Insider trading refers to the buying or selling of a company's securities by individuals who have access to non-public, price-sensitive information about that company. Put differently, it means one party to a trade holds material information the other does not, an advantage that regulatory frameworks are designed to eliminate. This article covers the insider trading meaning, how it works, who qualifies as an insider, and more.
What Is Insider Trading?
Insider trading can be understood as the practice of buying or selling stocks on the basis of information which is not available to the public at large. In the Indian context, the phrase "insider trading" means trading based on Unpublished Price Sensitive Information (UPSI).
In accordance with SEBI's Prohibition of Insider Trading (PIT) regulations, insider trading has been defined by the SEBI. The individual would be regulated if he trades UPSI, passes it on to anyone else, or recommends someone else to trade based on this information. The definition covers both direct stock buying and trading in derivatives, mutual funds, and any other security listed in a recognized stock exchange.
Trading stocks on the basis of information which is not available to other investors creates inequality. This asymmetry distorts how prices are formed and erodes confidence among retail investors who trade without the same advantage.
Types of Insider Trading
There are two main types of insider trading: legal and illegal. The legality depends on key factors, including the timing of the trade and the level of disclosure.
Insider trading is considered legal when conducted by directors, promoters, and senior management during an approved trading window, with proper disclosure made to the stock exchange. Legal insider trades are publicly reported, and investors may track them on exchange websites.
Insider trading becomes illegal when someone trades on the basis of UPSI before that information reaches the public. It also covers tipping, passing UPSI to another person who then trades on it.
The person receiving the information carries equal liability under SEBI's framework. Even where the recipient has no formal connection to the company, possession of UPSI at the time of trading is sufficient to establish liability.
Who Is an Insider?
Under SEBI's framework, the definition of "insider" extends well beyond company directors and chief executives. It covers anyone who has access to UPSI, regardless of formal designation. The PIT Regulations divide insiders into two broad categories.
The first category covers connected persons, individuals who occupy a position likely to provide access to UPSI. These include directors, employees, auditors, legal advisers, bankers, and immediate family members of such individuals. SEBI presumes that connected persons are privy to UPSI unless they can demonstrate otherwise.
The second category is broader: any individual possessing or having access to UPSI. A friend, a spouse, or even a person who overhears a confidential conversation may technically qualify as an insider if they trade on that information.
UPSI Categories Under Indian Law
SEBI's regulations specify several categories of UPSI. These include:
- Financial results or forecasts not yet published — for instance, a company aware of a significant earnings miss before quarterly disclosure
- Proposed dividend declarations
- Changes in capital structure, including buybacks and rights issues
- Mergers, demergers, acquisitions, or disposals
- Changes in key management personnel
- Material regulatory orders or litigation outcomes
As per SEBI’s PIT Regulations, 2015, all companies need to have a Structured Digital Database (SDD), which should capture all individuals who have received UPSI, along with the type and date of information provided to them.
How Does Insider Trading Occur: A Step-by-Step Breakdown
Step 1: Information originates: A company plans to make an important announcement about a merger, negative performance, or regulatory issues. This information is known by just a few insiders in the organization.
Step 2: Information leak or access: One of the insiders either makes a personal trade or passes on the information to an outsider, like a relative, colleague, or friend.
Step 3: Trade execution: The insider or the outsider holding UPSI makes trades using their Demat account(s) or uses proxies to avoid being detected.
Step 4: Information becomes public The company files its disclosure with the exchange. The share price moves sharply in the direction the insider had anticipated.
Step 5: Abnormal trading patterns surface SEBI's surveillance systems flag unusual volume or price activity in the days preceding the announcement. This is because informed trading tends to produce abnormal patterns concentrated buying or unusual options activity that diverge from typical pre-announcement behaviour.
How Insiders Pass Information
In many SEBI enforcement cases, the original insider never trades directly. Instead, information passes through intermediaries. A promoter tells a relative. That relative tells a friend. The friend places the trade through a third-party account.
SEBI traces these connections using phone records, trading data, IP address logs, and bank account flows. The 2015 PIT amendments expanded the definition of insider and introduced the SDD requirement, making it significantly easier to establish information trails even without direct evidence of communication.
How SEBI Detects and Penalises Insider Trading
SEBI operates one of the more sophisticated market surveillance systems among Asian regulators, as noted in its Annual Reports. Its capacity to detect suspicious trading patterns has strengthened considerably since the 2015 PIT amendments.
The Integrated Market Surveillance System (IMSS) tracks all trading on NSE and BSE in real time. The system raises alerts when there is a sudden increase in volume, uncharacteristic activity in options, or concentrated buying ahead of corporate announcements. Once the IMSS detects a pattern, SEBI's investigation wing obtains trading records, telephone data, bank account details, and Demat account information from depositories.
