Tittle :

Insider trading in Malaysia; towards an improved regulation

Journal :

Research Paper

Author/s :

Rokiah Kadir and Suriyani Muhamad

Year :

2012

Main Issue/s :

Gauge the issue of insider trading in Malaysia by assessing some

selected statutory provisions under the relevant law and examining
the issues of enforcement and prosecution.

Country/ies Involved:

Malaysia

Statutes :

Companies Act 1965

Summary/Discussion
INTRODUCTION
Insider trading is buying or selling of shares by people who knows or is in possession
of certain information about the shares and the information is not yet release. Insider trading
regulation is necessary as it is potential to diminish or increase investors confidence. The
information that is not release is such a nature because if known to the public would impact
on the price of the shares. So, the insider uses the non-public information to derive profit or
avoid loss by selling or buying securities. The reason is to preserve market efficiency and
promote fairness among all shareholders. All investors should have equal access to material
corporate information and directors of company or corporate executives are likely of this
offence because having control of companys property. Therefore, they are in position to
explore and exploit to their advantage information about the company operations which are
secret outside the board room. Violation of confidential information by insiders is one of the
corporate governance issues affecting security industry. So, various theories have been cited
to justify formulation of policies and regulations against insider trading.
SCOPE OF THE STUDY, METHOD AND LITERATURE REVIEWS.
Include qualitative analysis involving the analysis of relevant statutes, law reports as
well as documents in the Parliament, Security Commission and Polis Diraja Malaysia.

RESULT AND DISCUSSION.

The number of countries adopting insider trading regulation keeps increasing and
Malaysia has long joined those countries which have resorted to legislation in order to
combat insider trading. The insider trading regulation can also promote wide distribution of
shares ownership, more accurate share prices and improved liquidity. Malaysia has taken
wise move when it chooses to legislate against insider trading. However, the question of how
far the regulation addresses the issues and problems insider trading give rise to remain
unclear and is an area this paper undertakes to analyse. Various analyses has been attempted
to explain the rationales underlying prohibition of insider trading.
The crucial issue is the promotion of fairness. An executive or director should not use
corporate information for personal gain, as the trading would give rise to unfairness to
investors who are not insiders, or have no excess to the information. Unless, the information
made is available to general public. This rationale seems to have been endorsed under section
89E of the Securities Industry Act 1983 through its definition of an insider as a person who
possesses information that is not generally available, which becoming generally available a
reasonable person would expect it to have a material effect on the price or the values of
securities and know or ought reasonably to know that the information is not generally
available. So, it is obvious that the definition of insider is provided in a way that the focus is
on the unavailability of the information to the investing public.
Insider trading would encourage informational disadvantage and this is in turn can
lead to lack of confidence in the market, reduce the liquidity, slow down the share offering
and raise the cost of capital. Investors generally will not trade if they feel that they have been
disadvantaged. Next, the prohibition of insider trading can also be substantiated on the basis
of the fiduciary obligations of officers to the company. The officers hold the position of trust
and therefore should not be allowed to take advantage from the positions. However, the
fiduciary justification may have a drawback in that people who are not fiduciaries such as
those who are external to the company can escape legal ramifications, thus leaving the
security market susceptible to abuse.
Section 132(2) only prohibits an officer or agent of the company or officer of the
Stock Exchange from engaging in the prohibited conduct. In the same manner section 132A
only holds an officer, agent or employee of a corporation of officer of the Stock Exchange
liable for insider trading and section 132B extends the prohibition on abuse of information to
officers as well as previous officers. The justification underlying the prohibition of insider
trading may also be derived from the concept that information constitutes property rights
which solely belongs to the company. Sections 132(2), 132A and 132B under the Companies
Act 1965 do not address the issue of insider trading satisfactorily. Two issues deserves
comment in this respect, first, requiring the acquisition of the confidential information which
must be virtues of the traders position in the company is too restrictive. Second, section
132A shed some light on the example of price-sensitive information, it is not clear if the
matters are to be confined to only these two categories.

