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trading in the Indian stock market refers to buying or selling shares of a listed company by someone who has access to unpublished price-sensitive information (UPSI) about that company.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Insider trading is the dealing in securities of a listed company by an "insider" while in possession of unpublished price-sensitive information (UPSI).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Additionally, SEBI strictly prohibits the acquisition of Unpublished Price Sensitive Information (UPSI), except where such access is required by law or as part of a legal proceeding.
What is Unpublished Price-Sensitive Information (UPSI)?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.
