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Insider trading occurs when individuals use confidential information—known as unpublished price-sensitive information (UPSI)—to trade securities before that information is publicly available. Its significance lies in maintaining market fairness and investor confidence.
At its core, insider trading involves trading a company’s securities by someone with access to UPSI, such as financial results, strategic plans, or board decisions. An insider may be a company executive, employee, director, or anyone connected who gains from such data.
SEBI enforces Prohibition of Insider Trading Regulations, 2015, and key sections of the SEBI Act, 1992. These rules define insiders and connected persons, restrict their trading during certain periods, and mandate disclosure of trades. The goal is to create a level playing field for all investors.
UPSI includes earnings forecasts, dividend decisions, mergers and acquisitions, significant management changes, or major financial developments. This information can materially affect the stock price once released, so it must remain confidential until officially disclosed.
The following examples illustrate how insider trading occurs:
Corporate executive trades on pending merger news – A director executes trades after learning of an upcoming deal.
Family member uses private info – Trading via a relative or associate to benefit from non-public insights.
To uphold transparency and fairness in the securities market, SEBI actively monitors trading behaviour using several tools and regulatory frameworks:
Advanced Surveillance Systems: SEBI employs sophisticated electronic surveillance tools such as the Integrated Market Surveillance System (IMSS) and Data Warehousing and Business Intelligence System (DWBIS). These systems track unusual price movements and trading volumes, especially around sensitive corporate events like mergers, earnings announcements, or regulatory filings.
Mandatory Disclosure Requirements: As per SEBI regulations, key managerial personnel, directors, and other designated persons in a company must disclose their trades in company securities within two working days. These disclosures are made public through stock exchanges, enhancing transparency.
Data Correlation and Audit Trails: SEBI investigates suspected cases by analysing trading data, phone records, email communications, and financial transactions. The regulator collaborates with telecom providers and banks when necessary, building a timeline of interactions and trades to establish links between information access and suspicious trades.
This multilayered approach enables SEBI to both deter and detect insider trading, reinforcing investor trust in Indian capital markets.
Violating rules may lead to substantial penalties, disgorgement of profits, and even criminal actions. SEBI can impose fines up to ₹25 Crores, while Indian courts can enforce imprisonment and further penalties under the SEBI Act.
Here is how stakeholders prevent non-compliance:
Trading windows restrict insider trades during sensitive periods.
Mandatory pre-clearance for official trades ensures transparency.
Compliance training educates employees about insider rules and penalties.
Insider trading disrupts trust in financial markets by giving some participants an unfair edge. SEBI’s regulatory framework aims to uphold transparency and prevent misuse of confidential information. All individuals connected to listed firms must understand UPSI, adhere to trading restrictions, and report their securities transactions as required by law.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
Insider trading occurs when someone trades securities on the basis of material, non-public information that can influence the price of those securities.
Yes, insider trading is prohibited under SEBI’s regulations and the SEBI Act. Violations can result in fines, disgorgement, and imprisonment.
SEBI uses electronic surveillance, mandatory trade disclosures, and investigation of suspicious trading patterns linked to confidential announcements.
Unpublished price-sensitive information includes any confidential details capable of influencing an investor’s decision—such as earnings, M&A, or management changes—that have not been publicly released.
Yes, SEBI can take action against relatives or connected persons who trade or share UPSI, as they are held accountable under the connected person framework.
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