Insider trading, also known as insider dealing, is the malpractice of selling or buying securities such as equity and bonds by the insiders of a company, which includes the employees, directors, executives and promoters.
To prevent such acts and to promote fair trading in the market for the interest of common investors, the stock market regulator Sebi (the Securities and Exchange Board of India) has prohibited the firms to purchase their own shares from the secondary market.
Insider trading is one of the most serious malpractices that exists in the market.
Insider trading basically refers to the buying, selling or trading of shares or other securities (such as bonds or stock options) of a listed company using unpublished price-sensitive information (UPSI) that can affect the stock price that has not been disclosed yet.
Who is an insider?
The Sebi defines an ‘insider’ as someone who has access to price-sensitive information about a particular company's shares or securities. An insider can be anyone who has been associated with the company in some way during the six months preceding the insider trade.
That person could be an employee, a director, relative, banker or legal counsel to the company or even an official of the stock exchanges, trustees, employees or of an asset management company (AMC) that worked with the company.
Insiders, who have access to confidential and exclusive information about the issuer of a particular security or stock, benefit from buying or selling undisclosed securities before they fluctuate in price.
What is UPSI?
UPSI refers to a piece of exclusive information related to a firm’s stock prices, quarterly results, acquisition deals, mergers or any kind of sensitive activities that have not been shared with the public at large. When insiders are able to access the UPSI, they illegally conduct trade dealings for personal gains.
For example, a company director informs his friend about a yet-to-be-declared deal and the latter disseminates that information to his colleagues who then buy that company’s stocks. Then, the manager, his friend and his colleagues are liable to be booked by Sebi for violation of PTI (Prohibition of Insider Trading) Regulations.
In India, insider trades are regulated by the Sebi under the Insider Trading Regulations, 2015. In fact, the market regulator can impose fines and prohibit individuals or entities from trading in the capital market if found in violation of rules.
Penalty for insider trading
If any insider who -
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either on his own or on behalf of any other person, deals in securities of a corporate listed on the stock exchange on the basis of any unpublished price-sensitive information; or
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communicates any unpublished information to any person, with or without his permission for that particular information except as required in the ordinary course of business or under any law; or
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procures for any other entity to deal in any securities of a corporate on the basis of unpublished price-sensitive information,
shall be liable to a penalty by the Sebi
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