Insider trading malaise in markets

The promoters of Hyderabad-based pharma major Aurobindo Pharma Limited (APL), who keep low profile for the reasons best known to them, hit headlines on Monday for wrong reasons.

Market regulator Securities and Exchange Board of India (Sebi) slapped a staggering fine of Rs 22.7 crore on promoters, relatives and related entities of the pharma major for allegedly indulging in insider trading practices.

In a 78-page detailed adjudication order, the market regulator maintained that investigations conducted by it noticed signs of insider trading in the stock of Aurobindo Pharma during the period from July 22, 2008 to March 20, 2009.

Aurobindo signed three licensing and supply agreements with global pharma major Pfizer on July 22, November 30, and December 29, 2008. But it did not disclose the agreement details to stock exchanges immediately, which is mandatory.

Instead, Pfizer issued a statement on March 2, 2019 while Aurobindo did the same a day later March 3. These statements pushed up stock prices of Aurobindo.

The probe found that the promoters and promoter entities traded in Aurobindo scrip before the details of agreements were made public. That way, they made 'unlawful gains', the regulator said.

Sebi order named PV Ramaprasad Reddy, promoter of Aurobindo Pharma, his wife P Suneela Rani, Kambam P Reddy, also a promoter, as beneficiaries of insider trading. It also listed out Trident Chemphar, Veritaz Health Care and Top Class Markets, all companies linked to Aurobindo Group, which, the order says, also benefited.

They 'purchased shares while in possession of the UPSI (unpublished sensitive information) pertaining to APL and made unlawful gains from having purchased shares of APL at a lower price before publication of the UPSI on March 3, 2009' and thereby violated insider trading rules, it said.

The regulator observed that promoters and persons closely connected with the company obtained unfair advantage by trading while in possession of sensitive information which was not available with ordinary investors.

Sebi estimated that by indulging in insider trading, APL promoters and its related companies made notional profit of over Rs 10 crore. In the view of this, Sebi imposed Rs 22.7 crore fine on APL promoters and others.

It slapped penalty of Rs 7.5 crore on Top Class Capital Markets, Rs 6 crore on Trident Chemphar and Rs 5 crore on Ramprasad Reddy, who was also the company's Chairman at that time.

This APL's episode brings forth the menace of insider trading in the Indian stock markets. Ordinary investors who put their hard-earned money in the stock markets will be at disadvantage if insider trading happens in major companies like Aurobindo Pharma.

Keeping this view, Indian government and Sebi should forthwith bring in stricter laws and regulations to curb this menace. Otherwise, small investors will lose faith in stock markets and keep themselves away from it.

At a time when the central government and stock market entities are encouraging great participation in stock markets from retail investors, the incidents of insider trading are unfortunate, to say the least.

Mere imposition of fines on perpetrators will not be enough. More stringent rules including harsh punishment measures should be brought in.

Hope the central government and regulators take notice and come out with stringent measures.