Insider Trading and Its Regulations in the Indian Market

General
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1. What is Insider trading?

Insider trading refers to the trading practice in a public company’s securities by individuals who have access to private price-sensitive information about the company. This is considered unethical and illegal in most jurisdictions (including India) as it gives an unfair advantage to insiders over regular investors and undermines market integrity.

2. Definition of Insider Trading (India)

As per the Securities and Exchange Board of India Regulations, 2015 (SEBI PIT Regulations, the Prohibition of Insider Trading) insider trading involves:

“Trading in securities of a listed company or a company that is proposed to be listed, when in possession of UPSI (Unpublished Price Sensitive Information) .”

UPSI includes any information that is not generally available and upon becoming public, is likely to materially affect the price of the securities. Examples include:

  • Financial results

  • Mergers, acquisitions, or demergers

  • Change in key managerial personnel

  • Dividend announcements

  • Significant corporate restructuring

3. Who is an Insider?

As per SEBI regulations, an insider can be defined as:

  • A connected person: Someone who is connected to important individuals with the company (such as directors, employees, legal advisors, consultants, auditors, etc.).

  • A possession insider: Anyone who has access to UPSI.

4. Key Regulations Under SEBI (PIT) Regulations, 2015

The SEBI PIT Regulations, which were last significantly amended in 2018 and 2019, aim to curb insider trading and enhance transparency. Major provisions include:

a. Prohibiting trading while in Possession of UPSI

Insiders are prohibited from trading in securities when in possession of UPSI.

b. Disclosure Requirements

Insiders are required to disclose their holdings and any change in holdings:

  • Initial Disclosure – by promoters, directors, and KMPs within 30 days of these regulations coming into effect or upon appointment.

  • Continual Disclosure – if there is a change of more than ₹10 lakh in value or 5,000 shares in their holding.

c. Trading Window and Trading Plans

  • A trading window is established by companies to regulate the period during which insiders can trade.

  • Insiders can formulate a trading plan, which allows trading in securities in a pre-decided manner, even when in possession of UPSI, subject to SEBI approval and strict conditions.

d. Code of Conduct

Companies are required to establish:

  • A Code of Fair Disclosure (for ensuring fair disclosure of UPSI)

  • A Code of Conduct for Prevention of Insider Trading (to regulate and monitor trading by insiders)

e. Whistleblower Mechanism

SEBI allows any person, including whistleblowers, to report instances of insider trading and provides monetary rewards under the SEBI Informant Mechanism introduced in 2019.

5. Penalties for Insider Trading

SEBI has been vested with strong enforcement powers. Under the SEBI Act, 1992, penalties for insider trading can include:

  • A fine of up to ₹25 crore or three times the amount of profits made (whichever is higher)

  • Imprisonment of up to 10 years (under the Companies Act, 2013)

  • Disgorgement of gains, freezing of assets, ban from accessing the securities market

Few examples of prominent insider trading cases in India

  • Rakesh Agrawal Case (1992) – One of the earliest cases where SEBI penalized an executive for insider trading.

  • Reliance Industries Ltd (2007) – SEBI imposed penalties on RIL for trading in its own shares through a third party using UPSI.

Infosys and Wipro Employees (2021–2023) – Instances where employees were penalized for trading based on financial results not yet made public.