What is Insider Trading?
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The stock market thrives day by day because of its transparency, fairness and equal access to information. If the balance is disturbed it will affect the investor’s confidence and undermine the integrity of financial markets. One of the key violations against the principle is insider trading. Often surrounded by a cloud of mystery and controversy, the term draws attention especially in the high-profile financial scandals.
Through this blog, you can explore insider trading meaning, easily understand who is consider as an insider, its legality, review SEBI regulations and get the real-time examples of insider trading in India.
What is Insider Trading?
Insider trading is the buying or selling of a company’s securities by someone who has non-public, material information about the company. They will understand the growth and issues of the company and predict the stock price and make movements. It is an unfair advantage of the person over other investors who do not have access to such information about the company. The exact meaning of insider trading is the use of confidential information to benefit financially.
Insider trading in India or other countries based on the information that is not available to the public. It can significantly impact the stock price once disclosed, that’s why it is illegal for our country.
Who is an Insider?
The insider can be anyone who gets access to sensitive and non-public information about a company. This includes;
🠖 Company Executives (CEO, CFO, Board Members)
🠖 Employees of the Company
🠖 Auditors and Legal Advisors
🠖 Consultants or Analysts working in the company
🠖 Relatives or Friends who receive privileged information
If an insider has access to confidential data that could influence an investor’s decision to buy or sell the company’s securities.
Insider Trading: Is It Legal?
Insider trading is not legal in India; it is an illegal practice under the SEBI Act 1992. Many people have doubt about why insider trading is illegal in India. If a person who trades based on the company information that is not publicly available and is obtained through breach of trust or confidence. The activity is punishable by law and leads to several consequences.
Sometimes the activity is legal, when company insiders like board members or executives buy or sell shares of their own company but report their trades to the stock exchanges NSE or BSE and they follow all regulatory requirements. These transactions are basically pre-planned, and the official statements will be disclosed to the public.
SEBI Regulations on Insider Trading India
To regulate insider trading, SEBI announced strict rules under the SEBI (Prohibition of Insider Trading) Regulations, 2015. These regulations define key terms, identify insiders and outline penalties. The key aspects of SEBI’s insider trading regulation include;
🠖 Designated Persons: The certain employees and connect persons of the company who had access to UPSI (Unpublished Price Sensitive Information).
🠖 UPSI: The information’s like financial results, acquisitions, changes in capital structure, mergers that can impact the share price.
🠖 Disclosure Requirements: The trading activities of insiders will be disclosed to stock exchanges.
🠖 Trading Window: The insiders can only trade during a specific time.
🠖 Code of Conduct: The company should have a code of conduct to monitor and control insider trading activities.
SEBI always analyzes insider trading NSE and insider trading BSE transactions to find out unusual activities.
Real-Time Examples on Insider Trading in India
Here you can see some of the notable insider trading examples in India that will highlight the seriousness of this illegal activity.
Reliance Petroleum Case (2007)
Reliance Industries Limited (RIL) was started by Dhirubhai Ambani in 1960. RIL engaging the industries like petrochemicals, telecommunications, retail, media and oil gas exploration. SEBI penalized RIL for allegedly engaging in insider trading related to their Reliance Petroleum shares. The company is accused of trying to make money by avoiding restrictions of trading limit while selling a significant stake.
Infosys Whistleblower Case (2019)
The IT company broke the SEBI insider trading rules by not disclosing an insider’s complaint about illegal trading. The complaint was made on September 20, 2019, but the issue becomes public in October through the whistleblower. Then November the company’s director settled the case by paying the fine of ₹3 lakh to SEBI.
HDFC Bank Employee Case (2021)
An employee of HDFC Bank shared the confidential financial data with a broker before it’s official announcement to the public. The broker used that information to buy shares in anticipation of a price rise after the financial results were released. SEBI fined both the employee and broker and took further action to ensure compliance.
Axis Bank and Axis Mutual Fund Case (2023)
SEBI investigated a case where some Axis Mutual Fund managers were accused of a form of insider trading by using internal trading plans to buy or sell stock before the fund did. SEBI took disciplinary action against it including barring involved individuals from the market.
Conclusion
Illegal insider trading is considered a serious offense with significant consequences. Regulatory bodies like SEBI continue to strengthen frameworks to detect and deter such practices. Insider trading penalty in India can be severe like, monetary penalties up to ₹25 crore or three times the number of profits made, debarment, criminal prosecution and disgorgement of gains.
So, understanding what is insider trading in stock market will help investors to be aware about its impact and the importance of regulatory compliance. The Indian stock markets grow and evolve so stay informed about insider trading regulations with Navia Markets and grow!
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Frequently Asked Questions
What is a Trading Plan?
A trading plan is a pre-declared schedule that allows insiders to buy or sell company shares at predetermined times. It helps avoid accusations of insider trading by ensuring trades are not based on unpublished price-sensitive information.
What is UPSI?
UPSI (Unpublished Price Sensitive Information) refers to any confidential information about a company that, if made public, could significantly impact its stock price.
Who Can Change the Code of Insider Trading for a Company?
The Board of Directors of a company has the authority to change the Code of Insider Trading.
What are the 4 Elements of Insider Trading?
Insider – A person with access to Unpublished Price Sensitive Information (UPSI).
UPSI – Confidential information that can affect a company’s stock price if disclosed.
Trading – Buying or selling securities based on the UPSI.
Breach of Duty – Use of UPSI in violation of trust, company policy, or SEBI regulations.
Is Insider Trading Legal in India?
Insider trading is illegal in India when it involves trading based on unpublished price-sensitive information (UPSI).
What are the Two Types of Insider Trading?
Legal Insider Trading – When insiders trade company securities with proper disclosures and in compliance with SEBI regulations.
Illegal Insider Trading – When trades are made based on unpublished price-sensitive information (UPSI), violating laws and ethical standards.
What is Insider Trading in SEBI?
In SEBI terms, insider trading refers to buying, selling, or dealing in securities of a listed company while in possession of UPSI. It is prohibited under the SEBI (Prohibition of Insider Trading) Regulations, 2015 to ensure fairness and transparency in the securities market.
DISCLAIMER: Investments in the securities market are subject to market risks, read all the related documents carefully before investing. The securities quoted are exemplary and are not recommendatory. Brokerage will not exceed the SEBI prescribed limit.
