August 4, 2021 | Ganesh Adhikari
What is Insider Trading?
Insider trading is the trading (buying or selling) of a public company’s stock or securities based on non-public, material information about the company/stock. Insider trading is the way for huge financial gains to those who can access valuable information before it gets public. But make no mistake, it is illegal in Nepal along with other several countries. Insider trading can lead to both jail time and financial penalties. This forbidden technique should be avoided to stay out of legal trouble and value one’s ethics.
According to Chapter 9 of Securities Board Regulation, 2064, “If any person deals in securities or causes any other person to deal in securities based on any insider information or notice that are unpublished or communicates any information or notice known to such a person in the course of the discharge of his or her duties in a manner likely to affect the price of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 be deemed to have been committed an insider trading in securities.”
Insider trading can be observed to have a great impact on day-to-day trading in NEPSE. When the news comes for handsome dividends or mergers or high annual growth, the stocks would have had already gained high points one week or so before the date when the news is made public. This gives very little chance for the small and amateur investors or traders to make money from these company’s stocks because the prices are already high, making the potential entry after the news as being late to the party. Those who had the insider’s news and made trade make impressive gains.
Examples of Insider Trading in Nepal
One of the eye-catching examples of insider trading in Nepal is of the Corporate Development Bank (CORBL). The stock rose from Rs 210 to Rs 498, an increment of more than 130% within two weeks.
The reason for this unusual but spectacular increase was because the company had applied with SEBON to issue a 1:1.5 rights issue. Before the news was announced the company’s insiders or SEBON insiders bought the shares of the company. Finally when the news was announced the price reached as high as Rs 798. This is when the insiders’ started to sell the shares which they had got cheaply and the price was down to Rs 670.
Similarly, when the news came out that Ajod Insurance Limited (AIL) had called its 3rd AGM on 7th Baisakh, 2078 and was going to take the agenda of the right share to its annual meeting, the prices were already hiked which led to the SEBON’s investigation. This eventually led the issue to be postponed as of now. The National Microfinance Laghubitta’s (NMFBS) acquisition of the Mahila Sahayatra Laghubitta (MSMBS) also resulted in Mahila Sahayatra Laghubitta’s price increment before the news being public. One of the most recent cases is of Radhi Bidhyut Co Ltd. (RADHI) where the share price had already increased by more than 50% in the last 20 days with the high increase in volume before it had declared impressive 36.5% bonus shares.
Laws and Punishment Relating to Insider Trading in Securities Transactions in Nepal
1. A person who commits insider trading as referred to in Section 91 shall, upon being convicted of the offense of insider trading, be liable to the punishment with a fine equal to the amount in controversy or with imprisonment for a term not exceeding one year or with both punishments.
2. If a person intentionally makes or publishes any statements or projection related statements with the knowledge that such a statement is false, misleading, or fake, or hide any fact or information with mala fide intention, to purchase or sell securities, such a person shall be deemed to have committed an act of misleading. They shall be liable to the punishment with a fine of one hundred thousand rupees to three hundred thousand rupees or with imprisonment for a term not exceeding two years or with both punishments, and where anyone has suffered any loss or damage from such transactions, such loss or damage shall also be recovered.
3. If anyone knowingly or with mala fide intention, does not 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, or information or if one makes, prepares, or retains false statements or documents, the Board may punish such a person with a fine of fifty thousand rupees to two hundred thousand rupees.
4. If anyone issues securities carry on or cause to be carried on a stock exchange or operate or causes to be operated securities transaction in the capacity of a securities business person without fulfilling such requirements as required to be fulfilled under this Act or the Rules or Bye-laws framed under this Act, the Board may punish such a person with a fine of fifty thousand rupees to one hundred fifty thousand rupees.
NOTE: Further details about offenses relating to insider trading in securities and transactions of securities and punishment can be accessed on the Nepal government’s official law-commission website.
Scenarios of Insider Trading
1. A high-level employee of a company finds a potential merger with a big company so the company’s stock is expected to go way up. S/He buys the shares of the company in bulk in someone else’s name making make a profit using his/her insider information before news of the purchase going public. S/He tells his friends and family about it and the share prices get sky-high even before the merger is announced.
2. A board member of a company might know about the financial struggles of the company driving into bankruptcy, he suggests his relatives who own it or might short sell (not allowed in Nepal) the stocks which lead to the downfall of the stock price.
3. A company’s account that has seen exceptional growth in the company’s annual returns might hear the CEO that the company is going to provide impressive dividends.
4. The words spread to near ones from the board members of a company about the right share issue proposal make way for stock’s prices to rise.
5. A government employee aware of the new regulation to be passed that will benefit commercial bank will secretly buy shares of the commercial banks and then pushes the stock prices up with the help of those in his circle.
An unrestrained insider trading is indeed paralyzing the country’s capital market. Since the insiders hold all the aces to make profits in the trades through insider trading and affect the enthusiastic new and small investors the most.
In insider trading, the valued information is first obtained by insiders of the company followed by the SEBON insiders, passed to those having a close link with these insiders. The institutional investors get the information and eventually when the small investors hear about the reason why the stock of the company was rising, insiders start to dump the stocks. Despite having clear regulations, the required investigations and punishment have not been handed to those involved in insider trading. The market can only be matured, efficient and competent if every investor has access to the information at the same time.
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