SEPT 14, 2003
 Cover Story
 Personal Finance
 Case Game
 Back of the Book

Q&A: Jagdish Sheth
Given the quickening 'half-life' of knowledge, is Jagdish Sheth's 'Rule Of Three' still as relevant today as it was when he first enunciated it? Have it straight from the Charles H. Kellstadt Professor of Marketing at the Goizueta Business School of Emory University, USA. Plus, his views on competition, and lots more.

Q&A: Arun K. Maheshwari
Arun Maheshwari, Managing Director and CEO of CSC India, the domestic subsidiary of the $11.3-billion Computer Sciences Corporation, wonders if India can ever become a software product powerhouse, given its lack of specific domain knowledge. The way out? Acquire foreign companies that do have it.

More Net Specials
Business Today,  July 20, 2003
The Scourge of Insider Trading

Let me start with a fundamental question. What is insider trading? The commonly accepted definition is "trading on price-sensitive information obtained from insiders before it becomes public". There are many kinds of insider trading but I have tried to classify them into three broad categories. Each type evolves as times change.

Type 1. People closely connected with the management get some price-sensitive information before it is made pubic and they use the information to make a profit. At the most one would term this as unfair trade practice, but in keeping with the average human nature. The early stages of the stockmarkets saw such malpractices.


Type 2. This involves an operator-management nexus. The evolution and growth of stockmarkets brought about the entry of mutual funds. The markets grew and thus the opportunities to manipulate increased. Insider trading took a new turn. The operator could be a fund manager or have one as an associate. The fund manager provides the resources and the management provides the inside information. They trade on the insider information on their personal accounts and use the fund for aggressive buying or selling to facilitate perpendicular rise or fall. This helps them to square up their positions at huge profits in a very short time. Risk is eliminated and quick profits realised, thanks to other people's money. The fund acts as a buffer should anything go wrong. This is a blatant abuse of position leading to profits at the expense of others and a threat to the system. It is easy to know about such manipulations, but difficult to pin responsibility.

Type 3. Manufacturing so-called price-sensitive information and making it public. A policy decision can wreak havoc on the stock prices. For example, whether a public sector enterprise will be disinvested or not, whether banks will be allowed to give back government equity at par or a premium, or whether the State Bank of India will be allowed to increase its foreign institutional investor stake are all questions that weigh heavily on stock prices. Those having access to such information on policy decisions are in an enviable position to trade on insider information.

Or sometimes manipulators plant manufactured price-sensitive information in the press. Irresponsible media persons often end up helping such practices. The concerned people take positions in the market on their own account and then make the information public. More than individuals, it is the system that is to blame here.

The rules of the game of insider trading have also changed with the advent of globalisation and market capitalism. In the current scenario, insider information does not pertain to particular companies but goes across sectors of the economy. Sensitive information regarding certain policy decisions has wide ranging ramifications on entire sectors and industries. The game has become bigger, the players more powerful and sophisticated and the stakes, higher. Thus, the job of the regulator has become very difficult.

The world over, conscious effort is being made to curb this menace. But I doubt if it can be totally eradicated. Where there is money there will be greed. What is more likely to help in curbing such malpractices is the emergence of a sense of morality among the various players in the market and a growing awareness among the public of these pitfalls.

Parag Parekh is Chairman of Parag Parekh Financial Advisory Services.