What is insider trading and auditing in the company

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Insider trading and auditing in the company

Insider trading and auditing in the company are as respectively explained

Insider trading is defined as the malpractise where in trade of a company’s securities and sensitive information is under taken by people who by virtue of their work have access to the cruicial for making investment decision.

Price sensitive information insider trading

  • financial results of the company
  • any major expansion plans
  • mergers and take over.
    • case: United states v/s carpenter 1986
      • the supreme corurt held that cited that the usage of inside information recieved by virtue of confidential relationship must not be used or disclosed and by doing so the individual gets charged for insider trading.
    • Case: o’hagen
      • a company’s confidential information qualifies as property to which the company has a right of exclusive use.

Why to control insider trading

  • To protect the interest and reputation of the company
    • once a company faces a problem of insider investors tends to loose confidence and stop investing.
  • to maintain pubic confidence in the financial suystem as whole
    • to have a healthy economy a proper financial system is must and for that confidence in the market is of atmost important.

Methods of preventing insider trading

  • Conduct due diligence
    • tnvestigate the background of the potential and existing employees and suppliers, it very important to know the essential that whom you are dealing with and how they behave.
  • clearly defines sensitive non- public information
    • ensure that both employees and suppliers know that what they are legitimately allowed to share with others to prevent unlawful disclosure.
  • never disclose non-public information to the outsiders
    • this includes but is not limited to details about takeover, mergers,earning, profit earning, litigation or security offering.
  • promptly report any conerns
    • aa employees should promptly report any insider trading, unlawful disclosure or market manipulation concerns to their manager HR or the compliance team.
  • watch out for irregulation trading patterns
    • be vigilabt about trades outsides normal buying patterns as they may indiacte suspicious activity.
  • organise blockout period
    • where traders are barred from purchasing securities, such as earning announcements, at a certain times.

Legal and illegal insider trading

  • Illegal insider trading
    • insider trading is deemed illegal when the material information is still non-public and comes with harsh consequences, including potential fines and fail time, material non- public information is defined as any information that could substantially impact that company’s stock price.
  • legal insider trading
    • legal insider transactions happen in the stock market all the time. The question of legality stems from the SEC’s attempt to maintain a fair market place, it is legal for the company insiders to trade company stock as ling as they respect therse traders to the SEC on time.
  • insider trading is when non-publised information from a company is used to make a trading decision by someone, with an invested interest in that company, it is illegal to engage in insider trading , but it is leagl to trade your company shares.

Securities and exchange board of India(prohibition of ) insider trading regulations, 1992

  • Section 2(c) connected peson means any person who
    • is a director as defined in clause 13 of section 2 of the companies act, 1956, of a company, or is deemed to be a director of the company by virtue of sub-clause 10 of section 307 of that act.
  • occupies the position as an officer or an employee of the company or holds position involving a professional or busines relationship between himself and the company and who may reasonanbly be expected to have an access to unpublished price sensitive information in relation to that company.
  • Section 2(e) insider means any person who
    • is a or was connected with the company or is deemed to have been connected with the company and is reasonably expected to have in respect of securities of a company.
    • has received or has access to such an unpublished price sensitive information.
  • section 2(ha) price sensitive information
    • means any information which relates directly or indirectly to a company and which if published is likely to materially affect the price of securities of a company.

Oppression and Mismanagement section 241 to 245

oppresion is the exersie of the authority or power in an unjust manner against the consent of the other party.

Acts held as oppressive

  • Not caling a general meeting and keeping shareholders in the dark .
  • non-mentaince of a stautary records and not conducting affairs of the company in accordance with the companies act.
  • depriving a member of the right to dividend
  • refusal to register transmission under will
  • inssue of the further shares benefiting a section of shareholder
  • failure to distribute the amount of compention recied on nationalisation of business of company among members, where required to be so distributed.

Act held as not oppressive

  • An unwise, inefficient or carless conduct of director
  • non- pholding of the meeting of the directors
  • not declaring dividends when company is making losses
  • denial of inspection of books to a shareholder
  • lack of detail in the notice of the meeting
  • non- maintaince / non filing of records
  • increasing the voting rights of the share held by the management.

Mismanagement

mismanagement means conducting affairs in prejudicial incept manner or dishonestly.

