Introduction:
The term insider trading is referred to as the trading done by an individual based on some knowledge gained by non-public sources that are likely to impact the market and create an unfair advantage for the person who is gaining such knowledge. This type of fraud is particularly harmful to the market as it takes the fairness factor out of the equation and allows the person to earn a profit that is unethical and erodes the confidence of the investors.
Videocon has been caught up in the insider trading scandal from the earlier years of its trading. [1]This is very harmful to the company’s image as the investors of the company are investing to make a profit but the whole idea of profit erodes when insider trading happens as someone from the company’s management is leaking confidential information regarding the future of the company to a party for monetary benefits as this information can be used to trade shares of the company and manipulate the profits achieved.
Analysis
In the year 2015, the managing director and the chairman of the company Mr. Venugopal Dhoot were accused of violating Prohibition of Insider trading norms (PIT) and along with him, his relative Mr. Pradeep Kumar Dhoot was also considered to be a part of this unethical practice. He passed on confidential information regarding the loans of the company to his relatives during the UPIS period.
UPIS period is referred to as the Unpublished Price sensitive information period. This period is referred to as a sensitive period as certain information which is related to the financial results, change in the structure of the financial status, dividends, mergers, and acquisitions, loan-related information, etc. of the company are obtained by the members of the company and should not be made available in the public domain for a certain period. [2]This information is not to be made public immediately as the company needs to verify certain documents and figures from all the parties concerned and if the information comes out to be false then such a transaction can have a very harmful impact on the image of the company and thus the company can suffer unnecessary losses if such information was made public. To avoid all this confusion, this specific period is provided to the company. Since All these transactions are very likely to have an impact on the company and its securities. [3]The information thus is not accessible by the public for a certain period. When this information is made public it is ensured that the information is accessible by everyone without any bias and thus has an equal impact on the market.
Insider trading is done when this sensitive information which is not supposed to be made public for a certain period is made so by the members of the company to a certain individual of their interest or any transaction made by themselves for their monetary benefit.
The same was the case with Mr. Venugopal Dhoot and his relative Mr. Pradeep Kumar Dhoot. Mr. Pradeep Kumar Dhoot was the authorized representative who traded on behalf of CE India Ltd who are the promoters of the company. The promoter decided to off-load the shares of the company after learning that the company had loans from 41 banks which amounted to ₹23,070. This was the insider knowledge that was not supposed to be made public until the UPIS period was ongoing. [4]Most of the banks had listed the assets of Videocon Industries (VIL) as non-performing assets. This would mean that the banks are not expecting to recover any significant amount of loans from these assets and hence the firm could be pushed into liquidation. This would be a serious problem for the investors and the people who had any kind of interest in the organization as the company is unable to make any profits and hence cannot make any repayments towards its loans. This means that the company would be unable to pay any kind of interest to the investors and they would lose money.
All of this would happen when the information gets to the public. Everyone would be equally liable to take the loss and hence the loss would spread out between the members and the investors but in this particular case, this did not happen.
The investors CE India Ltd wanted to sell their stakes in the company and hence they approached Mr. Pradeep Kumar Dhoot to sell their stakes. He sold the stakes of the investors with the help of his firm Electroparts India which was previously recognized as Shree Dhoot Trading and Agencies. This means that the stakes were first sold to this entity and then later on sold to Videocon Realty and Infrastructures limited essentially putting the burden back on the firm. Both the parties had shown that they had made wrong disclosures regarding the market transfer of the shares. The Videocon shares that were sold by the parties were shown as pledges in contrast to being shown as off-market. This created a discrepancy.
The primary information received was regarding Dena bank that had listed the assets of Videocon as non-performing assets. [5]The UPSI period was to begin from March 1, 2017, to May 9, 2017, the transaction that occurred between this period regarding the securities was subjected to investigation by the Securities and Exchange Board of India (SEBI) as the transaction was of the hefty amount and an investor was involved which occurred during the UPIS period. All these factors were enough evidence to investigate the parties involved.
