Let's do Insider Trading !!!

When Ranbaxy's promoters decided to sell their stake to Japanese Daiichi Sankyo, many believed that the deal was already known to few in the market and a case of insider trading cannot be ruled out looking at the performance of Ranbaxy on the Dalal Street during couple of months prior to the deal.

Many others think that Ranbaxy has passed the test of compliance as well as good governance as far as the insider trading law and the takeover code is concerned; the deal offered same price to all the shareholders including promoters.

Analyses of all the listed Indian companies, including Ambuja Cements, Centurion Bank of Punjab and I-flex Solutions that were acquired in the last two years also showed similar pattern in their stock prices compared to that of Ranbaxy. In all these cases, stock prices of these companies outperformed its industry peers during couple of months prior to the deal.

In a recent path-breaking verdict, the Securities Appellate Tribunal had said that a person indulging in insider trading cannot be punished unless proven that he had unfair advantage over other shareholders. The ruling has far-reaching consequences considering that insider trading by nature is extremely difficult to prove.

Now, the question is how others will behave in the future as far as insider trading is concerned. Well, I think all depends on the ethical values of the persons and how they take inspiration from the above case and the applicable laws at the time. Let us discuss the ethical dilemma keeping in view the above case, the existing laws and the level of ethical values prevailing in today's business world.

All of us have seen many examples of people violating ethical standards in extremes. However, there are also many far less extreme examples of violation of ethical values. When people evade tax or cheat banks to get loan or lie on their CVs; one might think this as an unethical behavior. However, if the other person has made up his mind that this behavior is acceptable, a conflict of ethical values arises which is difficult to resolve.

The argument that it is ok to violate ethical standard is commonly based on the rationalization that everyone does it. Many argue if it's legal, it's ethical. This philosophy assumes perfection of laws. The likelihood of discovery of the behaviour and the severity of the penalty or consequences also determines if the unethical behaviour is acceptable.

Should a business correct an unintentional double billing to one of its customers when the customer has already paid the bill in full? If the seller believes the customer will detect the error and respond by not buying in the future, the seller will inform the customer now; otherwise the seller will wait to see if the customer complains.

Nowadays, many movies, television serials, and other media subscribe unethical behavior in name of Entrepreneurship creating the impression that unethical business behavior is normal behavior. The people behind these media conclude that management cannot conduct itself ethically and at the same time have its business succeed financially. Also, many conclude that actions must be extreme to constitute unethical behaviour. There is considerable evidence that none of these conclusions about business ethics is correct.

A large number of highly successful businesses follow ethical business practices because its management believes that it has a social responsibility to conduct itself ethically and in the long run such actions would also result in business success for them.

An ethical dilemma is a situation a person faces in which a decision must be made about the appropriate behaviour. Auditors, Accountants, Audit Committee and other business people face many ethical dilemmas in their business careers. For example, dealing with a client who threatens to seek a new auditor unless an unqualified opinion is issued presents a serious ethical dilemma when an unqualified opinion is inappropriate or continuing to be a part of the management of a company involved in insider trading.

Now think - You are on the Audit Committee of a company dumping thousands of litres of untreated water in a nearby river and which cannot afford the cost of replacing the equipment to stop further spills. If the environment ministry orders the comapny to replace the equipment, it would be forced to cease its operations. Will you report the matter to the environment ministry?

Many frameworks have been developed to help people resolve ethical dilemmas. The purpose of such a framework is in identifying the ethical issues and deciding on an appropriate course of action using the person's own values. Following is a relatively simple approach to resolving ethical dilemmas:

a. Obtain all the relevant facts
b. To ensure assumptions are not treated as fact
c. Identify the ethical issues from the facts
d. To determine how each stakeholder will be affected by the dilemma
e. Identify the alternatives available to the person who must resolve the dilemma
f. Identify the likely consequence of each alternative
g. Decide the appropriate action