Insider trading and information asymmetry By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

May 28, 2015 | Posted by bobbysrinivasan << back to blog

Information about a company can be classified into two categories. The first category of course is public information available to all and is like the announcement of quarterly earnings. The second category involves strictly confidential and sensitive information. This information is available to a set of selected executives of the company who will not use the information to their personal benefit. This is for example could be information regarding the proposed merger and acquisition activities of the company. People who have access to such information are called insiders and they carry a responsibility of not divulging the information to anybody. This is a conversation between a student and his professor.

Student: I have read in the papers that one of the senior corporate executives has been charged under the SEBI act for insider trading. What does it mean?

Professor: Insider trading happens when those who are privileged to have information that can move a company’s share price up or down. All listed companies are obligated to share every piece of material information relating to their operation with the shareholders. But an insider, be it an employee his relatives or business associate, when trades on the information that is not available to the public it is called insider trading.

Student: Is there any agency looking after the shareholders interest?

Professor: Yes, of course. SEBI in India is entrusted with this responsibility to ensure that everybody obeys the law and any violator will face legal charges.

Student: Is it appropriate for some insider to make use of the information for his personal benefit.

Professor: Absolutely not. This is called information asymmetry. Somebody has more information than others. When they make use of the information they are literally like thieves stealing the jewellery from a house. Besides, it is a failure of trust.

Student: Oh! Is it that serious? Can somebody go to jail?

Professor: You better believe it. The SEC of US has prosecuted 250 people for insider trading between 2009-2014. In 2014 alone there were 25 such cases. Some well-known cases are relating to Rajat Gupta, former McKinsey boss and Raj Rajaratnam of Galleon funds.

Student: Why is this coming up in India now?

Professor: SEBI has now accused the Chief of Murugappa group stating that he has used inside information and made significant profits for himself.

Student: It is a shame and if proven in court, what will happen to this person?

Professor: I am not a lawyer or a judge. Basically, it is a very unfair practice. Person in power has used it to his advantage. This will bring down the trust about the Indian stock market. Anyway, this is my first experience in the Indian market. Let us see how it all pans out.

Student: Thanks, Professor.

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