All three parties involved Mr. Dhoot, Electroparts, and Videocon Reality, and Infra were found to be at fault and hence were asked to pay fines to the tune of Rs. 75 Lakhs and the payment was to be made within 45 days of the issuance of such notice to the parties involved.
Conclusion
All the parties involved were caught and have been asked to pay the fines. This is the appropriate punishment for the parties involved as insider trading not only erodes the trust of the investors in the market but also causes physical harm to the investors who are already present in the market. They take risks to earn a profit and insider trading gives an unfair advantage to the people who are affiliated with the members of the company and hence have a very low risk of incurring any losses and on the other hand, have a very high probability of earning profits. [6]The whole risk factor is eliminated and the genuine investors who have invested with the market forces are always at a loss even though they might not incur an actual physical loss.
Steps are being taken by the market regulators like SEBI to reduce this evil practice as without the trust of the investors and general public the economy will not be able to grow. The companies that are floating their IPO’s will never be able to obtain the funds required for their functioning and thus no company will be able to grow.
Investors take the risks and thus are the primary agents in the company’s funding and thus they must have the right to take their part of the profits when the company is earning so. They must have the first right and it must not be influenced by anyone other than the market forces themselves. [7]This is the most important part of any economy and thus it must be followed with utmost care and caution. The trust of the investors must not erode. If the investors are not willing to invest in a company, then no one will ever invest in that company and hence the fate of such an enterprise is doomed even before it began to spread its wings.
The current case was resolved by the authorities after a considerable amount of time as the parties involved had committed the offense in the year 2017 and the fines were levied onto the parties after 4 years. The authorities must take quick action to resolve such matters as the trust of the investors is at stake. Other than all this the steps taken by the regulators are in a positive direction and they must continue to enforce them.
References:
[1] Sebi levies Rs 20 lakh fine on individual for insider trading in Videocon, PTI (Oct 09, 2021), https://economictimes.indiatimes.com/markets/stocks/news/sebi-levies-rs-20-lakh-fine-on-individual-for-insider-trading-in-videocon/articleshow/86877631.cms (Last visited on November 01, 2021)
[2] Prashun Talukdar, Insider Trading: SEBI Imposes ₹75 Lakh Penalty On Videocon’s Venugopal Dhoot, Two Other Firms, NDTV profit (Sept 28, 2021), https://www.ndtv.com/business/insider-trading-sebi-imposes-rs-75-lakh-penalty-on-videocons-venugopal-dhoot-two-other-firms-2557204 (Last Visited on November 01, 2021)
[3] Venugopal Dhoot, 2 others fined in the insider trading case, TNN (Sept 29, 2021), https://timesofindia.indiatimes.com/business/india-business/dhoot-2-others-fined-in-insider-trading-case/articleshow/86592475.cms (Last visied on November 01, 2021)
[4] SEBI slaps fine on 2 individuals for not complying with the summons issued in the Videocon Insider trading case, PTI (Oct 27, 2021), https://www.moneycontrol.com/news/business/markets/sebi-slaps-fine-on-2-individuals-for-not-complying-with-summons-in-videocon-case-7638281.html (Last Visited on November 02, 2021)
[5] SEBI penalizes 2 videocon Industries Promoters for violating the insider trading norms, PTI (Sept 13, 2021), https://www.financialexpress.com/market/sebi-penalises-2-videocon-industries-promoter-cos-for-violating-insider-trading-norms/2329462/ (Last Visited on November 02, 2021)
[6] Videocon case: Sebi slaps Rs 75 lakh fine on Venugopal Dhoot, two entities, Devdis course (Sept 28, 2021), https://www.devdiscourse.com/article/business/1747704-videocon-case-sebi-slaps-rs-75-lakh-fine-on-venugopal-dhoot-two-entities (Last Visited on November 02, 2021)
[7] Sebi levies Rs 20 lakh fine on individual for insider trading in Videocon, PTI (October 08, 2021), https://www.business-standard.com/article/markets/sebi-levies-rs-20-lakh-fine-on-individual-for-insider-trading-in-videocon-121100801085_1.html (Last Visited on November 02, 2021)
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