This article written by Tinku Singh Deora, studying at Jagannath University, B.A. LLB. 5th Year during his internship at LeDroit India.
This article examines India’s regulatory framework on insider trading with a focus on the SEBI (Prohibition of Insider Trading) Regulations, 2015. It outlines key compliance requirements for listed companies, intermediaries, and designated persons, including disclosure norms, Codes of Conduct, and structured digital databases. The scope also covers practical challenges such as UPSI leakage, monitoring difficulties, and technological gaps. While case laws are not analyzed in depth, the article evaluates regulatory expectations and operational issues, concluding with recommendations to strengthen compliance, governance, and coordination with SEBI.
KEYWORDS
Insider Trading, UPSI, SEBI Regulations, Compliance Framework, Market Surveillance
ABSTRACT
Insider trading poses a significant threat to market integrity, fairness, and investor confidence, making strong regulatory oversight essential. In India, the regulatory framework is primarily governed by the SEBI (Prohibition of Insider Trading) Regulations, 2015, supported by SEBI’s consolidated surveillance guidelines. This paper examines the legal architecture surrounding insider trading, including the evolution of regulatory norms, compliance obligations, and the mechanisms for monitoring and reporting trading activities.
It highlights persistent enforcement challenges such as detecting UPSI leakage, compliance fatigue, technological vulnerabilities, and increased scrutiny on designated persons and connected entities. The analysis further discusses critical compliance components such as Codes of Conduct, disclosure obligations, structured digital databases, and whistleblower systems. Finally, the study offers targeted recommendations aimed at strengthening internal controls, enhancing awareness, leveraging digital technologies, and improving collaboration with regulatory bodies to reinforce transparency and promote a resilient market ecosystem.
- INTRODUCTION
Insider trading refers to the dealing in securities of a listed company by individuals who possess unpublished price-sensitive information (UPSI), giving them an undue advantage over ordinary investors. Such conduct undermines trust in market fairness and transparency, making stringent regulation essential. In India, insider trading is primarily governed by the Securities and Exchange Board of India (SEBI) through the SEBI (Prohibition of Insider Trading) Regulations, 2015, supported by SEBI’s Master Circular on Surveillance of the Securities Market dated July 9, 2024, which consolidates applicable guidelines.
As a central component of the broader compliance framework and market surveillance ecosystem, insider-trading controls are crucial for safeguarding investor interests. This article presents an integrated overview of the regulatory structure governing insider trading, analyses compliance obligations, and examines persistent issues in enforcement within the Indian securities market.
2. LEGAL FRAMEWORK GOVERNING INSIDER TRADING IN INDIA
2.1 Historical Evolution
The regulation of insider trading in India has progressed with the growth of securities markets and the need for investor protection. Although SEBI was established in 1988, the granting of statutory status in 1992 marked a significant shift toward formal regulatory intervention. The first set of dedicated insider trading rules appeared in the SEBI (Prohibition of Insider Trading) Regulations, 1992. To enhance the framework, SEBI formed the N.K. Sodhi Committee in 2013, whose recommendations shaped the SEBI (Prohibition of Insider Trading) Regulations, 2015. These regulations have since been amended several times—most recently in 2018, 2019, 2021, 2022, 2023, and 2024—to address new challenges, strengthen compliance, and improve market surveillance.
2.2 SEBI (Prohibition of Insider Trading) Regulations, 2015
The PIT Regulations apply to anyone who has access to or handles UPSI, including directors, employees, auditors, consultants, intermediaries, fiduciaries, and other connected persons. The framework restricts communication and misuse of UPSI, imposes obligations for fair disclosure, and mandates strict internal controls. Key features of the regulations include prohibitions on sharing or procuring UPSI; a ban on trading while in possession of UPSI; the option for insiders to adopt predetermined trading plans; compulsory codes for fair disclosure and conduct; mandatory disclosures by insiders; and the maintenance of structured digital databases to trace the flow of UPSI.
Penal Provisions under SEBI Act for Insider Trading
- Section 15G – Penalty for insider trading (monetary penalty based on profit made, or up to ₹25 crore).
- Section 15HB – Penalty for contravention when no separate penalty is provided.
- Next Section 11, 11B & 11D – SEBI’s powers to investigate, issue directions, and pass cease-and-desist orders against insiders involved in misuse of UPSI.
