The Ultimate Guide to Understand Insider Trading in India 2021

The Ultimate Guide to Understand Insider Trading

We all have, at some point in time, heard the word ‘insider trading’, but a very few of us know what exactly ‘insider trading’ is. Simply put, insider trading is a very illegal process that consciously puts the majority of the investors at risk and benefits only a chosen few. Can’t possibly imagine how such a thing would be possible? This is exactly how – by sharing ‘material non – public information’. Still not clear? Well, let me explain

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What is insider trading?

An insider trading is when non – public material information from a public company is shared to people outside the company that gives an unfair advantage to the person to whom this information is passed on to. 

Non – public material information – what is it?

It means information that is not yet accessible to the public that could cause potential damage to the company/ investors when released before the company approves it to be released to the public.

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It is specified as ‘material’ as opposed to the immaterial information that doesn’t affect the company and the investors in any way when released.

It may be done by anyone inside the company – the CEO, managing director, the employee etc.

This information shared may be stocks or bonds or stock options, anything that would affect the potential investment to the company or would provide an unfair advantage to a few already existing or potential investors. 

In order to avoid this, you can even start with Systematic Investment Planning (SIP) to gain returns in short term and also long term, consult your financial advisor before investing.

Insider Trading example-

Image Credits: Christophe Vorlet

An employee working in the government health sector comes to know about a law that is to be passed that will significantly benefit a cola company.

So, the employee secretly buys a vast amount of shares and tells his close friend to do so too. They both wait for the law to be passed and implemented. And when the law is implemented, they will be hugely benefited. This is insider trading.

Now that we know what insider trading is, let’s see why it is considered illegal.

Why is insider trading considered illegal?

Listed below are some of the main reasons as to why insider trading is considered illegal

1. It goes against ethical and moral values

All the stockholders and investors should be given an equal advantage and information, and they should trade with the company with the same vantage point.

2. Damages the company’s reputation

People would be very sceptical and reluctant to invest and trade with a company if they think that the market is unfair.

3. It is not fair for the investors

Every investor, other than the ones with the non – public material information will be affected, like the ones with the information will make an immense profit than the ones that are not privy to the information.

We now understand what is insider trading and why it is commonly considered illegal. We’ll now see if this practice of trading is or is not legal in India.

Is insider trading legal in India?

Insider trading is illegal in India. In fact, it is a serious offence that could even lead to Federal prison sentences under Indian Law. The SEBI (Securities and Exchange Board of India), which is a statutory regulating body that is responsible for regulating the Indian capital market has an amendment introduced under ‘Prohibition of insider trading’. Under this amendment, possession of any non – published price – sensitive information (UPSI) without any valid purpose by the promoters of this company, irrespective of their shareholding status is held responsible by the SEBI. Also, Stock exchanges can hold you responsible for such actions.

Involving in insider trading is a serious offence that requires legal assistance and has consequences ranging from a substantial fine to a few years of federal prison sentences. It is very clear that this is considered a serious offence and rightly so. SEBI makes sure that the capital market of India is a safe ground for investors and the stockholders and provides equal vantage points to all those involved in it. We, as people of this country, should do our part and withhold from involving in such illegal practices and educate others to refrain from insider trading.

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