Short notes on Insider Trading, Corporate Fraud, Investor Protection


Insider trading refers to the trading of securities by corporate traders such as managers or executives.

why it matters

Some investors follows legal insider trading because they believe insiders have a better insight to the financial health of company.

For Example: A CEO buying shares of his company conveys confidence in the future of the business.

Meanwhile, illegal insider trading can lead to fine and even imprisonment for the guilty party.


Insider trading refers to the practice of purchasing or selling a publicly traded company’s securities while in possession of material information that is not yet public information.

Material information refers to any and all information that may result in a substantial impact on the decision of an investor regarding whether to buy or sell the security.

By non-public information, that the information is not legally out in public domain and only handful of people directly related to the information process.

The companies Act,2013 makes provision for prohibiting insider trading under section 195 of The Companies Act,2013.

Penalty: If any person contravenes the provisions related to insider trading, he shall be punishable with imprisonment for a term of 5 years or fine not less than 5 lakh rupees, which may extend to 25 crore, or 3 times the amount of profits made out of insider trading, whichever is higher or both.

Provisions related to insider trading shall not be applicable to any communication in the ordinary course of business. Also, SEBI has made regulations in respect of insider trading.

Some of the important provisions of SEBI (Prohibition of Insider trading) Regulations, 2015:

  1. That there shall be no contra trade even in case of ESOP.
  2. That every employee shall disclose all the trade related information to the company within 2 trading days of the transaction.
  3. That a new concept related trading plans have been introduced in India.
  4. The trading window shall be closed for adopting and considering financial results and other unpublished Price Sensitive Information(UPSI) matters.
  5. That there shall be prohibition on all designated persons for exercise of ESOP’s during the closure period of trading window.



Reliance Industries case

SEBI banned reliance industries from the derivatives sector for a year and levied fine on the company. They were charged the company with the intention of making profits by skirting regulations on its legally punishable trading limits and lowering the price of its stock in the cash market.

Raj Rajaratnam case

Raj Rajaratnam made about $60 million as a billionaire hedge fund manager by swapping tips with other traders, hedge fund managers and key employees of IBM and intd. Corp. He was found guilty of 14counts of conspiracy and fraud in 2009 and fined $92.8 million.


Corporate fraud consists of activities undertaken by an individual or company that are done in a dishonest or illegal manner, and are designed to give an advantage to the perpetrating individual or company.

Types of fraud

  1. Theft of cash, physical assets or confidential information.
  2. Misuse of accounts
  3. Procurement Fraud
  4. Payroll Fraud
  5. Bribery and corruption

Fraud in relation to affairs of a company or any corporate body as defined under section 447 of The Companies Act,2013 includes any act, omission, concealment of any fact or abuse of position committed by any person.

On any person intent to deceive, gain undue advantage from, or to injure the interest of the company or its shareholders, or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss.

Frauds covered under the act

Section 7(5): Furnishing false information

Section 8: Affairs of the company conducted fraudulently

Section 34: Mis-statement in prospectus

Section 36: Fraudulently inducing persons to invest money

Section 206: Business being carried out for fraudulent or unlawful purpose

An auditor who is guilty of fraud shall be punishable with imprisonment for a term not less than 6 months and up to 10 years, and fine, which shall not be less than the amount involved in the fraud and may extent to thrice of such amount.

If the fraud involves public interest, the minimum imprisonment to be awarded shall be 3 years.



Investors are often known as shareholders or members of the company. They contribute to the equity capital, have the voting rights in every matter and are entitled to get dividend.

An investor is a person who allocates capital with the expectation of a financial return.


Protection of investors means safeguard and enforcement of the rights and claims of a person in his role as an investor.

Provisions incorporated for the protection of investors under The Companies Act, 2013

Section 35: Civil Liability of mis- statement in prospectus

The amount to be compensated is the difference between the actual value of share and the amount actually paid.

Section 34: Criminal Liability

Members who can be punished are:

  1. Directors
  2. Promoters
  3. Who Pretend to be Directors
  4. Any member who authorized publication of false information


Investor education & protection fund

Section 125: Central government is to establish the fund called Investor education and protection fund.

The amount of fund can be received from:

  1. Grants by central government
  2. Donation by the central or state for the fund
  3. Unpaid dividends in company’s account

Payment of dividends

The company has to pay dividends within 30 days of its declaring them. And on not paying, the directors / defaulting members would be fined one thousand rupees for each defaulting day or 2 months imprisonment.


R. V.Lord Kylsant

The company showed it had been paying dividends regularly. Furthermore, the company was running into profits. However, it came into light & Co. Was running into losses and the only way they could pay dividends was through abnormal collection during war.

L.I.C. of India V. Escorts Ltd.

The Supreme Courts laid down the some fundamental rights of individual shareholders in this case which are:

-To elect the directors and participate in management.

-To receive regular dividends.

-Right against oppression and mismanagement.

– To share the surplus on winding up of the company.

Ideal Institute of Management & Technology, IV Year/ Student

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