3. COMPLIANCE REQUIREMENTS
3.1 Formulation of Code of Conduct
Every listed company, along with intermediaries and fiduciaries, must develop a Code of Conduct (CoC) to regulate, monitor, and report trading by designated persons (DPs) and their immediate relatives. Entities listed on stock exchanges must adopt minimum standards from Schedule B for trading in their own securities and Schedule C for trading in other securities. DPs typically include employees with access to UPSI, employees of material subsidiaries, promoters and promoter group members, senior management up to two levels below the CEO, and support staff such as IT or secretarial personnel.
The CoC must set out reporting obligations, Chinese Wall procedures with guidelines for crossing information barriers, trading window closures during UPSI periods, restrictions during quarterly financial reporting cycles, pre-clearance requirements for trades beyond specified thresholds, contra-trade prohibitions for at least six months, sanctions for violations, annual disclosures relating to PAN and contact details, and awareness initiatives to sensitise personnel. Companies must additionally publish a fair disclosure policy on their website.
3.2 Disclosure Requirements
Initial disclosures require newly appointed KMPs, directors, or persons becoming promoters or part of the promoter group to disclose their holdings within seven days. Continual disclosures obligate promoters, promoter group members, DPs, and directors to report trades exceeding INR 10 lakh in a calendar quarter within two trading days, and the company must intimate stock exchanges within two days of receiving such disclosures. Companies may also seek disclosures from other connected persons. SEBI’s System-Driven Disclosure mechanism automates reporting for many transactions, eliminating the need for manual filings where SDD is operational.
3.3 Reporting Requirements
Listed companies, intermediaries, and fiduciaries must promptly report to stock exchanges any violations of the Code of Conduct or PIT Regulations, ensuring regulatory oversight and accountability.
3.4 Compliance Officer
A compliance officer—usually a senior, financially literate official—must be appointed to ensure adherence to the PIT Regulations. Their responsibilities include monitoring insider trades, managing pre-clearance processes, maintaining documentation, handling trading plans, overseeing the preservation of UPSI, and conducting training programmes for insiders.
3.5 Whistleblower Policy
Companies must implement an effective whistleblower policy to encourage employees to report leaks or misuse of UPSI without fear of retaliation, supporting stronger internal surveillance.
3.6 Structured Digital Database
All entities required to handle UPSI must maintain a secure, tamper-proof internal Structured Digital Database (SDD). The database must contain details of the nature of UPSI shared, along with the names and PAN of persons sharing and receiving the information. The SDD must include time-stamping, audit trails, and internal controls, and cannot be outsourced to external service providers.
4. ISSUES AND CHALLENGES IN ENFORCING INSIDER TRADING NORMS
4.1 Detection and Prosecution of Insider Trading
Enforcement remains complex due to the fluid and evolving nature of UPSI, which may not be easily identifiable at the time of communication; cross-border transactions conducted through foreign entities; and the growing use of encrypted platforms and privacy-focused communication systems that hinder evidence collection. Regulators also bear the burden of proving that a trade was based on UPSI, a task that often requires extensive investigation and corroborative material.
4.2 Compliance Fatigue
Entities often struggle to cope with extensive regulatory obligations, which include constant record-keeping, ongoing monitoring of DPs and their relatives, and ensuring the accuracy of SDDs. The broad definition of “connected persons” increases monitoring complexity. Trading plans—intended to facilitate legitimate trades—are seldom used due to rigid conditions and uncertainties around operation. These factors contribute to compliance fatigue across the market ecosystem.
4.3 Heightened Scrutiny on DPs and Senior Executives
SEBI is paying closer attention to the trading activity of designated persons and senior leadership, particularly where contra trades or restricted-period trades are involved. As required under Schedule B and Regulation 9(1) of the PIT Regulations, such individuals must seek pre-clearance for high-value transactions. Violations have resulted in strict measures such as profit disgorgement and penalties.
4.4 Increased Action Against Trades by Immediate Relatives and Connected Entities
The regulatory spotlight also extends to family members and connected persons. SEBI emphasises compliance with blackout period restrictions, especially when relatives are likely to have access to UPSI. Several enforcement cases have involved family members trading ahead of financial announcements, leading to penalties and trading restrictions.
4.5 Proxy Trading Through Third Parties
SEBI uses advanced analytics to uncover indirect forms of insider trading carried out through intermediaries, shell entities, or acquaintances. In notable instances, insiders shared UPSI with third parties who executed trades on their behalf, resulting in bans and financial consequences.
