MAGMA – WHO KNEW, WHO TRADED….

Insider trading; it is something which we know happens all the time and we also know, it is something which is very difficult to nab. Finding a company or its employees guilty of insider trading is very rare though there maybe enough evidence in terms of price movements.

That’s exactly what came to mind when the news first broke of Adil Poonawala’s company taking over Magma FinCorp. The news “officially” broke only on 10^th Feb evening and it was logical for the stock to open the next day, 11^th Feb, straight at its 10% UC of the day and that too, a new high.

But what struck as odd was that 11^th Feb was not the first time it had hit a high; the stock, for almost 10 days in a row, had been hitting new highs consistently while there was no major material information coming forth.

Yes, the company did announce its Q3FY21 earnings on 6^th Feb but that infact should have dampened the stock price. Its net profit for the quarter was down 40% (YoY) at Rs.13 crore on a 3% drop in total revenue at Rs.589 crore.

Starting 1^st Feb, the stock price has been going up only one way – up. From Rs.47.25 on 1^st Feb, it rose to Rs.98.05 on 12^th Feb. The stock price reacted to the poor earnings with a freeze on the 20% UC. So, every single day, this entire month, the stock has been hitting the roof. Doesn’t the logical mind tell you very clearly that this is a clear case of insider trading? When the stock has started hitting the UC and new highs much ahead of the announcement, clearly, it is insider trading.

Getting information before it becomes public is what you, me and all believe will help you make windfall gains. So, when we make money by getting news of a company before it becomes public, does that tantamount to inside info? Or because we trade in small quantities, it is not really breaking the law?  Well, you can write ‘offence’ either in all caps or in italics or bold italics, but it still reads the same - ‘offence.

There is a very thin line which divides insider trading and trading on knowledge. You never know when this line is breached and you get on to the other side. But at the same time not every opportunistic behavior can be termed as insider trading. And as one can see, it is very difficult as such to discern what exactly can be called as insider trading, which is why the laws on insider trading also, world over, are not as vigilant as they should be.  How does one know what info is passed on through the phone or when meeting over a cup of coffee? Investigations can happen only when it comes to light that insider trading has happened. If that itself does not get detected, how can one track this down?

Insider trading, despite all the prohibitions, is undetectable most of the times. Yet, new checks are put in place time and again, hoping to cover up the loophole. But every time a hole is covered, it opens up some more new holes in its wake. SEBI has indeed done its bit; it has put in place a set of Code of Conduct, to ensure that unsubstantiated news is not circulated to distort the prices. Yet, very few ever get caught as these traders are two steps always ahead of SEBI. Thus when there is no fear of firstly ever being caught and secondly of no life-changing punishment, insider traders make hay, right under the nose of SEBI. So, the point is - no one can really control insider trading, at least in India. To say that it does not exist simply because it is not detected is being naïve.

Food for thought: Detecting insider trading is not about connecting the dots by going from one dot to the other but by starting at both dots and working towards the middle.