SEBI Insider Trading in India Explained Facts History Cases

SEBI Insider Trading in India Explained Facts History Cases 

Insider trading in the Indian stock market refers to buying or selling shares of a listed company by someone who has access to unpublished price-sensitive information (UPSI) about that company.

Definition (As per SEBI)

Insider trading is the dealing in securities of a listed company by an "insider" while in possession of unpublished price-sensitive information (UPSI).

Who is an "Insider"?

An insider is anyone who has access to UPSI, such as:

Promoters and Directors

Employees (senior or involved in strategic decisions)

Auditors, bankers, lawyers

Consultants, advisors, or analysts

Anyone with a personal or professional relationship with company insiders

According to SEBI regulations, the following individuals or groups are considered potential insiders and are therefore prohibited from trading in the securities of companies where they hold such status:

Immediate family members of connected persons or insiders

Associated or holding companies that have a direct relationship with the concerned corporation

Senior executives of the parent or holding company

Employees of stock exchanges or clearing corporations

Board members or trustees of asset management companies (AMCs) or mutual fund entities

Directors or chairpersons of public financial institutions

Additionally, SEBI strictly prohibits the acquisition of Unpublished Price Sensitive Information (UPSI), except where such access is required by law or as part of a legal proceeding.

What is Unpublished Price-Sensitive Information (UPSI)?

UPSI includes any information not publicly available that can significantly affect a company’s stock price. 

Examples:

Financial results before official release

Major mergers or acquisitions

Dividend announcements

Change in capital structure

Big contracts or deals

Regulatory decisions affecting the company

Laws Governing Insider Trading in India

SEBI (Prohibition of Insider Trading) Regulations, 2015

This is the main regulation preventing insider trading in India.

Companies Act, 2013

Also prohibits directors and key personnel from insider trading.

Types of Insider Trading - 

Legal Insider Trading

Disclosed to stock exchange (e.g., promoter buying shares, filed with SEBI)

Compliant with SEBI rules

Done after UPSI is made public

Illegal Insider Trading - 

Not disclosed, done using UPSI

Done before UPSI becomes public

Violates SEBI (PIT) regulations

SEBI Regulations Against Insider Trading

Section 11(2)(e) of the Companies Act, 1956 serves as a cornerstone in prohibiting insider trading. 

The regulation aims to:

Ensure equal opportunity for all market participants

Promote fairness and transparency in market transactions

Facilitate the free flow of information, thereby preventing information asymmetry

What Constitutes Price-Sensitive Information (PSI)?

Possession or misuse of the following Unpublished Price Sensitive Information (UPSI) may lead to insider trading charges:

Declaration of dividends

Periodic financial results before public disclosure

Plans related to buy-back or issue of securities

Significant changes in corporate policies or operational strategies

Details of upcoming mergers, acquisitions, or takeovers

How SEBI Monitors Insider Trading

Surveillance through stock exchanges

Tracking unusual trading activity

Mandatory disclosures of trades by insiders

Whistleblower mechanisms

Investigation and penalties

Penalties for Insider Trading

As per SEBI Act:

Penalty up to ₹25 crore or 3 times the profit made, whichever is higher.

Criminal prosecution may lead to imprisonment up to 10 years.

Criminal Punishment Insider Trading in India ?

 no individual has been finally jailed after a full criminal trial exclusively for insider trading in India, but SEBI has imposed  fines, barred individuals from markets, and initiated criminal proceedings which could lead to jail if proven.

 

 Insider Trading Cases  and SEBI -

 

 1-

 General Insurance Corporation (GIC)

In October 2019, SEBI issued a notice to General Insurance Corporation (GIC) in connection with an ongoing insider trading investigation. 

Along with the notice, SEBI extended a settlement offer to the company. Subsequently, in December 2019, GIC accepted the offer and settled the matter by paying a penalty of approximately ₹1.23 crore.

2-

Infosys -

Infosys came under scrutiny for violating SEBI’s insider trading regulations after it failed to disclose allegations made by a company insider regarding unlawful trading activity.

Although the original complaint was submitted on September 20, 2019, the issue gained public attention only in October, when a whistleblower forwarded the complaint to the media.

In November, Kiran Mazumdar-Shaw, the lead independent director of Infosys at the time, settled the matter with SEBI by paying a penalty of ₹3 lakh.

3-

Rakesh Jhunjhunwala

Billionaire investor Rakesh Jhunjhunwala was summoned by SEBI in connection with an alleged insider trading case involving Aptech Limited.

4-

Balram Garg (PC Jeweller) – In December 2019, SEBI issued a notice to Managing Director Balram Garg for alleged insider trading. It also ordered the impounding of approximately ₹8 crore earned by two promoters and related entities through suspected unlawful trades.

5-

Reliance Industries (RIL) – 2020

SEBI barred RIL from the derivatives market for one year in 2020 and imposed a penalty for allegedly manipulating the cash market price of its stock to unlawfully profit beyond its trading limits.