Insider Trading in India: Key Regulations and Consequences

What is Insider Trading?

Insider trading is defined as the buying or selling of a company’s securities by individuals who possess unpublished price-sensitive information (UPSI). This information can significantly impact the stock’s price once it is disclosed to the public.

Legal Framework Governing Insider Trading in India

In India, insider trading is primarily governed by:

• The SEBI Act, 1992
• The SEBI (Prohibition of Insider Trading) Regulations, 2015
• The Companies Act, 2013 (specifically Section 195, which is now omitted but the concept is retained via SEBI regulations)

Who is Considered an Insider?

Under Indian law, an insider refers to individuals such as directors, officers, employees, and connected persons who have access to UPSI. These individuals are often termed as "designated persons" and are subjected to stricter trading controls and reporting requirements.

Understanding Unpublished Price-Sensitive Information (UPSI)

UPSI encompasses any non-public information that could materially influence a company's share price. Examples include:

• Financial results
• Mergers and acquisitions
• Changes in key management
• Significant business transactions

Prohibitions Regarding Insider Trading

Key prohibitions enforced on insiders include:

• Trading securities based on UPSI.
• Sharing, recommending, or inducing others to deal in securities using UPSI, unless in the ordinary course of duty or legal obligation.

Penalties Imposed by SEBI for Insider Trading Violations

The SEBI can impose various penalties for insider trading violations, such as:

• 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.

Case Study: SEBI's Action Against IndusInd Bank Executives

SEBI has barred five former executives from IndusInd Bank from trading due to allegations of trading on UPSI regarding accounting discrepancies in derivatives. This group includes the ex-CEO and deputy CEO.

Actions Taken by SEBI Against the Executives

• SEBI ordered the five executives to return ₹19.78 crore, representing profits from trading on UPSI.
• They are prohibited from trading—directly or indirectly—until further notice.
• No pre-filed trading plans were submitted, which could have provided compliance protection.

Strengthening Enforcement Against Insider Trading

SEBI is enhancing its enforcement measures against insider trading by:

• Employing technology-driven tools for surveillance.
• Mandating pre-clearance of trades by designated persons.
• Introducing stricter disclosure requirements.
• Shifting towards preventive compliance and real-time alerts.

Ensuring Compliance Among Listed Companies

Listed companies are required to:

• 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 actions against former IndusInd Bank executives underscore the importance of compliance with insider trading regulations. Companies must actively implement measures to uphold market integrity and transparency.

Frequently Asked Questions (FAQs)

Q1. What constitutes insider trading in India?
Answer: Insider trading occurs when individuals buy or sell a company's securities based on unpublished price-sensitive information (UPSI) that could influence the stock price.

Q2. What laws regulate insider trading in India?
Answer: Insider trading is primarily regulated by the SEBI Act, 1992, the SEBI (Prohibition of Insider Trading) Regulations, 2015, and relevant provisions of the Companies Act, 2013.

Q3. Who qualifies as an insider?
Answer: An insider includes directors, officers, employees, and connected persons with access to UPSI. They are subject to specific trading controls and reporting norms.

Q4. What are the penalties for insider trading violations?
Answer: SEBI can impose monetary penalties, trading bans, disgorgement of profits, and even criminal prosecution for severe violations of insider trading laws.

Q5. How is SEBI improving enforcement against insider trading?
Answer: SEBI is enhancing enforcement through technology-driven surveillance, pre-clearance mandates for trades, and stricter disclosure requirements to prevent insider trading.