Insider Trading in India by Vanshika Chauhan at LEXCLIQ

Insider trading is the buying or selling of a security by someone who has access to material non-public information about the security. Insider trading can be illegal or legal depending on when the insider makes the trade. It is illegal when the material information is still non-public.

The term ‘insider’ has been defined under Regulation 2(e) of SEBI (Prohibition of Insider Trading) Regulations, 1992. Basically, the term ‘insider’ can be classified into three broad categories, which are:

  • Persons who are connected to the company,
  • Persons who were connected with the company,
  • Persons who are deemed to be connected to the company.

In order to become an insider a person has to fulfil three elements, viz;

  • The person should be a natural person or legal entity;
  • The person should be connected person or deemed to be connected;
  • Acquisition of the unpublished price sensitive information by virtue of such connection.

Insider trading is trading in company’s securities and bonds by those individuals who have access to price-sensitive confidential information which is otherwise not available to public about the company.  It is against the principles of fiduciary duty which an individual has undertaken in lieu of his duty and has in consonance of that duty got privileged access. A company is mandatorily required to annually report trading of stocks by corporate officers, directors, or other members of the company who are having access to privileged information to the Securities and Exchange Board of India (“SEBI”) and are duty-bound to disclose such information publicly.

Insider trading in India is basically determined by SEBI laws which govern the whole trading in national stock exchange or Bombay stock exchange. The main aim of this law is that to ensure traders that no one is gained by trading on ‘insider’ or ‘unpublished’ information- information that is not made public. Another aim of this law is to make the information available to all the participants. The enforcement of insider trading laws increases the market liquidity and decreases the cost of equity. Insider trading laws are found in developed countries where strong trading regulations are adopted. The main aim of government in the enactment of insider trading laws is that all the participants in the market have the same information. When the Indian economy was liberalized and security market was open to foreign institutional investors, common investors aim to get quick returns in short period of time.

In India, SEBI (Insider Trading) Regulation, 1992 framed under the Section 11 of the SEBI Act, 1992 intends to curb and prevent the menace of insider trading in securities. An insider is a person who is an accepted member of a group or organization who has special knowledge regarding his firm.

Penalties for committing insider trading

The penalties and punishments for committing insider trading have been defined under Chapter IV-A of the SEBI Act. The penalties have been discussed below according to the SEBI (Amendment) Act, 2002.

  • Section 15(G)(i)–  if an insider either on its own or on behalf of any person has dealt on behalf of his company any unpublished information then he may be fined with RS. 25 crores or 3 times the profit made, whichever is higher.
  • Section 15G(ii)– if an insider has given any price sensitive information then he may be fined up to RS. 25 crores or 3 times the profit made.
  • Section 15G(iii)–  if an insider has procured any other person to deal in securities of anybody corporate on basis of published information then he may be fined up to RS. 25 crores or 3 times the profit made which is higher.

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