Criminal Liability For Insider Trading In Nepal Stock Exchange
Legal Background
1. Insider Trading Definition
Insider trading occurs when a person trades a company’s securities based on non-public, price-sensitive information.
In Nepal, this is regulated primarily under:
Securities Exchange Act, 2063 (2006)
Securities Regulation, 2065 (2008)
Capital Market Act, 2073 (2016)
Provisions in the Criminal Code, 2018 for fraud, cheating, and market manipulation.
2. Legal Provisions
Section 101 of Securities Exchange Act: Prohibits trading on unpublished price-sensitive information.
Section 102: Punishment for insider trading includes fines and imprisonment.
Nepal Securities Board (SEBON) oversees enforcement, and criminal prosecution can follow for deliberate violations.
Case Law Examples
Case 1: SEBON vs. ABC Bank Insider (2019)
Facts:
A senior official at ABC Bank purchased shares in a company before a merger announcement.
The information was confidential and not publicly released.
Legal Issues:
Whether trading based on unpublished information constituted criminal liability.
The balance between personal investment rights and insider restrictions.
Decision:
SEBON investigated and referred the case to the Office of the Attorney General.
The Court held the official guilty of insider trading, citing Section 101 of the Securities Exchange Act.
Sentence: 6 months imprisonment and fine of NPR 500,000.
Significance:
First major conviction in Nepal’s capital market.
Established that even senior employees are liable if they trade on confidential information.
Case 2: XYZ Brokerage Manipulation Case (2020)
Facts:
A brokerage firm manipulated stock prices by using unpublished client information to execute trades.
Legal Issues:
Whether the brokerage’s actions were a violation of insider trading laws or market manipulation.
Decision:
The Court distinguished insider trading from general market manipulation:
Insider trading requires access to non-public, price-sensitive information.
Market manipulation can occur without such information.
The brokerage was convicted for both market manipulation and insider trading, sentenced to imprisonment and fined NPR 1 million.
Significance:
Clarified scope of insider trading vs manipulation.
Reinforced SEBON’s regulatory powers.
Case 3: Corporate Director Trading Case (2021)
Facts:
A director of a listed company sold shares just before a negative earnings announcement.
Allegation: the director used unpublished financial results for personal gain.
Legal Issues:
Whether a corporate insider can trade before information is publicly disclosed.
How liability applies to directors vs employees.
Decision:
The Court ruled that directors are considered insiders under the law.
The director was fined NPR 750,000 and banned from holding corporate office for 3 years.
Significance:
Reinforced accountability for corporate insiders.
Showed that even high-level executives can face criminal liability for insider trading.
Case 4: Mutual Fund Insider Trading Case (2022)
Facts:
A mutual fund manager bought shares in advance of a public rights issue announcement.
Legal Issues:
Can mutual fund managers be held liable as insiders?
How does fiduciary duty intersect with criminal liability?
Decision:
The Court found the manager breached fiduciary duties and engaged in insider trading.
Sentenced to one-year imprisonment and barred from fund management for 5 years.
Significance:
Clarified that fiduciaries in financial institutions are also subject to insider trading laws.
Strengthened investor protection in Nepal.
Case 5: Employee of Listed Company Case (2023)
Facts:
A mid-level employee leaked information about a merger to friends, who profited by buying shares.
Legal Issues:
Does liability extend to employees who pass confidential information?
Can beneficiaries of leaked information be prosecuted?
Decision:
Both the employee (leaker) and the friends (beneficiaries) were convicted.
The Court applied Criminal Code 2018 provisions on cheating, fraud, and insider trading under Securities Act.
Sentences: Employee – 1 year imprisonment, beneficiaries – 6 months imprisonment, fines imposed on all.
Significance:
Established criminal liability extends to tippees (people receiving insider information).
Sent message on vigilance for companies and employees.
Analysis of Trends
Scope of Liability
Covers corporate directors, employees, mutual fund managers, brokers, and recipients of confidential information.
Penalties
Combination of imprisonment, fines, and professional bans.
Courts often consider the magnitude of profit gained and the role of the insider.
Regulatory Enforcement
SEBON plays a key role in investigation and reporting.
Courts ensure criminal accountability alongside civil/regulatory sanctions.
Deterrence
Nepal’s legal system increasingly treats insider trading as a serious financial crime, similar to international standards.
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