Insider Trading: Legal Implications and Regulatory Framework 

Renu More BBA LLB (Hons.), 4th Year University of Mumbai, Thane Sub-Campus During her internship at LeDroit .

Introduction 

Insider trading — a name that immediately conjures up visions of money scandals, hushed-up boardroom discussions, and wildly fluctuating stock prices. Though the concept may strike some as exciting or even shrewd, the reality is considerably more serious and complicated. Inside at its core, insider trading undermines the foundation of capital markets’ confidence. 

Simply put, insider trading is the use of non-public information to gain an unfair edge in the purchase or sale of securities. But its reach goes beyond personal profit — it impacts investor confidence, disturbs market equilibrium, and sullies corporate reputations. 

Particularly in India’s fast-changing financial environment, with more retail investors getting involved and online platforms opening up trades, the law on insider trading assumes a critical role in protecting the integrity of the market.  

Synopsis 

Let’s be real — insider trading isn’t just a topic for finance geeks or regulatory experts. It’s something that affects all of us, from law students and young investors to corporate professionals and regulators. So instead of getting lost in jargon, this article aims to break things down the way I’d explain it to a classmate — clear, practical, and rooted in current realities. 

We will start by learning exactly what insider trading is — and, importantly, isn’t. The article then takes us through the Indian legal landscape, particularly the SEBI (Prohibition of Insider Trading) Regulations, 2015. We’ll explore landmark cases, the mechanisms through which SEBI enforces the rules, and what operational impediments it continues to face. 

To put it into wider perspective, we will also look at how insider trading is addressed internationally — from the aggressive U.S. enforcement to India’s more civil-penalty-oriented model. And we will also mention some of the newer trends, such as compulsory digital databases and systematized surveillance systems. And since a picture is worth a thousand words, there’s also an easy-to-understand graph depicting the increasing SEBI enforcement over the years. 

To not only know the black-letter law, but to see the grey areas and the urgent need for tighter compliance and consciousness — particularly in India’s thriving securities market. 

1. What is Insider Trading? 

Essentially, insider trading involves the buying and selling of a firm’s shares by an individual possessing unpublished price-sensitive information (UPSI). This UPSI may consist of: 

• Upcoming financial reports 

• Merger or acquisition decisions 

• Share buybacks or dividends 

• Leadership change in key positions 

If one uses this information to act before it is public — and profits or prevents a loss — that’s insider trading. But here’s the twist: not all insider trading is against the law. 

For instance, insiders (such as directors or employees) can trade lawfully as long as they adopt organized procedures such as pre-disclosed trading plans and make sure that the information is already public. The law does not prevent insiders from trading — it prevents them from exploiting their privilege unfairly. 

2. Who Is an Insider? 

Based on the SEBI (Prohibition of Insider Trading) Regulations, 2015, an insider may belong to two categories: 

• Connected Persons: 

These are individuals directly linked to the company — directors, staff, consultants, lawyers, auditors, etc. 

• Possession Insiders: 

Even when you’re not formally attached to the company, if you have UPSI and utilize it, you’re responsible. For instance, a friend, family member, or even a reporter who is given inside information and makes trades on it — voluntarily or involuntarily — can be charged. 

Insider trading regulations seek to stop even the unofficial and indirect filtrations — such as the so-called “WhatsApp leaks” around earnings forecasts that coincided with the actual outcome suspiciously accurately. 

3. India’s Legal Framework 

India’s insider trading law is substantially based on: 

• SEBI Act, 1992 

• SEBI (Prohibition of Insider Trading) Regulations, 2015 

• Companies Act, 2013 (Section 195 — now removed for being redundant) 

The SEBI (PIT) Regulations, 2015, are the cornerstone of India’s legal framework. Some of the notable features include: 

• Empirical definitions of insiders and UPSI 

• Establishment of trading plans for genuine trades by insiders 

• Disclosure requirement for promoters, directors, and KMPs 

• Structured Digital Database (SDD) to record sharing of UPSI 

• Code of Conduct for all listed companies 

These regulations were updated in 2019 and 2021 to include digital record maintenance, mandatory compliance officers, and tighter audit trails — a move in line with SEBI’s tech-driven surveillance approach. 

4. Landmark Case Laws in India 

Here are some Indian cases that shaped insider trading law interpretation: 

• SEBI v. Rakesh Agarwal (2003) 

Rakesh Agarwal, a Jagatjit Industries Ltd. Executive, was discovered sharing UPSI of a takeover with his brother-in-law, who dealt and benefited. Although Rakesh did not deal himself, SEBI held him responsible for tipping. This case was instrumental in laying down tipper liability. ???? Hindustan Lever Ltd. V. SEBI (1998) 

HLL purchased shares of Brooke Bond Lipton before a merger. SEBI accused misuse of UPSI, but HLL said the information was known to them as promoters. The case was rejected, yet it generated national discussion regarding what is authentic strategy and what amounts to insider abuse.  

