June 1, 2005: the stock of Adlabs Films, a production to processing entertainment major, is quoting at a modest Rs 162 on the National Stock Exchange (NSE). In 10 days, the price creeps up to a little under Rs 190, with trading volumes galloping 19 times. By June 29, Adlabs is on a high, crossing the Rs 200 mark. On the last day of the month, Anil Ambani's Reliance Capital sends notices to the stock exchanges, informing them about a decision to acquire a 51 per cent stake in the entertainment company. The Adlabs stock by then has gone crazy, up to Rs 241 on the day of the announcement.

Point to note: The Adlabs scrip rocketed 49 per cent between June 1 and 30; the Nifty crawled just 6.37 per cent in the same period.

July 11, 2005: The stock of VSNL, the Tatas' communications solutions provider, is quoting at a modest Rs 278 on the National Stock Exchange. By July 20, the price creeps up to a little over Rs 360. Five days on, the Tatas announce an acquisition of the Bermuda-based Teleglobe International Holdings for Rs 1,000 crore. The VSNL stock has, of course, gone delirious by then, almost kissing Rs 400 in intra-day trading on that day.

Point to note: The VSNL scrip rocketed 40 per cent between July 11 and 25; the Nifty crawled just 3.29 per cent in the same period.

These are just two of the more recent, and glaring, instances of a sharp run-up in share prices-relative to the market as a whole-days, weeks, and often even months before a company makes a major announcement, which more often than not is an acquisition or a divestment. Such curious spurts in stock prices prior to a deal being closed out can mean only one thing: That either the promoters, or the directors, or the management, or the lawyers, or the accountants, or the investment bankers, or the public relations punter, or just about anybody with information pertaining to the transaction-which, needless to say, is unavailable to the general public-has made a huge killing. By buying stock in advance, armed with information that's going to send the price soaring, these gentlemen-fittingly dubbed insiders-pocket obscene sums of money by selling those securities when the announcement of that price-sensitive deal is finally announced. Which, needless to say, is when the humble folk start buying, by which time the upside is minimal if not non-existent. Result: The insiders have profited at the expense of the uninformed trader-which could well be you.

"While we do keep investors informed on what is going on in the company, it is difficult to control speculation" Manajit Ghoshal CFO/ Mid-Day Multimedia

The problem with this modus operandi-which really isn't half as elaborate as it sounds-is that it is illegal, with punishments ranging from hefty fines to jail terms. The good part, or the bigger problem, depending on which side of the fence you reside, is that nobody ever gets caught (partly because it isn't easy to nail an insider). "The truth is that there is not sufficient realisation that insider trading is serious. There is just not enough investor education," points out well-known investor Rakesh Jhunjhunwala.

The market watchdog, the Securities & Exchange Board of India (SEBI), has the mandate to step in if the stock exchanges do note any unusual price movements. But then, SEBI doesn't exactly have a glorious record when it comes to cracking down on insider trading, which probably explains why it happens with such monotony and impunity. The stock exchanges for their part claim to follow standard investigation procedures. "All market movements are watched closely, and deviations in price and volume are captured," points out BSE CEO Rajnikant Patel.

In SEBI's defence you have to say that insider trading is notoriously difficult to pin down. And that's why BT too will be the first to admit that the run-up in the prices of the VSNL and Adlabs stocks is doubtless an inadequate indicator of insider trading in these scrips. Much more data would need to be collated to come close to proving that-and if SEBI isn't in a position to do so, pray how can BT ever even pretend to? SEBI officials were unable to comment, and most of the promoters BT spoke to claimed ignorance to their stocks' price high-jinks. "We are not sure how it works; at our end we try to be careful to ensure there is no leak in information. Those in my office got to know of the deal with Reliance Capital only when they saw it on the television channels," shrugs Adlabs Chairman Manmohan Shetty. Officials at VSNL and the Reliance Capital spokesperson had no comment to offer.

According to a senior market observer, in most cases the insider is none other than the company itself. "Typically, someone in the company intimates a group of brokers who are quick to take positions on the stock and by the time the announcement takes place, everybody has profited," he explains. He hastens to add that this can rarely be proven and is something that happens across the world. What's more, the inevitable time lag from the time a deal is on the negotiation table to the point of intimating the stock exchanges when it is concluded is an open invitation for insiders to cash in.

Yet, pinning the blame on the promoters would be simplistic, given that there are countless others in the loop who could be responsible for the informed buying. As Manajit Ghoshal, CFO and Vice President (Corporate Services), Mid-Day Multimedia points out: "Speculation is beyond our control. While we do keep the investors informed on what is going on in the company, it is difficult to control speculation." Mid-Day Multimedia too is one of those peculiar stocks that witnessed a massive surge prior to its board approving a preferential issue of equity shares to T Rowe Price International, a foreign institutional investor. While a communiqué was sent to the exchanges on August 23, that the board would meet the following day to discuss the preferential issue, the stock had by then already seen a huge welling-up in volumes; on August 18 alone, volumes went up almost 13 times.

Corporates also defend themselves by pointing to their strong corporate governance ethics. Take the case of Oracle's recent acquisition of Citi's stake in i-flex: Volumes ballooned three times just a day before the deal was announced. A company spokesperson, however, attributes the flare-up in volumes to the company's results, which were announced a day before the deal was. "We observe quiet periods and require permissions to buy or sell i-flex shares by the employees of the company and this makes our compliance with corporate governance very strong."

"We are not sure how it (insider trading) works. At our end we try to be careful to ensure there is no leak in information" Manmohan Shetty Chairman/Adlabs

Other than the company itself, the investment bank involved in the relevant transaction would also be privy to the price-sensitive information. Is this the perfect breeding ground for an insider? Not at all, we also have our high levels of compliance, is the refrain. "Investment in stocks by an employee has to be cleared by his head of the department following which it goes to the compliance cell for approval. The compliance cell ensures that the employee is not investing in the stock(s) of a company on which he is working on," states JM Morgan Stanley Director Vishal Kampani. This is apart from the fact that no employee can sell his holdings for a month after he buys it. "The MARD (Mergers Acquisitions and Restructuring Department) team keeps the compliance department informed about the potential transactions based on which it is ensured through internal processes that there is no trading in a stock by a team which is working on it. This is an international practice and the consequences for not adhering to it could be fatal," adds Adi Patel, JM Morgan's Executive Director and Head, Mergers and Acquisitions.

The problem, though, may be a more fundamental one than nitty-gritty like compliance and other such sub-heads ensconced in the market rule book. A Mumbai-based investment banker sums it up best when he says that when the markets are on a frenzied bull run, "caution is typically thrown to the winds". What is required, he adds, is "a process of clear and quiet investigation". Sceptics, though, wonder why such a big noise is being made about insider trading, a practice that's arguably as old as speculation itself. What's more, if the regulator itself isn't capable of coming down on insiders, there's little point in equating insider trading with other criminal activity. Yet, the classical case for curbing insider trading is that it maintains investor confidence in the integrity of the markets, and this confidence will deteriorate rapidly if speculators are allowed to trade on non-public information. That's the theory bit. In practice today on the Indian markets, both investor confidence and speculation rule; and the insider is king.