What is the definition of insider trading?
Trading (buying or selling) a public company’s shares or securities based on non-public, material information about the company/stock is known as insider trading. Insider trading is a technique for those with access to valuable information before it becomes public to make enormous financial advantages. But make no mistake: it is prohibited in Nepal, as well as in a number of other nations. Insider trading can result in prison time as well as financial penalties. To stay out of legal difficulties and maintain one’s ethics, this banned approach should be avoided.
“If any person deals in securities or causes another person to deal in securities based on any insider information or notice that is unpublished, or communicates any information or notice known to such a person in the course of the discharge of his or her duties in a manner likely to affect the price of securities, such a person shall b” according to Chapter 9 of Securities Board Regulation 2064.
Insider trading has a significant impact on day-to-day trading in the NEPSE. When the news of large dividends, mergers, or significant yearly growth arrives, the stocks will have already reached new highs a week or two before the news is made public. This means that tiny and inexperienced investors or traders have a slim chance of profiting from these companies’ stocks because the prices are already high, making a potential entry after the news look like being late to the party. Those who traded on insider information made significant gains.
A few examples of insider trading in Nepal
The Corporate Development Bank is one of Nepal’s most notable examples of insider trading (CORBL). Within two weeks, the stock surged from Rs 210 to Rs 498, a gain of more than 130 percent.
The company had applied with SEBON to issue a 1:1.5 rights issue, which explains the unexpected yet dramatic growth. Before the news was made public, corporate insiders or SEBON insiders purchased the business’s stock. When the news was finally released, the price soared to Rs 798. This is when insiders began to sell shares that they had purchased for a low price, bringing the price down to Rs 670.
Similarly, when word broke that Ajod Insurance Limited (AIL) had scheduled its 3rd AGM on the 7th Baisakh, 2078, and was planning to bring the right share agenda to its annual meeting, the prices had already risen, prompting the SEBON’s investigation. As a result, the matter has been put on hold for the time being. The acquisition of the Mahila Sahayatra Laghubitta (MSMBS) by the National Microfinance Laghubitta (NMFBS) led in a price increase for the Mahila Sahayatra Laghubitta (MSMBS) before the news became public. One of the most recent examples is Radhi Bidhyut Co Ltd. (RADHI), whose stock price had already risen by more than 50% in the previous 20 days due to a large increase in volume before it announced stunning 36.5 percent bonus shares.
Insider Trading in Securities Transactions in Nepal: Laws and Penalties
- A person who commits insider trading as defined in Section 91 is subject to a fine equal to the amount in dispute, imprisonment for a term not exceeding one year, or both punishments if convicted of the offence.
- A person is deemed to have committed an act of misleading if he or she intentionally makes or publishes any statements or projection-related statements with the knowledge that they are false, misleading, or fake, or hides any fact or information with the mala fide intention of purchasing or selling securities. They shall be punished by a fine of one hundred thousand rupees to three hundred thousand rupees, or by imprisonment for a term not exceeding two years, or by both punishments, and anyone who has suffered any loss or damage as a result of such transactions shall be compensated for that loss or damage.
- If anyone fails to maintain, make, prepare, or submit such accounts, books, statements, reports, notices, information, or similar other documents as required to be maintained, made, prepared, or submitted under this Act or the Rules or Bye-laws framed under this Act within the time specified for the maintenance, making preparation, or submission of such accounts, books, statements, reports, notices, information, or similar other documents as required to be maintained, made, prepared, or submitted under this Act or the Rules or Bye
- If anyone issues securities, causes securities to be carried on a stock exchange, or operates or causes securities transactions to be operated in the capacity of a securities business person without complying with the requirements set forth in this Act or the Rules or Bye-laws enacted under this Act, the Board may impose a fine ranging from fifty thousand rupees to one lakh rupees.
NOTE: The Nepal government’s official law-commission website has further information about insider trading in securities and transactions, as well as the penalties associated with them.
Insider Trading Scenarios
- A high-level employee of a company discovers a potential merger with a large corporation, causing the company’s stock to skyrocket. S/He buys the company’s shares in bulk in someone else’s name in order to profit from his/her insider information before the acquisition is made public. Even before the merger is announced, he tells his friends and family about it, and the stock prices skyrocket.
- If a board member of a firm is aware of the company’s financial difficulties, he may recommend it to his relatives who own it, or he may short sell (which is illegal in Nepal) the shares, causing the stock price to plummet.
- A firm’s account that has witnessed extraordinary growth in annual returns may hear from the CEO that the company will pay out substantial dividends.
- When word from a company’s board of directors spreads to close friends and family about a good share issuance proposal, stock prices soar.
- A government official who is aware of a new legislation that will benefit commercial banks will buy shares in commercial banks in secret and then manipulate stock prices with the help of his friends.
Insider trading that is unrestricted is strangling the country’s capital market. Insiders have all the aces when it comes to profiting from deals through insider trading, and this has the greatest impact on new and small investors.
Insider trading occurs when valuable information is received first by corporate insiders, then by SEBON insiders, and then transferred on to those who have a close relationship with these insiders. Insiders begin to dump stocks once institutional investors receive the information, and small investors soon learn why the stock of the company is rising. Despite the existence of explicit regulations, people involved in insider trading have not been subjected to the necessary investigations and penalty. The market can only be matured, efficient, and competent if all investors have simultaneous access to information.