4.6 Inadequate Pre-Clearance Mechanisms
Weak or poorly implemented pre-clearance frameworks expose organisations to regulatory risks. SEBI expects listed companies to maintain robust systems for evaluating trades that exceed prescribed limits, as outlined under Schedule B and Regulation 9(1). Inefficient systems often attract regulatory attention and can damage corporate credibility.
4.7 Non-Compliance with Trading Window Norms
Trading windows must be closed during periods when insiders could possess UPSI. SEBI continues to penalise companies and individuals who execute trades during such restricted periods, citing the mandatory obligations under Schedule B.
4.8 Delayed Reporting of Insider Trades
Timely disclosure of insider trades is fundamental to regulatory transparency. SEBI has initiated actions against companies and individuals who fail to report transactions promptly or omit disclosures altogether.
4.9 Handling of UPSI
SEBI has adopted a strict stance on the improper sharing or leakage of UPSI, especially through informal channels like private chats or social media. Several insiders and analysts have faced penalties for circulating confidential information prior to public disclosures.
4.10 Unusual Trading Patterns Before Announcements
Trades executed shortly before major corporate announcements attract immediate attention. Using IMSS, SEBI has been able to identify coordinated activities across linked or connected accounts and take action accordingly.
4.11 Consent Orders and Settlements
SEBI continues to provide the option of settling insider-trading-related cases through consent orders, allowing entities to resolve matters by paying settlement amounts without admitting guilt. This facilitates quicker resolutions while ensuring regulatory compliance.
5. NOTABLE RECENT INSIDER TRADING CASES
5.1 Profit Motive: SEBI v. Abhijit Rajan (2022)
The Supreme Court observed that although actual gain or loss is irrelevant, trading that is evidently against economic logic cannot easily be linked to misuse of UPSI, and intent to profit unlawfully remains a relevant factor.
5.2 Evidentiary Burden: Balram Garg v. SEBI (2022)
The Court held that insider trading must be proven through concrete evidence such as communications or witness testimony, and that mere proximity or association cannot justify presuming the flow of UPSI. A complete chain of evidence is required to establish guilt beyond reasonable doubt.
5.3 Technology: Shruti Vora v. SEBI (2021)
The SAT ruled that forwarding a WhatsApp message “as received” does not automatically classify it as UPSI unless a clear link is established between the information shared and the company’s unpublished financial results.
5.4 Bona Fide Trade: Rakesh Agrawal v. SEBI (2004)
The SAT clarified that the regulations are intended to curb fraudulent misuse of UPSI, not hinder legitimate corporate transactions. Liability arises only when UPSI is used for unfair advantage or personal gain.
6. RECOMMENDATIONS FOR ENHANCING COMPLIANCE AND ENFORCEMENT
6.1 Internal Controls
Companies must implement strong internal mechanisms such as information barriers between departments, strict access controls, encrypted communication channels, and continuous cybersecurity monitoring. These measures help prevent leakage of UPSI and ensure that only authorised individuals can view or handle sensitive information.
6.2 Enhancing Awareness and Training
Periodic and well-structured training programmes are essential for ensuring that employees, directors, and intermediaries fully understand insider-trading rules. These sessions reduce unintentional violations by educating insiders on how to identify UPSI, how to handle it responsibly, and the consequences of non-compliance.
6.3 Robust Structured Digital Database (SDD)
Entities should invest in advanced, automated systems capable of maintaining accurate, secure, and tamper-proof records of all persons who receive or access UPSI. A well-maintained SDD ensures traceability, supports internal investigations, and demonstrates compliance during SEBI audits.
6.4 Collaborating with Regulatory Bodies
Companies must actively communicate with SEBI by seeking informal guidance, participating in regulatory discussions, and promptly reporting suspicious trades or potential breaches. This collaborative approach not only minimizes compliance risks but also helps build trust and transparency in the market ecosystem.
7. CONCLUSION
Ensuring a fair and transparent securities market requires strict regulation of insider trading, as it directly impacts investor confidence. While SEBI’s PIT Regulations offer a strong and detailed framework, enforcement challenges continue due to evolving technology, complex evidence requirements, and increasing compliance burdens. Companies play a crucial role in strengthening the system through enhanced vigilance, effective internal controls, employee sensitisation, advanced technological tools, and consistent cooperation with regulators. Together, these efforts help uphold market fairness and protect investor trust.
