Insider Trading in India: Comprehensive Overview and Key Regulations

What is Insider Trading?

Insider trading refers to the buying or selling of a company’s securities by individuals who have access to unpublished price-sensitive information (UPSI) that can influence the stock’s price once made public. Understanding this concept is crucial for compliance in the securities market.

Legal Framework Governing Insider Trading in India

Insider trading is primarily regulated by:

• The SEBI Act, 1992
• The SEBI (Prohibition of Insider Trading) Regulations, 2015
• The Companies Act, 2013 (Section 195, though now omitted, retains its concept through SEBI regulations)

Who is Considered an Insider?

In Indian law, an insider includes directors, officers, employees, and connected persons who have access to UPSI. These individuals are categorized as “designated persons” and face stricter trading controls and reporting norms.

Understanding Unpublished Price-Sensitive Information (UPSI)

UPSI refers to any non-public information that could materially affect a company’s share price. Examples include financial results, mergers, acquisitions, changes in key management, and significant business deals.

Key Prohibitions on Insider Trading

• Insiders must not trade securities based on UPSI.
• They are prohibited from sharing, recommending, or inducing others to deal in securities using UPSI, except in the ordinary course of duty or legal obligation.

Penalties Imposed by SEBI for Insider Trading Violations

SEBI can impose various penalties for insider trading, including:

• A monetary penalty ranging from ₹10 lakh to ₹25 crore or three times the profit made, whichever is higher.
• Trading bans, disgorgement of profits, or barring individuals from the securities markets.
• Criminal prosecution in severe cases.

SEBI's Case Against IndusInd Bank Executives

Recently, SEBI barred five former IndusInd Bank officials, including the ex-CEO and deputy CEO, from securities markets for allegedly trading in shares while possessing UPSI related to the bank’s derivatives accounting discrepancies.

Actions Taken Against the Executives

• SEBI directed the five executives to disgorge ₹19.78 crore, representing profits from trading on UPSI.
• They are barred from trading—directly or indirectly—until further notice.
• No trading plans had been filed in advance, which could have offered some compliance protection.

Strengthening Enforcement Against Insider Trading

To enhance enforcement against insider trading, SEBI employs tech-driven tools for surveillance. It mandates pre-clearance of trades by designated persons and has introduced stricter disclosure requirements. The regulator is also focusing on preventive compliance and real-time alerts.

Compliance Requirements for Listed Companies

Listed companies must:

• Maintain structured digital databases of insiders and UPSI sharing.
• Implement robust codes of conduct.
• Require designated persons to report trades.
• Conduct internal audits and train employees on compliance.

Conclusion

In summary, SEBI’s vigilance in regulating insider trading is vital for maintaining integrity in the financial markets. The recent actions taken against individuals involved in insider trading reinforce the importance of compliance and the severe consequences of violations.

Frequently Asked Questions (FAQs)

Q1. What constitutes insider trading?
Answer: Insider trading involves buying or selling securities based on unpublished price-sensitive information that could impact share prices once disclosed.

Q2. Which laws govern insider trading in India?
Answer: Insider trading in India is primarily governed by the SEBI Act, 1992, the SEBI (Prohibition of Insider Trading) Regulations, 2015, and the Companies Act, 2013.

Q3. Who is classified as an insider under Indian law?
Answer: An insider includes directors, officers, employees, and connected persons who have access to unpublished price-sensitive information.

Q4. What are the penalties for insider trading violations in India?
Answer: SEBI can impose penalties ranging from ₹10 lakh to ₹25 crore, trading bans, disgorgement of profits, or criminal prosecution for serious offenses.

Q5. How is SEBI enhancing its efforts against insider trading?
Answer: SEBI is using technology for surveillance, mandating pre-clearance of trades, and introducing stricter disclosure requirements to strengthen enforcement against insider trading.