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Ye Andar ki Baat Hai!

In this week's FinMail we look at the Infosys' Insider Trading Story and understand Insider Trading and its repercussions. Wait till the end for Bonus Content!

The Story:

SEBI on Monday declared that it had unravelled an Insider Trading Activity by 2 employees of Infosys named Pranshu Bhutra and Venkata Subramaniam who had communicated secret and unpublished information to six other entities and helped them gain profits worth ₹3.07 Crore.

SEBI had filed an order on the same matter and has banned eight entities (including the two Infosys Employees) from trading in the capital markets. SEBI has seized the profit amounts as well as have frozen their bank accounts and have also restricted them to sell or transfer any assets that they own. SEBI will continue investigating this matter to reveal more gains if any and will take necessary actions on the entities involved in the case.

So in this FinMail, we will understand that why is the Indian Market Regulator so stringent about Insider Trading or any unlawful gains? What qualifies as Insider Trading and what it is? What impact does it have on Capital Markets? So let's just start!

What is Insider Trading?

"Insider Trading is an unethical practice resorted to by those privy to certain unpublished information relating to the Company to profit at the expense of the general investors who do not have access to such information." We don't want this definition, let's keep this aside. In simple terms, Insider Trading is Trading in an asset, based on some confidential information that a larger number of people aren't aware of. Let's say, you have a relative who works in Reliance and he tells you that Mr. Ambani is going to announce something big (a new business venture), in this year's AGM so buy the stock of Reliance. And when the information is made public, the stock price goes up, as a result, you make a profit. You traded on the information which was not public yet and as a result, you made unethical profits and thus it means that you indulged in Insider Trading.

Insider Trading mainly consists of 3 parts:

1) Insider:-

An Insider is a person from the "inside" of the company, an employee/key person/director/manager/accountant, etc. Anyone who has access or possession of undisclosed information because s/he is associated with the company is called an insider. And this information is not publicly available and/or is to be made available in the near future.

2) Price Sensitive Information:-

Information that can impact the price of the Company's stock is called Price Sensitive Information. A company's profit/loss in a quarter is called Price Sensitive because once made public, it can impact the company's stock price. Similarly, any information about the company's contracts, deals, balance sheets, accounts, research, unreleased product, etc. can be called Price Sensitive Information.

3) Trading on the basis of PSI:-

If the person who is in the knowledge of PSI, takes position in the company's stock i.e. buys the stock if the information is positive or sells/shorts the stock if the information is negative. The trader then squares off the position after the information is made public, thus making a profit using undisclosed information.

Why does SEBI or any other Global Regulator want to restrict Insider Trading?

As you now know what Insider Trading is, you might agree that the trader who takes upon Insider Trading has an undue advantage over any other participating entities such as Retail Investors, Mutual Fund Houses, Foreign Investors, HNIs, Banks, or anyone in the case. Basically, it is "not a fair game" where one has an undue advantage over the other. And if a trader is making money, there is someone on the other hand who is losing money (even if it means paying a higher price) just because they don't have access to this information. And most of the time it is the retail investor or the general public as we say, who is in the middle of all the losses. Even if a Mutual Fund or a Bank or any other institution losses money, it is the retail investor who provided them with their money.

And thus in most cases, it is the trader vs the retail investor's money who is in the battle where the trader has access to information which the retail participant doesn't. And thus Regulators all over the world, including SEBI wants to curb Insider Trading in their Capital Markets to protect the interest of the participants of the markets. Kyonki aise cheating hogi to, mein (Gungroo Seth) nahi khelunga!

What will happen if incidents of Insider Trading becomes frequent?

The world will continue to evolve and innovate and so will the wrongdoers. Rules are meant to be broken. No matter how strict the laws are made or how intensive the monitoring is done, the lawbreakers will always find a loophole or a grey spot to get their work done. Insider Trading is also similar, no matter how much monitoring is done, traders will always find a way to make a quick buck using confidential (insider) information.

But what if such events become more frequent?

As we looked earlier, events like this hurt one part of the section the most, the retail investors. They are the ones who are the biggest capital providers in the markets either directly or indirectly. Frequent events would only create doubt and even worse, fear in the minds of Investors and they would choose not to participate in the markets (not at least directly). If someone is having an added advantage over them, they would not want to fight a battle which they couldn't win (no one will). Investor funds would get decreased and diverted to other markets even to other economies. People would not prefer investing where there are more incidents like this and thus invest their money elsewhere.

This would impact the Capital Markets of course and it can also potentially impact the economy. Overall, the money flow would get damaged. And regulators really do not want this to happen, especially SEBI, where in India, Retail Investor participation in the stock market is nearly at rock bottom.

