• Insider trading is the process of using non-public material knowledge about a listed

company by an insider like associates, employees, board members, etc. The

information is used to execute buying or selling of company securities for personal
benefits.

Insider Trading Definition

Insider Trading is the act of purchasing, selling, underwriting, or agreeing to underwrite the
securities or stocks of an organization by key executives/personnel of the company who have
access to UPSI - Unpublished Price Sensitive Information regarding the company.

Insider Trading Meaning

This is malpractice in which a company's unpublished sensitive information is used to trade in
the company's securities. Using this information to make an improper profit or loss is called
Insider Trading. The information is said to be "price sensitive" because it can affect a company's
share price in the market.

Who is an Insider?
An insider is a person who is a part of the company whose shares he trades. He can be a person
who owns more than 10% of the company's stock, for example, a company's directors,
presidents, and senior executives. Sometimes the insider can be someone who isn't a part of the
company but still has ample confidential information on stock performance from a real
company executive. Some NSE Insider Trading examples are:
• Of icers, directors, and employees of the company who trade in the securities of the company
after becoming aware of important and con idential business developments
• Friends, peers, or relatives of such of icers, directors, and employees, who exchanged securities
after receiving such information
• Employees of legal, banking, and press irms who acted on information obtained about the
provision of services to the company whose securities they trade
• Government employees who have exchanged con idential information learned from their of ice
• Political intelligence consultants who can make suggestions or act on material non-public
information obtained from government employees
• Others have misused and abused con idential information from their employers, family, friends,
and others.

Types of Insider Trading

This can be legal or illegal, depending on the type of material information available to the
insider. If the insider has non-public information, they are prohibited by law from trading their
existing stock for that company. On the other hand, if the information is already public, these
people can trade safely without taking legal action against them.

What Are The Effects Of Insider Trading?

Misuse of inside information is discouraged for several reasons:
1. Insiders take unfair advantage of the person whose information has been withheld
f
f
f
f
f
f
f
 2. It creates a con lict of interest because it is in the insider's interest and not in the company's best
interest.
3. It damages the prestige of the market and discourages investment.

Who Regulates Insider Trading in India

Several countries have objected to this practice. The USA was the first country to take action
against Insider Trading. The UK, too, followed suit and imposed many restrictions on
administrators to control the practice.
The Securities and Exchange Board of India SEBI, under the Companies Act and SEBI
Regulations 1992, and the SEBI (Prohibition of Insider Trading) ("PIT") Regulations, 1992,
strictly regulates NSE Insider Trading in India today. Any merchant or insider caught violating
the various regulations imposed by the government agency can be subject to hefty fines.
The penalty under SEBI Act 1992 (Section 15G) and Companies Act 2013 (Section 195) cannot
be less than INR 10 lakhs and may extend to INR 25 crores or 3 times the profit of the tort of
'insider' as the case may be.

SEBI regulations
The SEBI has drafted the SEBI Regulations 2015, which sets out the rules for the prohibition
and restriction of Insider Trading in India.
The Insider Trading regulations provide that the transmission of any confidential information
related to a company by an insider is prohibited unless authorized.
The information misused by the person or another person on their behalf will be considered a
violation, which will be treated as a criminal offence under the law. This offence is punishable
by imprisonment of up to 10 years or a fine of up to 25 crores, whichever is greater. Under the
SEBI rules, the arbitrator may impose a penalty on anyone who violates the provisions of the
rules other than the offence committed under section 24 of the act.

The Restrictions/Prohibitions imposed by SEBI

The Insider Trading regulations impose the following restrictions:
The Regulations restrict/prohibit Insiders from communicating, providing, or providing access
to UPSI related to any publicly traded company or security to any person, including other
Insiders.
These regulations restrict/prohibit a person from purchasing a UPSI from an insider related to
a publicly traded company or securities to any person, including other insiders.
The Regulation restricts/prohibits an insider, when in possession of UPSI, from dealing in
securities listed or proposed for listing on a recognized stock exchange.
SEBI also has the authority to investigate NSE Insider Trading and related matters. SEBI may
exercise investigative powers for two main reasons:
• Investigate complaints from investors, intermediaries, or other persons regarding matters
relating to allegations of this practice; and,
• Investigations based on its knowledge or information in its possession to protect the interests of
securities investors against violations of these regulations.
f
Under the Insider Trading regulations, company founders will be held liable regardless of their
shareholder status if they violate Insider Trading standards by using price-sensitive
unpublished information of society without a legitimate purpose.
Legal Insider Trading and Exceptions to the Rule
• Disclosure is permitted for a legitimate purpose, to comply with a duty, or to comply with a legal
obligation.
• Disclosure is permitted where it is in the best interest of the company.

Insider Trading Examples - Cases Of Insider Trading In

India
• On May 21, SEBI ined Indiabulls Venture, former non-executive director Pia Johnson, and her
husband Mehul Johnson for violating PIT regulations by exchanging the company's scrip using
USPI.
• The incidence of this practice seems to be increasing as many large companies, such as SpiceJet,
Sun Pharma, Future Group, etc., appear to violate laws.
• Rakesh Jhunjhunwala Case - Independent investor and billionaire Rakesh Jhunjhunwala has been
summoned by SEBI for alleged NSE Insider Trading at Aptech Limited. According to reports, the
regulator investigates the period between February and September 2016. Apart from
Jhunjhunwala, SEBI is also looking into the role of a member of his family in the matter.
• Balram Garg Case - Another high-pro ile case of alleged Insider Trading came to light in
December 2019, when SEBI issued a notice to PC Jeweller's Managing Director, Balram Garg. At
the same time, the government agency ordered the con iscation of approximately INR 8 Crore,
which deserves two promoters and associated units of alleged illegal trade.
• Reliance Industries- The Securities and Exchange Board of India banned RIL from the
derivatives sector for a year and levied a ne on the company. The exchange regulator
charged the company with the intention of making pro ts by skirting regulations on its
legally permissible trading limits and lowering the price of its stock in the cash market.
SEBI has a long way to go to strengthen the governance of the NSE Insider Trading laws as it
lags in many ways, such as the lack of technical experience, making it very difficult for SEBI to
catch the culprit.
Even if SEBI can identify the culprit, initiating Insider Trading cases is difficult because these
allegations are usually based on circumstantial evidence, which makes them difficult to prove.
SEBI does not have the authority or power to wiretap phones.

Conclusion
With such strict rules against Insider Trading, obtaining fines, and imprisonment, investors
should ensure that they do not engage in such illegal activities by being aware of its rules and
regulations.
f
f
fi
f
fi