A question that a lot of our patrons have is, "Can Government employees trade in the stock market?" Well, to simply put it, Government employees cannot trade in the stock market. Because trading is not the same as investing. Government employees can invest in the stock market, subject to certain restrictions.
Today, we learn about the very stark, yet severely ignored difference between trading and investing along with the restrictions that the Indian Legislative system puts on Government employees in terms of Investing in the stock market.
Ask and ye shall receive!😉
Investing vs Trading
While the two words are often used interchangeably, Investing and Trading are very different. Even though both of these activities involve buying and selling of similar securities, the difference lies in the period for which each security is held along with the method the holder of these securities earns from their portfolio.
Investing usually involves holding the security for a period of time which usually lasts for a year or longer. When it comes to trading though, the securities are held for a significantly shorter period, which can even be as small as less than a day.
Reaction to Short-Term Losses
Investors usually choose to “ride out” the short-term or temporary losses. This means that investors hold on to their securities and wait for small or insignificant losses to pass without selling the security because it is in the red.
Traders behave differently, they usually employ a function known as a stop-loss. A stop-loss is an order placed with the broker to sell the security in question when it falls to a decided price. This helps a trader avoid significant losses as they trade more frequently and frequent losses would hurt their portfolios greatly.
Method of Earning
Investors earn from their investments in the form of dividends, interest and share splits. The price appreciation of their held securities is neither the main nor the singular source of income for an investor.
The only source of income for traders is the fluctuations in the price of held securities. These fluctuations are caused by the market rising and falling and are not very predictable. This is why trading is a speculative activity while investing is a forecast based activity.
Now that we have established the differences between investing and trading, we look into the statute’s guidelines and limitations when it comes to Government employees engaging in the stock market.
Government Employees and the Stock Market
Rule 16 of the Central Civil Service(Conducts) Rules, 1964 sets out the laws regarding any Government employee’s activities in the stock markets. The various sub-rules and what they stand for, are as follows:
This sub-rule stands to prohibit government employees from engaging in speculative trading in the stock market. Frequent purchase or sale or both, of shares, securities or other investments shall be deemed to be speculation within the meaning of this sub-rule.
This sub-rule conveys that the family members and people acting on behalf of the government employee shall maintain a similar attitude towards speculative trading in the stock market. The people mentioned in this rule should also refrain from engaging in any speculative activities.
Specifies that the Government shall be referred in case any question arises regarding whether a transaction shall be considered under the standards mentioned in sub-rule (1) or sub-rule (2).
Restricts the government employee from entering any monetary obligation with any person or organisation that the employee might deal with during the normal discharge of their duties. This involves lending or borrowing money from organisations and people in exchange of interest or other non-monetary compensation.
Welp, that’s it for this blog, this is all the information a person would need in regards to investing in the stock market as a government employee.
Got you worried for a bit didn’t I? Relax, I’m not gonna leave you with this legal jargon to confuse you. Let’s understand some of the terms in the statute and what it intends.
Terminology, Explanation and Declarations as per the Rule
The most important distinction that the rule intends to establish is between Investing and Trading with speculative trading being prohibited.
The sale or purchase of securities would be considered as trading of the speculative nature, if these transactions are too frequent.
The rule also states that family members of the employee and persons acting in the employee’s behalf are to also follow these rules with the same discretion.
The rest of the sub-rules are regarding lending and borrowing from various organisations and people and restrict government employees from engaging in these transactions within the local limits of their authority.
Also, there are guidelines that impose the necessity to furnish declarations to the appropriate authorities in case either or both of the following conditions are met:
If the transaction value of the investment exceeds ₹50,000 for group A and group B employees; or ₹25,000 for group C employees.
If the transaction value exceeds the amount of salary the employee would receive in two months.
The rule also limits the employee from investing in IPOs or FPOs of companies that the employee is involved in during the ordinary discharge of their duties. Ex. An employee of the IRCTC investing in the IPO of IRCTC.
The Intent of the Rule
The reason for this rule’s creation and implementation is to prevent government employees from making undue gains by misusing the influence afforded to them through their position. The rule also intends to avoid the misusage of insider information that government employees may gain access to during the ordinary course of their employment.
The rule itself is fairly encompassing of most scenarios. But in case an exceptional case presents itself; that doesn’t fall in the purview of the rule, the Government of India has the power to make appropriate and specific decisions in relation to said case.