wiped out Rs. 20,000 crores in savings. This hastragically led to suicides by investors.


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What went wrong? The US-64 crisis is rooted in plain mismanagement.

US-64 was launched as a steady income fund. Logically, it should

have invested in debt, especially low-risk fixed-income governmentbonds.

Instead, its managers increasingly invested in equities, with high-riskspeculative returns. In the late 1980s UTI was politicized with otherfinancial institutions (FIs) such as LIC and GIC, and made to invest in

certain favoured scripts. By the mid-1990s, equities exceeded debt inits portfolio.

In the past couple of years, UTI made downright imprudent but heavyinvestments in stocks from Ketan Parekhs favourite K-10 portfolio,

such as Himachal Futuristic, Global Tele and DSQ.


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Contd

These technology investments took place despite indicationsthat the technology boom had ended. US-64 lost half its Rs.

30,000 crore portfolio value within a year.

According to insiders, the Finance Ministry substantiallyinfluenced them: all major decisions need high-level politicalapproval.

Today, its NAV stands at Rs. 8.30 a massive loss for 13 millionunit-holders.


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Thank you

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