• Reliance Industries Buyback Case (2021) 

SEBI imposed a fine of ₹25 crore on RIL and ₹15 crore on Mukesh Ambani for not conforming to disclosure standards in their buyback procedure. While not a classic textbook insider trading instance, it underscored regulation intolerance for information asymmetry in corporate governance. 

5. The way the Insider trader regulations are implemented by SEBI 

Enforcement and investigation powers SEBI: 

•To make searches and seizures 

•Freezing demat and bank accounts 

•Fining (upto ₹25 crores or 3x profit made — whichever is higher) 

•A prohibition order preventing someone from trading or acting in a corporate director role 

•Filing of criminal complaint (although rare in India) 

SEBI has also made use of advanced methods such as DWBIS (Data Warehouse and Business Intelligence System) for identification of abnormal trading. With the digital databases under the SDD guidelines, the regulator is getting more proactive in identifying violations. 

6. Global Comparison: Where Does India Stand? 

Let’s compare how India stands globally in the regulation of insider trading: 

While the U.S. leads with aggressive prosecution, India relies more on civil enforcement. India is improving steadily, but still lacks strong whistleblower laws and quicker court judgments — two major strengths in U.S. regulation. 

7.Challenges in Insider Trading 

Enforcement has many obstacles although the legal system has developed: 

• Mens Rea is impossible to prove—evidence is circumstantial 

• Slow justice dilutes FAST ACTION of SEBI 

• Informal communications, the equivalent of chatting over WhatsApp or picking up the phone, are hard to monitor 

• Fear of Whistleblower’s due to lack of protection and incentive 

Trends and Developments 

Certain recent reforms are: 

• Compulsory structured digital databases (SDD) — all UPSI disclosure must be recorded digitally 

• Trading Windows — windows during which insiders are not permitted to trade (such as the blackout period for financial results) 

• Tech-based Surveillance analytics  

8. Trends and Developments 

Certain recent reforms are: 

• Mandatory Structured Digital Databases (SDD) — all UPSI disclosure needs to be digitally recorded 

• Trading Windows — fixed windows when insiders are not allowed to trade (such as during financial results) 

• Tech-based Surveillance — SEBI now monitors behavioral patterns through AI and data analytics 

All these steps are an indication that India is seriously thinking of preventive compliance rather than reactive penalties. 

Graph: Increase in Insider Trading Cases (2017–2023) 

  Insider Trading Cases (SEBI Enforcement) 

Data source: SEBI Annual report 

Conclusion 

It’s not about unfair profit — it’s about destroying trust in our capital markets. Investors, particularly small ones, play on the assumption that they’re on an even playing ground. The instant that gets shattered, participation drops, and the system gets weakened. 

India’s legal battle against insider trading has come of age, but it can still grow — faster courts, more robust whistleblower protection, and real-time monitoring are needed. For future professionals, lawyers, or even amateur investors like me, it’s a reminder that money alone doesn’t make the markets, but integrity does. 

References & Citations 

1. SEBI (Prohibition of Insider Trading) Regulations, 2015 (Latest Amended Version): 

2. SEBI Act, 1992: 

3. Companies Act, 2013: 

4. SEBI v. Rakesh Agarwal, 2003 (Case Law): 

5. Hindustan Lever Ltd. V. SEBI (SAT Order): 

6. Reliance Industries Buyback – SEBI Order (2021): 

7. SEBI Annual Report 2023 (Statistics on Insider Trading Cases): 

8. Global Comparison – Investopedia article on Insider Trading:   

9. SEBI Site 

[1] https://www.icsi.edu/media/filer_public/26/02/260220c4-7545-4046-8aad-83504789e118/presentation_-_pit-_icsi__cs_reena_raje.pdf 

[2] https://www.indiacode.nic.in/handle/123456789/1362/simple-search?query=SEBI+%28Prohibition+of+Insider+Trading%29+Regulations%2C+2015+%28Last+amended+on+January+21%2C+2019%29&searchradio=regulation 

[3] https://www.sebi.gov.in/legal/regulations/jun-2024/securities-and-exchange-board-of-india-prohibition-of-insider-trading-regulations-2015-as-amended-on-june-26-2024-_84494.html 

[4]https://www.sebi.gov.in/sebiweb/home/HomeAction.do?doListing=yes&sid=1&ssid=3&smid=0 

[5]https://thc.nic.in/Central%20Governmental%20Regulations/Securities%20&%20Exchange%20Board%20of%20India(Prohibition%20of%20Insider%20Trading)%20Regulations,2015.pdf 

[6] https://icmai.in/upload/pd/SEBI-Insider-16012015.pdf 

      [7] https://www.foxmandal.in/News/sebi-amends-insider-trading-regulations/ 

[8] https://blog.ipleaders.in/insider-trading-under-sebi-prohibition-of-insider-trading-regulation-act/ 

[9]https://www.icsi.edu/media/portals/2/SEBI%20Insider%20Trading%20Regulations2015.pdf