Insider Trading – What Is It Really?


Insider Trading is a term that is frequently used in the world of finance. It is discussed in-depth by those “in-the-know” but it is often misunderstood by people not close to the subject.

In this article, we will provide an overview of Insider Trading for beginners, including what it is, why it is illegal, what type is legal and what the consequences can be.

What is Insider Trading?

Insider Trading is a term used to describe the act of buying or selling securities in a publicly traded company based on non-public information.

In India, this is referred to as Unpublished Prices Sensitive Information or ‘UPSI’

This information could be something like a company’s financial performance, potential mergers or acquisitions, an upcoming rights issue, a preferential allotment, a new product launch, a significantly huge client order, a change in the top-management or other significant news that has not yet been made public and could impact the company’s stock price.

The goal of Insider Trading using UPSI is to take advantage of this information to make a profit by buying or selling securities before the news is released to the public giving Insiders an unfair advantage over the public.

Insider Trading can be conducted by a wide range of people, including executives, employees, board members, and other individuals who have access to confidential information about a company’s operations. In some cases, Insider Trading may also involve individuals who are not directly associated with the company, but who have access to confidential information through a third party.

Why is Insider Trading Illegal?

Insider Trading is illegal in India and most other countries around the world because it can lead to unfair advantages for individuals who have access to non-public information.

This can lead to a situation where these individuals are able to make large profits by trading securities before the news is made public, while other investors are left in the dark.

A critical reason why Insider Trading is illegal is that it can lead to a lack of trust in the financial markets. If investors believe that the markets are not fair, or that certain individuals are able to manipulate the markets to their advantage, it can lead to a decrease in confidence and a decline in investment activity.

And, of course, Insider Trading is also illegal because it can be used to commit fraud.

What are the repercussions of Insider Trading in India?

Insider Trading is a serious offense in India and can lead to significant legal and financial penalties. Some of the potential consequences of being found guilty of Insider Trading may be fines, imprisonment, or both. One of the key regulatory bodies responsible for enforcing Insider Trading laws in India is the Securities and Exchange Board of India (SEBI). The SEBI has the power to investigate potential instances of Insider Trading and can take legal action against individuals or companies that are found to have engaged in this illegal activity.

In addition to legal penalties, Insider Trading can also lead to significant financial consequences. Individuals who are found guilty of Insider Trading may be required to pay restitution to any investors who were harmed because of their actions. They may also be required to forfeit any profits that were made as a result of the Insider Trading.

Is it possible to carry out Insider Trading legally?

The legality of Insider Trading depends on the type of information used by insiders.

If trading is carried out by anyone who happens to be an Insider using information that is available publicly, it is considered legal Insider Trading.

However, if you hold UPSI, it may be presumed that your trades are motivated by such UPSI.

In legal Insider Trading, the transaction is reported to SEBI for India and the company itself. This ensures that investors are not at a disadvantage as they have access to such information. As a result, legal Insider Trading does not attract any penalties.

Insider Trading is a serious offense pretty much everywhere (certainly in India), and can lead to significant legal and financial penalties up to and including imprisonment. Its not just in Hollywood movies.

Regulatory compliances to control, guard against and check Insider Trading have been increasing exponentially and will continue to do so as the importance of the equity capital markets grows.