What is Insider Trading?
30 May, 2025
Synopsis
Insider trading involves buying or selling shares by an insider of the company based on information that is privately available to the insider.
SEBI regulates insider trading in India through strict disclosure norms, trading windows, and surveillance systems to detect suspicious activity and protect market integrity.
Legal insider trading is permitted under SEBI guidelines, but misuse of confidential information for personal gain can lead to heavy penalties and market bans.
Insider trading refers to the buying or selling of a company’s securities by individuals who are insiders of a company and who have access to private, unpublished price-sensitive information (UPSI). This practice becomes illegal when insiders act on such confidential data to gain unfair advantages in the market—often at the expense of public investors.
With increasing awareness and tighter oversight, regulatory bodies like SEBI in India have established clear guidelines to prevent corporate insider trading and maintain market integrity.
Insider Trading Definition
At its core, the insider trading definition refers to transactions in a company's shares conducted by someone with access to non-public, material information. This could include details about mergers, financial results, dividend announcements, or regulatory approvals that are privately available with insiders but are not publicly available.
While insider buying stocks is not always illegal (e.g., when done transparently and disclosed to the stock exchanges), it crosses legal boundaries when done using insider information that is not yet available to the public.
Who is Considered an Insider?
An insider could be:
A company’s directors, executives, or employees
Auditors, consultants, or legal advisors with privileged access to sensitive data
Promoters or shareholders with access to confidential developments
Any person who receives privately available insider information from an insider
According to SEBI’s (Prohibition of Insider Trading) Regulations, 2015, both “connected persons” and “possession insiders” are accountable under insider trading rules in India.
Types of Insider Trading: Legal vs. Illegal
There are two broad types of insider trading-
Legal Insider Trading
This occurs when company insiders—like executives or board members—buy or sell shares while complying with disclosure norms. Such trades are reported to the stock exchange (like NSE insider trading reports) and are visible to the public.
Illegal Insider Trading
This happens when someone uses unpublished price-sensitive information to make trades before the news becomes public. This violates fairness in the market and is punishable under securities law.
Examples of Insider Trading in India
India has witnessed several cases where individuals have misused access to unpublished price-sensitive information (UPSI) to gain an unfair advantage in the markets. Common scenarios include trades made by insiders ahead of earnings announcements, strategic investments or major corporate actions such as buybacks or mergers. In many cases, insiders have shared confidential information with associates or external parties, who then executed trades for personal gain.
Such incidents highlight the seriousness with which SEBI monitors and penalises violations related to insider trading on the NSE and other exchanges. The regulator has imposed financial penalties and issued trading bans to uphold market integrity and protect retail and institutional investors alike.
How is Insider Trading Regulated by SEBI in India?
SEBI has a well-defined framework to curb insider trading through the following mechanisms:
Mandating companies to maintain a Code of Conduct and Code of Fair Disclosure
Defining UPSI and restricting access to such data
Requiring disclosure of trades by key managerial personnel
Penalising those who trade on UPSI or tip others
Implementing trading windows that limit when insiders can trade
Regulations Against Insider Trading
The primary legislation governing insider trading in India is the SEBI (Prohibition of Insider Trading) Regulations, 2015. These regulations define "insider" broadly to include not just employees and directors, but also external stakeholders such as consultants, auditors, and legal advisors who may have access to unpublished price-sensitive information (UPSI).
To ensure transparency and accountability, companies are required to maintain structured digital databases that track who accessed UPSI and when. The regulations also mandate regular disclosures to monitor insider trading activity, particularly insider buying of stocks. Additionally, compliance officers are obligated to report any suspicious trades. SEBI works closely with stock exchanges like the NSE and BSE to analyse trading patterns and detect anomalies that may indicate potential violations.
How SEBI Detects and Prevents Insider Trading
SEBI uses several surveillance tools and data analytics techniques to spot insider trading. These include:
Trade Pattern Analysis: Unusual spikes in volumes or price movements ahead of announcements.
Linkage Tracking: Identifying relationships between tipper and tippee.
Digital Trails: Monitoring communication and trading records for patterns.
Whistleblower Inputs: Leveraging confidential reports by employees or investors.
Through audits and investigation, SEBI ensures that no participant exploits stock insider information for personal gain.
Stay informed and invest responsibly!
Insider trading undermines market fairness, transparency, and investor confidence. While insider trading isn’t always illegal, using unpublished price-sensitive information for personal gain is a serious offence.
SEBI continues to refine its insider trading regulations to ensure strong governance, prevent manipulation, and maintain public trust. As investors, staying informed and vigilant can help uphold the integrity of the markets we participate in.
Explore HDFC Bank’s InvestRight platform to access verified insights, regulatory updates, and tools to help you make confident, compliant investment decisions.
FAQs
What is UPSI in insider trading?
UPSI stands for Unpublished Price Sensitive Information. It refers to any information that can significantly impact a company’s stock price once made public, like earnings, acquisitions, or regulatory decisions.
What are the penalties for insider trading in India?
Penalties include:
Fines up to ₹25 crore or three times the profit made (whichever is higher)
Disgorgement of gains
Prohibition from accessing the capital market
Possible criminal prosecution in extreme cases
Can investors report suspected insider trading?
Yes. SEBI has a SCORES platform where investors can report any suspicious activity or corporate insider trading concerns confidentially.
*Disclaimer: Terms and conditions apply. This is an information communication from HDFC Bank and should not be considered as a suggestion for investment. Investments in securities market are subject to market risks, read all the related documents carefully before investing.
Related Articles
Video
