Harshad Mehta – the ordinary stockbroker who single-handedly shook India’s stock market in 1992 by finding the golden goose ‘Insider trading’- that caused a massive jolt of worth Rs 3452 crores to the stock market.
In 1991, when India was embracing liberalisation, the rules of trading were not robust, benefitting which Harshad Mehta exploited ‘insider information’ to quickly make wealth.
What is insider trading?
Insider trading is a malpractice in the stock market, where few individuals, on getting the confidential news of a company, buy or sell a stock based on information that is not available to the general public.
For instance, any big step taken by a company whether it is about merger, acquisition, signing a big deal, or introducing a new product in the market is first officially reported to the stock exchanges from which the information is disseminated to the media and public. But many people use this information to get an upper hand in stocks. Harshad Mehta used this inside information to buy the shares of the company at a much lower price before it reached the stock exchanges. When the information reached the public later, it led to a surge in stock price, which is where Harshad Mehta amassed profits by selling his already bought shares at a high price. This practice went on for about four long years.
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Insider trading is a malpractice in the stock market, where few individuals, on getting the confidential news of a company, buy or sell a stock based on information that is not available to the general public.
Effects of illegal insider trading
Here is how it impacts the stock market:
Unfair for other investors
Individuals who have such inside information can potentially make larger profits from the stock market than a typical investor who is devoid of such knowledge.
It is unethical
Does not give investors equal opportunities of earning with the same piece of information about the company.
Hampers investor’s confidence
Investors spend time and effort while investing in stocks. With insider trading, investors will not get the opportunity to make any money which eventually results in eroding their trust to trade in stock markets.
SEBI’s amendment to curb insider trading
The frauds committed by Harshad Mehta led to the establishment of a strong regulator, Securities, and Exchange Board of India (SEBI) by the government with the passing of the SEBI Act 1992.
In January 2019, SEBI introduced a new amendment under ‘ Prohibition of Insider Trading’. The new amendment holds all those promoters irrespective of their shareholding status to be violating insider trading norms who possess non-published price sensitive information (UPSI) of a company without any legitimate purpose.
The legitimate purpose will include sharing of the non-published price-sensitive information (UPSI) in the ordinary course of business by an insider with partners, collaborators, lenders, customers, suppliers, merchant bankers, legal advisors, auditors, insolvency professionals or other advisors or consultants, provided that such sharing has not been carried out to evade or circumvent the prohibitions of these regulations.
Recently, SEBI has penalised six individuals by charging a fine of Rs 1 lakh to each for violating insider trading norms in the matter of Titan Company Ltd. The total traded value of the securities by each of them was over Rs 10 lakh.
What lies ahead for the investors?
Investors should never engage in this kind of insider stock market trading and committing such malpractices will attract considerable fines and even federal prison sentences under Indian Law.
