What is Insider Trading?

Trading in the stock market is generally considered a regular practice, where you buy and sell the shares of a listed company to potentially profit from its price movements. However, did you know that some types of trading can be considered illegal? We’re talking about insider trading, of course. 

You may have heard this term or it may be new to you. Whatever the case may be, in this article, we take a closer look at what insider trading is and when it is illegal. 

What is Insider Trading?

Insider trading is the practice of buying or selling the shares of a publicly listed company based on insider information. Known as Unpublished Price-Sensitive Information (UPSI), it includes any material details that are not publicly available to traders and investors. These details are generally only available to those within the company, like those on the company’s board of directors, their employees or parties who are a part of any upcoming deals with the entity. 

With insights into such material deals, policies or events that are yet to become public knowledge, insiders may be able to engage in potentially profitable trades. This unfair advantage is what makes insider trading illegal. 

According to the Securities and Exchange Board of India (SEBI), an insider is anyone privy to price-sensitive information regarding a company. The regulator has also set a time frame for identifying insiders — with anyone associated with the company in the six months preceding the insider trade being considered an insider. 

Legal vs. Illegal Insider Trading

Many experts, market analysts and even traders and investors debate whether all insider trades are illegal. In other countries, some kinds of trades, even when done by insiders with access to UPSI, may not be entirely illegal. For instance, in the United States of America, some insider trades are accepted as legal, provided the insider reports the particulars of their transaction to the Securities and Exchange Commission (SEC). 

However, in India, the consensus is that insider trading is illegal — with the market regulator strictly overseeing insider information and controlling such trades. This is because carrying out stock purchases or transfers using publicly unavailable information is considered an unfair practice. The stock market is meant to be an equal ground, with no trader or investor having any undue advantage over another. 

Examples of Insider Trading

Despite the strict rules regarding insider trading in India, many insider trades have occurred in the country’s financial markets. SEBI has also penalised those involved in such trades as per the prevailing laws. Here are some examples of illegal insider trading that have occurred in India. 

• Infosys Insider Trading Case

SEBI noticed unusual trading patterns in the IT giant’s stocks in the period surrounding the announcements of its quarterly results. These patterns were observed for four consecutive quarters — from December 2019 to September 2020. Further investigation by the market regulator unearthed several potential insider traders involved in such unfair practices. These traders were all issued notices by SEBI and appropriate action was taken.

This case shows us that sometimes, it is easier to verify and confirm illegal insider trading practices and take the action required promptly.

• Reliance Industries

In 2021, the market regulator imposed a penalty of Rs. 70 crore on Reliance Industries Limited, a couple of other related entities as well as the company’s chairman, Mukesh Ambani. The penalty was imposed because of insider trading in the cash and futures segment of the shares of Reliance Petroleum Limited — which eventually merged with Reliance Industries in 2009. 

This instance tells us that in some cases, verifying and taking action for insider trades may take several years, depending on the complexity of the trade involved and the evidence available. 

• Balram Garg Case

SEBI held Balram Garg, the Managing Director of PC Jeweller Limited, responsible for insider trading in 2018. The market regulator’s case held that Garg had access to UPSI because he was an insider and that he shared this material information with his relatives, who profited from trades using those details. However, since there was no proof that Balram Garg shared this information with the traders, the Supreme Court overruled SEBI’s order. 

This goes to show that the nuances of insider trading are multidimensional, making it harder to pin down instances of such unfair trading practices in some cases. 

When is Insider Trading Legal?

True insider trading that is based on illegal USPI is never legal. Nevertheless, some transactions may appear to be insider trades at first glance, but may be legal if the trader carries them out according to the prevailing rules, makes the necessary disclosures, obtains the proper approvals and uses the right channels. 

When is Insider Trading Illegal?

In India, insider trading is illegal if anyone recognised as an insider by SEBI uses or shares UPSI to execute trades and profit from price changes in a company’s shares. The market regulator imposes a penalty for such violations, depending on the magnitude of the illegal trades. 

Conclusion

Broadly, insider trades are frowned upon at best and illegal at worst. So, if you or anyone you know is privy to some additional information about a company — something that is unavailable to the general public — it is best not to engage in any new trades using that information. The regulations surrounding insider trading in India are stringent and SEBI has been known to take strict actions against this malpractice. 

The safer way to invest in the stock market is to rely on publicly available information about different companies, their sectors and industries. However, for many aspiring investors, finding up-to-date information about all the various aspects of a company may be challenging. Here’s where the Motilal Oswal Research 360 platform can help.

By bringing all the crucial financial and technical indicators of a company to your fingertips, Research 360 makes both trading and investing a more informed exercise rather than a blind practice.