The Companies (Amendment) Act 2007 unfortunately retains the undesirable position
under the old law. The requirement pertaining to the manner the information must be acquired
remains under section 132(1G(c). There is nevertheless some improvement with regard to the
second comment above. The Securities Industry Act 1983 has brought about some changes
pertaining to this issue. The provision though does not settle the issue once and for all. This
may give rise to a question whether the definition would also cover imprecise information in
order to constitute the offence. The answer is probably in the affirmative due to the generality
of the phraseology employed.
On the issue of the persons whom the law holds as liable for insider trading offences,
section 132B provides a slightly broader definition than sections 132(2) and 132A. Section
132B expands the scope of the prospective offender to include persons who hold former
official capacity in the company or the Stock Exchange. These people are literally the
insiders to the company. While the widening of the scope to include ex-staff registers some
improvement, the measure is far from being sufficient. It is the misusing of the confidential
information with the purpose to gain profit or avoid loss that forms the reason behind the
provisions in question. The loopholes if go unaddressed will certainly defeat the spirits of the
law against the prohibition of the offence.
Section 89E (1) of the Securities Industry Act 1983[2] improve the matter in relation
to listed companies by declaring a person to be an insider if the person possesses information
that is not generally available which on becoming generally available a reasonable person
would expect it to have a material effect on the price or the value of securities and knows or
ought reasonably to know that the information is not generally available. The definition is
wide enough to cover not only those who have employment, business or professional
connection with the company but also those who are without. Considering that it is inherently
unfair for a person to take advantage of such information, the non-relevance of the
connection in the definition of insider is a commendable move by the Parliament. With this
provision it is a settled position in Malaysia now that with regard to listed corporations
insiders will include the traditional insiders, shareholders and any person who has access to
inside information.
On the issue of the prohibited conduct and its punishment, section 89E of the
Securities Industry Act 1983 makes dealing in shares an offence. On the issue of punishment
subsection (4) states that contravention of the provision containing these prohibited activities
is an offence and is liable on conviction to a fine of not less than RM1 million and to
imprisonment for a term not exceeding ten years. The mandatory imprisonment especially is
meant to scare the criminals and deter prospective offenders in the future from utilizing
corporate information for personal gains. The one million ringgit fine alone might not be a
deterrent punishment if the traders view the fine as an offset against the more lucrative gain
from the dealings.

An alternative device to the criminal sentencing in regulating insider trading will be

the civil sanction. The civil sanction is provided under section 90A of the Securities Industry

Act 1983[3] allowing a person who suffers loss or damages by reason of the insider trading to
recover the amount of loss or damages by instituting civil proceedings against the other
person, whether or not the other person has been charged with an offence in respect of the
contravention or, whether or not a contravention has been proved in a prosecution.
Rules regulating insider trading also found its way into the Bursa Malaysia under
Main Market Listing Requirement. Section 9.19 of the Bursa Malaysia under Main Market
Listing Requirement lists down circumstances in which a listed company must make the
announcement to the Exchange. The absence of this qualification in the new provision of
section 132(1G(c)) under the 2007 Amendment, which prohibits a director from using any
information to gain benefit, raises a question whether the amended provision provides an
extra protection to the investors.
CONCLUSION
It is a well-recognized fact that legislation can be an effective tool to create an
encouraging business environment. The purpose of this paper which is to analyse the
frequently reiterated issue of insider trading in Malaysia raises a number of issues. It
identifies problematic and unsatisfactory provisions and analyses the potential outcomes of
the provisions and the difficulties brought about if the problems remain unaddressed. These
issues if left unattended would create a disadvantage for business firms in Malaysia as they
do not promote competitive capital market in the region. Specifically, the provision on the
manner the information must be obtained is not a creditable solution-requiring the acquisition
of the confidential information which must be by virtues of the traders position in the
company is too restrictive, and hence is not necessary if greater protection is to be granted to
investors. This requirement may be seen to have a bearing with the definition of insider trader
which hinges closely on the concept of fiduciary obligations.