Insider trading refers to buying and selling of stocks based on information which is not available to the general public and can significantly affect a company’s stock price. In other words, it’s a trading which takes place based on “insider” information.
In order to maintain fair trading practices, government regulatory bodies, monitor and enforce laws against illegal insider trading.
In India, we have the Securities and Exchange Board of India (SEBI) which monitors and regulates insider trading.
Similarly, we have the Securities and Exchange Commission (SEC) in the U.S which monitors and enforce laws against insider trading in the US.
Is insider trading legal in India?
In India, insider trading is legal when a corporate insider trades in companies shares based on information that is publicly available or when they comply with regulatory requirements as enforced in India.
A corporate insider must comply with the prohibition of insider trading regulation set by SEBI. It requires timely disclosure to both SEBI and stock exchanges in case of a corporate insider trade in a company’s shares.
Trades will be treated legal as long as the corporate insider does not trade based on non-public and material information.
How does SEBI detect insider trading?
Securities exchange board of India (SEBI) uses several methods to detect insider trading in India.
They analyze trading data to identify unusual activities that may suggest insider trading.
SEBI gathers information from whistleblowers, market participants, and media reports to identify potential insider trading information.
SEBI works closely with the stock exchanges to monitor trading activities and report unusual activities. They have set up independent surveillance departments in the stock exchanges to monitor abnormal market activities and detect market manipulation.
Examples of insider trading
When a corporate executive of the company in possession of undisclosed material information trades in shares and securities of the same company to gain profit, it is called insider trading.
If a consultant, advocate or accountant gets access to undisclosed material information and uses it to their own benefit, then it may be treated as insider trading, depending on how the information is used.
Front running, where a broker or trader carries out their own trades before punching the order of their clients in order to make profit is also treated as illegal insider trading.
Here are few cases of insider trading:
Rajat Gupta
This insider trading case is linked to the US market. Rajat Gupta, a former CEO of McKinsey, accused of leaking insider information about Goldman Sachs.
Rajat Gupta was accused of leaking insider information about Goldman Sachs to Raj Rajaratnam, the founder of Galleon Group, who was already embroiled in an insider trading scandal.
Raj Rajaratnam
He was accused of receiving insider information from corporate insiders and analysts.
In 2011, he was found guilty on securities fraud and conspiracy. He was sentenced to 11 years in prison and ordered to pay a significant fine and forfeit millions in profits.
Satyam computer services
In satyam, few executives and insiders traded shares based on undisclosed information about the company’s true financial condition.
Several insiders were found to have sold shares before the scandal was publicly disclosed, profiting from their positions.SEBI imposed penalties on several individuals involved, including bans from trading in securities.
RIL
Certain executives traded Reliance industries limited shares based on undisclosed price-sensitive information.
In 2017, SEBI imposed a fine on RIL and its executives for insider trading.
Edelweiss Financial Services
Certain individuals associated with Edelweiss allegedly traded shares of the company based on possession of sensitive information before public announcements. SEBI imposed penalties on the individuals involved.
Vinod K. Jain
He was involved in insider trading. He was accused of trading shares based on non-public information regarding the company’s financial performance. In 2014, SEBI imposed a penalty on Jain, which included a ban from trading in securities for a specified period and a monetary fine.
