Bursa Malaysia Securities Berhad (Bursa Malaysia) defines insider trading as the purchase or sale of a company’s securities effected by or on behalf of a person with knowledge of relevant but non-public material information regarding that company.
The insider is in a position to make massive gains by selling or buying securities before information that might affect the price of the company’s securities (price-sensitive information) is made public.
From this definition, it can be understood that to constitute insider trading, there are three elements that need to be fulfilled as follows:
(a) The trading is effected by an insider. The insider concept relates to the corporate setting, the word “insider” being one that conveniently describes those who are likely “to be in the know” about significant corporate matters.
Normally, an insider is someone connected with the management of the company. The insider concept, however, can also be extended to others who forge a relationship with an insider or his company (e.g. by virtue of his employment, office or profession and those who have been tipped off by the insider).
(b) The trading is effected pursuant to knowledge of relevant but non-public material information regarding that company.
(c) The effect of that information is that when it is made available to the public, it will affect the price of the company’s securities.
Position under Malaysian law
With the passing of the Capital Markets and Services Act 2007 (CMSA) last September, the statutory provisions governing insider trading can now be found in Part V, Division 1, Subdivision 1 of the Act.
Section 188(2) of the CMSA prohibits an insider in possession of certain information, as described in Sections 183 to 185, from acquiring, disposing of or procuring, directly or indirectly, an acquisition or disposal of, or the entering into an agreement for or with a view to the acquisition or disposal of such securities.
By virtue of Sections 190 and 191 same Act, the prohibition of insider trading also extends to secrecy arrangements by corporation and partnership.
Under Malaysian law, if one commits insider trading, he may be subjected to certain criminal and civil actions, as follows:
(a) Criminal sanction under the CMSA. The only criminal case involving insider trading in Malaysia thus far is PP v Chua Seng Huat.
(b) Civil suits by persons affected by insider trading under the CMSA.
(c) Civil suits instituted by the Securities Commission under the CMSA.
(d) Any civil actions brought against the insider by persons affected by insider trading under any other law.
(i) Chinese Wall Defense for Corporation(ii) Chinese Wall Defense for Partnership.
(iii) Exception for Underwriters.
(iv) Exception for Transactions Carried Out Under Schemes of Arrangement, Reconstruction and Takeovers Under Any Written Law.
(v) Exception for Corporation with Knowledge of its Intention.
(vi) Exception of knowledge of individual’s own intentions or activities.
(vii) Unsolicited Transaction Exception.
(viii) Exception for Redemption of Units of a Unit Trust Scheme Under Buy-Back Covenant.
(ix) Parity of Information Defense.
Position of insider trading under Islamic law
Islamic law also prohibits insider trading as it contravenes several basic principles in Islam. The said principles are as follows:
(a)
Principles of fairness and justice. Insider trading is against the basic principles of fairness and justice in Islam as it creates unfair competition among the actors in the market. In the Islamic view, justice denotes placing something in its rightful place. It also means giving others equal treatment.Insider trading is considered unfair and unjust to the others in the market as the culprit has the relevant non-public information which will affect the price of the company’s securities when the information is made public while others have no access to such information.
Allah says in the Holy Quran concerning justice and fairness: “Be Fair and Just, that is nearer to piety (Taqwa).” In another Surah, Allah says, “And act justly. Truly God loves those who are just.”
(b)
Principle of trustworthiness. The insider who has access to the privilege a information is considered a “trustee” of that information until such information is made public. Until such period, he is prohibited from dealing with the securities of the company using such privileged information.The person who abuses this principle is deemed to have committed a breach of trust. The Quran and the Sunnah of the Prophet Muhammad emphasize the importance of honesty and trustworthiness.
Allah says in the Holy Quran, “Ye that believe! Betray not that trust of Allah and the Messenger, nor misappropriate knowingly things entrusted to you.”
It is narrated from Abu Hurayrah by al-Mundhari that the Prophet Muhammad said, “A hypocrite has three signs: when he speaks, he tells lies; when he makes a promise, he does not fulfill it; and when he is entrusted with something, he commits a breach of trust.”
(c)
Principle of entitlement to equal, adequate and accurate information. The concealment of vital information (ghish) also violates the norm of Islamic ethics. According to the Sunnah of the Prophet Muhammad, the party who is disadvantaged as regards information at the time of entering into the contract has the option to annul the contract.
Islamic scholars take the view that a transaction must be free from jahalah or misrepresentation to be considered Islamic. The institution of a transparent market is, thus, quite important and transactions should be executed within the market after taking into account all relevant information.
Mohd Herwan Sukri Mohammad Hussin is an associate at Azmi & Associates, a Kuala Lumpur-based legal firm. He can be contacted at +603 2118 5061 or via email at
[email protected]
. References are available on request from the writer.