Understanding Insider Trading and Unpublished Price Sensitive Information
Sebi, the regulator for Indian markets, aims to make business easier for listed companies while preventing insider trading. Insider trading happens when people with confidential information (like company executives) use it to gain unfair advantages over other investors. This is against Sebi’s rules.
Imagine a company executive leaks news about a big company move to a small, local newspaper after making some insider trades. They might claim the information is now public, even though it’s still unfair to other investors. This makes it hard for regulators to catch them.
Sebi’s rules say companies must confirm or deny such rumors quickly. This helps keep the market fair and prevents insiders from gaining an unfair advantage.
How Insiders Use Rumors to Gain
Insiders might spread rumors about things like stock buybacks, special share allocations, or mergers to profit unfairly. For example, if an executive tells a junior staff member about a planned buyback, the junior might trade on this info before it’s public, making a profit at the expense of other shareholders.
If the company’s share price changes significantly and the company confirms the rumor within 24 hours, the stock exchanges will use an “unaffected price” to keep things fair. This price ignores the artificial inflation caused by the rumor.
What Is the Unaffected Price?
The unaffected price ignores price changes caused by rumors and ensures a level playing field. It will apply for 60 to 180 days after the rumor is confirmed. This rule will start on June 1, 2024, for the top 100 listed companies and on December 1, 2024, for the next 150 companies.
What Is Volume Weighted Average Price (VWAP)?
VWAP is the average price of a stock, weighted by trading volume. It shows the price at which most trades occurred. For example, if someone buys 100 shares at ₹50 each, 150 shares at ₹60 each, and 200 shares at ₹80 each, the average price per share is ₹63.33. However, VWAP takes into account the volume of shares traded, making it ₹66.66 in this case.
Adjusting VWAP After a Rumor
If a company confirms a rumor within 24 hours, the unaffected price is calculated by excluding the price variation caused by the rumor from the VWAP. This adjusted VWAP is used until the company announces the official action or the board approves it.
For example, if a stock’s VWAP was ₹1,060.76 on July 26 and then jumped to ₹1,164.47 on July 27 due to a rumor, the variation (₹118.14) will be deducted from the VWAP to get the adjusted price. This adjusted VWAP will be used for 60 days from the rumor confirmation.
In this way, Sebi’s new rules aim to prevent insiders from exploiting confidential information, ensuring a fair market for all investors.
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