Ok so SEBI keeps a watch on Insider Trading and it does carry investigation on suspicious activities. But what is the punishment?

Insider Trading is a punishable crime that has a penalty or fines of ₹25 Crores or 3 times the profit made in Insider Trading, whichever is higher. Apart from this fine, the person involved can also face imprisonment of up to 10 years and in some cases, there is a fine and imprisonment, both. The punishment is not limited. Some disciplinary actions like a lifetime ban in Capital Markets can also be laid. It is totally up to SEBI what to do. Power move!

All this is okay. But how successful is SEBI in catching the "Insider Traders"?

As per SEBI’s annual reports in 2017 and 2018, the regulator took up 85 cases for investigations and only 25 have been completed so far. Starting from the financial year 2011 to 2017 the regulator has completed probes in about 13-21 cases each year. Insider Trading cases are difficult to crack but for SEBI it is more difficult because it does not have any investigative powers and proper tools for monitoring or analysing such cases. SEBI did not even have the power to check Call Data Records until 2014 and when SEBI asked the central government in 2020 for giving them authority to tap phone calls, the government declined. SEBI has even set up a reward system of ₹1 Crore to people who pass on any piece of information or tip that can help unveil any major Insider Trading cases but there's no success in there either, atleast not yet. Let's see how the Infosys story goes through.

(Source: Mint)

So that is it ....


This brings to the end of simplifying what Insider Trading is but if you are a geek and also want to understand how SEBI unveiled the Infosys Insider Trading Case, here's some bonus content for you.

Bonus Content:

How did SEBI unviel Insider Trading in Infosys?

(A Summarised Case Study)

SEBI's monitoring systems (sounds geeky) alerted SEBI about potential Insider Trading in the scrip of Infosys upon which SEBI began a preliminary investigation. The trades had happened around the declaration of Infosys Quarterly results on 15th July 2020. The insider in focus was Pranshu Bhutra and Venkata Subramaniam. Venkata being a senior officer in the Accounts Department of Infosys had access to confidential information about Infosys' performance in the quarter. He had communicated this information to Pranshu. Pranshu had in turn communicated this information to Amit Bhutra who was connected with Pranshu through Pranshu's father Ram. Amit had shared this information with his business partners.

(Are you getting some Bollywood Vibes already?)

Using this information six entities including Amit Bhutra were involved in trading Infosys to earn profits using the unpublished information.

The trading had been done on behalf of Capital One Partners and Tesora Capital who had taken significant positions in Infosys between 10th and 14th July 2020 and then squared them off completely on 15th and 16th July 2020 making a combined profit of ₹3.07 Crores. Infosys had submitted their results to the exchanges on July 15, 2020 post-market hours and on July 16, 2020 the stock of Infosys rose 9.63% in a single day due to positive results thus, earning profits to the "Insiders". SEBI found out about this and began investigating the matter.

They got access to the call records of Pranshu, Venkata, Amit and other partners at Capital One and Tesora and found out that Pranshu and Venkata were in constant touch between June 29 to July 9 and during the same period Pranshu was in touch with Amit. Amit in turn was in touch with his partners Bharath and Manish for communicating information about Infosys and trades. After the connection was made using call records, this was the time to analyse banking transactions.

Banking Transactions proved that Pranshu had transferred amounts of ₹1.15 Crores to his father's company (Mahrishi Alloys) and Mahrishi had a banking transaction with Amit's mother. Amit's mother had transactions with Amit. Amit had transactions with Capital One. Thus banking and transaction connection was also proved. Now was the time to verify Trading Transactions.

The trading had taken place on behalf of Capital One Partners and Tesora Capital. On checking the trading accounts of Capital One and Tesora, they both had taken trades on Infosys around the declaration of the result. Obviously, there were no significant trades in Infosys on behalf of them other than this period, confirming they had taken trades in the possession of Insider information and had a conviction of earning profits. Thus, proving the case of Insider Trading.

The interesting thing to note here is that SEBI had also noticed that both Capital One and Tesora had increased their trading activities in Infosys in 4 other instances in and around result dates which SEBI is still yet to investigate.

To conclude, SEBI has frozen the banking accounts of the entities involved. They have also banned them for the time being in the capital markets. They have also asked for information on the assets owned by the entities involved. And hopefully, we will soon see some resolution on the matter being. Till then,

prepare a Trading Heist using the information we conveyed to you as you now know what not to do in Insider Trading. Just kidding ;) Don't!

And that is it for this week. Stay safe & keep learning.


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