Mumbai, Jan. 1: The capital market regulator has initiated a mechanism to halt insider trading on the bourses, which has always been suspected but almost never been proven.

The Securities and Exchange Board of India (Sebi) today introduced ‘short swing’ regulations in India which mirror what the US markets do to stop company insiders from trading on information that they are privy to.

The new rules mean that company insiders will have to hold the shares in the company for at least six months after purchase. If the individual buys and sells these shares within six months, the profits from these deals will have to be surrendered to the company.

This is the first time that the market regulator is proposing these regulations in India even though it has never been able to nail a high-profile insider trading case.

In a consultative paper released today, Sebi said this was being done as an additional corporate governance measure to align the interests of company’s shareholders to that of its insiders.

Sebi is of the view that the new regulation will check insiders, who have greater access to price-sensitive information, from taking advantage to make short-term profits (or short-swing profits).

“It is assumed that insiders have a long-term investment in the company and are not expected to make rapid buy/sell transactions, which are assumedly based on at least some level of superior access to information, whether material or not,” Sebi said.

According to the market regulator, the Last In First Out method will be adopted to determine the six-month period between trades.

This means that if an individual conducts a series of buy transactions within a month in his company’s shares, the date of the last transaction will be the first date for computing the six-month period.

Sebi said the short-swing rule would get activated as soon as two things were established: first, whether the individual was an insider or a designated insider and, second, whether the same securities were bought and sold within six months of each other.

Under the Sebi (Prohibition of Insider Trading) Regulations, 1992, insider means any person who is or was connected with the company, or is deemed to have been connected with the company, and who is reasonably expected to have access to unpublished price-sensitive information in respect of securities of a company, or who has received or has had access to such unpublished price sensitive information.

Elaborating on what a designated insider meant, Sebi said it would include all key management personnel, all directors and all officers of the company who were the beneficial owners, directly or indirectly, of 10 per cent or more of its equity.

Alternatively, all officers of the company as well as all beneficial owners of the company in excess of 10 per cent holding, singly or in concert, would also be implicated in the definition of a designated insider.