SEBI also obtains relevant disclosure information from stock exchanges, covering listed companies and their officers. Since 2019, companies are required to maintain a Structured Digital Database (SDD). This records every instance of UPSI sharing — including who received it, when, and in what context.
Penalties for Insider Trading Under Indian Law
Under Section 12A of the SEBI Act, participating in or facilitating insider trading is strictly prohibited, meaning any violation of the PIT Regulations automatically breaches this section as well. Furthermore, information is only deemed "generally available" if it can be accessed by the public on a fair, non-discriminatory basis.
The penalties under Indian law are substantial. Key provisions are set out in the SEBI Act, 1992 (as amended in 2014) and the Companies Act, 2013:
- Civil monetary penalty: Penalties can range from 10 lakh to ₹25 crore, or three times the profits made from the illegal trade, whichever is higher — under Section 15G of the SEBI Act
- Criminal prosecution: Under Section 24 of the SEBI Act, a fine of up to ₹25 crore and imprisonment of up to 10 years
- Disgorgement: SEBI may direct the offender to return all profits made from the illegal trade
- Market debarment: SEBI may prohibit individuals from buying, selling, or otherwise dealing in securities for a specified period
- Company-level action: Under Section 195 of the Companies Act, 2013, insider trading by company officers constitutes a distinct offence with additional penalties
Conclusion
It is obvious that insider trading does not reflect the principle of justice without which no stock market can operate effectively. The regulatory mechanism developed by SEBI, including the PIT Regulations and IMSS surveillance mechanisms, has become stronger through enforcement activities and legislation. It will be useful for retail investors to learn about the nature of insider trading, its participants, and SEBI’s detection mechanisms.
FAQs on Insider Trading
What is insider trading with an example?
Insider trading is defined as trading securities using non-public information that affects their price. For instance, buying shares before a merger is announced using confidential information constitutes insider trading.
What is UPSI (Unpublished Price Sensitive Information)?
UPSI means any unpublished information regarding a business entity that can impact the price of its shares.
What are the penalties for insider trading in India?
There are civil penalties that can reach up to ₹25 crore or three times the gains made from the illegal trade, whichever is higher. Criminal prosecution may result in imprisonment of up to 10 years and a fine of up to ₹25 crore.
Is insider trading legal in India?
Insider trading means trading based on non-public information. It may be permitted if done with proper disclosures, but use of UPSI for trading is restricted under regulations.
Was Rakesh Jhunjhunwala an insider trader?
There is no record establishing him as an insider trader. There are many market participants who are assessed based on disclosures and regulatory outcomes rather than speculation.
Disclaimer:
The information contained in this Article (“Article”) is for general informational purposes only. Northern Arc Capital Limited (“Northern Arc”) does not make any warranties about the completeness, reliability, and accuracy of this information. Any action you take upon the information contained in this Article is strictly at your own risk, and Northern Arc will not be liable for any losses and damages in connection with the use of our Article.
The data included in this Article has been obtained from sources that are believed to be reliable and accurate at the time of publication. However, Northern Arc does not guarantee the accuracy or completeness of any information, nor does it assume any responsibility or liability for any errors or omissions therein. Any opinions expressed herein are subject to change without notice and Northern Arc is under no obligation to update or keep current the information contained in this Article.
This Article is not intended to constitute, and should not be construed as, investment advice or a recommendation to purchase, sell, or hold any security or to engage in any investment strategy or transaction. Readers should not rely solely on the information provided in this Article for making investment decisions and should conduct their own due diligence or seek the advice of a qualified professional.
The content of this Article is for informational purposes only and is not a solicitation or an offer to buy or sell any securities or financial instruments. Northern Arc is not responsible for any investment decisions made by the recipients of this Article. Readers should take independent financial advice from a qualified professional in connection with, or independently research and verify, any information that is provided in this Article and wish to rely upon, whether for the purpose of making an investment decision or otherwise.
Northern Arc and its affiliates, directors, employees, and agents expressly disclaim any and all liability for any direct or indirect losses, damages, or expenses of any kind arising out of or relating to the use of this Article, including but not limited to, any losses related to the accuracy, completeness, timeliness, or reliability of such information.
This Article may contain forward-looking statements that are based on current expectations, estimates, forecasts, and projections about the markets in which Northern Arc operates, as well as management’s beliefs and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results.
This report is intended solely for the recipient and is not for further circulation. Any distribution, modification, reproduction, or disclosure of the contents of this Article, in whole or in part, without the prior written consent of Northern Arc, is strictly prohibited.