Act held as mismanagement

  • where there is serious inflighting between directors
  • where board of directors is not legal and illegality is being continued
  • where bank account was operated by an anauthorised person
  • where directors take no serious action to revover amounts embezzled
  • contiuation in office after expiry o term of directors
  • sale of assets at low price and without compliance with the act
  • violation of memorandum
  • violation of statutory provisions and those of the articles
  • company deemed to trade unprofitably.

Act held as not mismanagement

  • building up of reserves or non declaration of dividend especially when it does not result in devaluation of shares
  • merely because a company incurs loss, mismanagement can’t be alleged
  • arrangement with creditors in company’s bonafide interest
  • removal of director and termiation of works manager’s services.

Case: foss v/s harbottle

  • Rule in foss v/s harbottle
    • the first rule is the” proper plaintiff rule”, which estates that only the company can issue the directors or outsiders for any wrong due to fraudulant or negligent act, members of outsiders can sue on behalf of the company because of the principle of “separate legal entity.”
    • the second rule is the” majority rule”, where the courts will not interfare if the elligled wrong can be ratified by a majority of members in a general meeting.
  • exception to the rule in foss v/s harbottle
    • derivative action
      • shareholder can bring an action for the wrong is done acting as represtatives of other members whose relig is sought.
    • ultra vires
      • if an action is taken by the company beyond the power or scope of its article of association any member can bring legal action against it.
    • fraud on minority
      • minority can file the suit
    • individual membership rights
      • being an shareholder of the company indevidual minority can also file a suit.
    • oppression and mismanagement
      • case: tata consultancy service limited v/s cyrus
        • investments in private limited
    • Section 241
      • application to tribunal for relif in cases of oppression etc.
    • section 242
      • power of tribunal
    • section 243
      • consequences of termination or modification of certain agreements.
    • section 244
      • right to apply under section 241
    • section 245
      • class action
    • section 246
      • application of certain provisions to proceedings under section 241 or section 245.
    • section 247
      • valuation of registered value.

Corporate fraud

Any illeagl activity or fraud act for creating profit by individual or by any company is corporate fraud

Section 25 fraudulant of ipc 1860

section 17 fraud of Indian contract act 1872

section 69 fraud of nyay sanhita

Case: vimla v/s state of NCT. There should be two essential of fraud i.e deceptive/ decieve and inquiry. In the company

Types of fraud in corporate fraud

  • finacial misappropriation
    • misappropriation of paymet fudgin the book of account, misleading the investors to invest by rapidly increasing the share price.
  • misappropriation of assets
    • stealing physical assets IPR intellectual property rights dummy/ fake payment using in person asets.
  • corruption
    • making or recieving improper payments offering bribes to public official taking political supports to commits fraud.
  • first fraud case of corporate in India was east india company.

Concept of auditing

An audit is when an auditors examines or inspects various books of account followed by a physical inventary check to insure that all departments are using a defined system of recording transaction, it is done to insure that the financial statement presented by the organisation are accurate.

Principles of Auditing

  • planning
  • honestly
  • securacy
  • audit evidence
  • internal control system
  • skill and competance

Steps of process

  • establish audit
  • prepare the audit
  • report
  • analysis record
  • the very first stage is to eatablish the auditors position which is typically done through with a letter signed by the client.
  • the second phase is to prepare the audit which gives information like timelines and that when the organisation will be scrutnised
  • the third phase is the result which are usually published in a form of report
  • the final stage is analysing the finding in the report prepared by the auditor.

Advantages of auditing

  • Accuaracy in the financial system
  • errors and fraud can be disscoverd in the accounts book
  • it gives a second opinion of their finacial standing
  • since the books are closely examined it helps the employees to the honest and resposible
  • the financial statement get more credibility by their auditing

Disadvantages

  • extra cost
  • makes major changes
  • employees feels harressed

Basic principle governing on auditing

  • Arthemetic precision
    • sharp in calculation/ maths
  • principle of accounting
    • tally the credit and debit
  • asset verification
    • check out assets working properly
  • liability verification
    • whether the liability real or not
  • attestation
    • cross verification
  • statutory obligation
    • whether the organisation/ companies are following the SEBI or statutory guidelines or not.

Reference: orginal note written by Riya Tiwari student of LLB of United university Prayagraj Uttar.

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