Insider trading means buying or selling shares of a listed company based on important information that is not available to the public.
This information is called Unpublished Price Sensitive Information (UPSI).
Examples of UPSI include financial results, mergers, acquisitions, dividend announcements, and changes in key management.
Using such confidential information to gain an unfair advantage, make a profit, or avoid a loss is considered unlawful.
In India, insider trading is regulated by SEBI under the SEBI (Prohibition of Insider Trading) Regulations, 2015. The rules apply to people who are considered insiders, such as:
- Company promoters, directors, and employees
- Auditors, lawyers, consultants, and advisors
- Anyone who has access to confidential company information
Key rules under SEBI’s regulations include:
1. Trading restrictions:
Insiders are prohibited from trading during restricted periods, such as the time leading up to financial results or major announcements. Companies must maintain a trading window mechanism to regulate when insiders can or cannot trade.
2. Code of conduct:
Every listed company must implement an internal code of conduct detailing policies for handling UPSI, responsibilities of employees, and compliance procedures.
3. Disclosure Requirements:
Insiders must disclose large trades and follow rules for pre-clearance of trades above set limits.
4. Monitoring and Enforcement:
SEBI monitors trading patterns and can investigate, impose fines, and even take criminal action if insider trading is proved.
5. Penalties:
Insider trading is a serious offence. Penalties may include
- Monetary fines up to ₹25 crore or three times the amount of profit made, whichever is higher
- Imprisonment of up to 10 years
- Disgorgement of illegal gains and restrictions on future trading.
Always make sure you trade based on public information only.