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Insider trading was once again in the limelight last week as former JP Morgan securities analyst, Aashish Aggarwal, was arrested for allegedly trading on non-public information gleaned from clients.
Regulators across the globe are serious about curbing this practice as it puts the small investor at a disadvantage. But most insider trading cases deal with stakeholders of the company benefiting from unpublished information, and regulators have not really paid attention to companies wilfully passing on such information. This occurs when analysts from brokerages or fund houses meet company managements to ‘understand’ what is happening to the business. It is quite common for companies to drop interesting leads on the possible triggers to revenue or earnings in such meetings. This information is in turn used by the firm employing the analyst to trade on the stock, or it is passed on to their most privileged customers.
The regulator is not unaware of such practices. The old as well as the new insider trading regulations have a section that lays down that all listed companies should follow a code of fair disclosure to ensure that price sensitive information is revealed to all stakeholders at the same time. All listed companies are required to publish this code on their website. The regulation states clearly that there should not be selective disclosure of unpublished information. There is also a framework for dealing with company meetings with analysts. The company has to ensure that information shared with analysts and research personnel is not unpublished price sensitive information. If any such information is disclosed inadvertently at these meetings, it should be disseminated to the public without delay. The company also has to make sure that transcripts or records of meetings with analysts and other investor relations conferences should be put up on the official website. While the regulation has covered most aspects well, the large gap between the rules and their implementation is a worry and needs to be addressed.
Deputy Editor and Head of Research
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