Insider trading, the unlawful use of private information for financial advantage, hurts international markets. By giving an unfair advantage, this behaviour erodes investor trust, distorts prices, and compromises market integrity. Its intricacies are examined in this analysis, including issues with prevention, regulation, and repercussions both domestically and abroad.

Insider trading is the practice of making profitable trades utilizing unreported material information (UPSI), which would have a substantial impact on a company's stock price if it were made public. This UPSI includes executive changes, mergers, and unpublished financial data, among other things. The term "insiders" refers to both "tippees" who receive knowledge from insiders and "insiders" who have access to it, such as auditors, key shareholders, and employees of the company.

In essence, insider trading is possible for anyone, regardless of position, who has access to significant, confidential information. This includes employing sophisticated instruments to conceal the activity as well as straight trading. Recognizing the negative consequences, India created the Securities and Exchange Board of India (SEBI) to control securities trading and preserve market integrity. It did this by implementing global best practices while taking into consideration its own situation.

Origin of Insider Trading:

Insider trading, the activity of trading securities based on substantial, non-public knowledge, has been around for as long as stock markets. Examples of this type of activity were visible in the United States as early as the late 1700s. At first, this behaviour was frequently viewed as merely taking advantage of favourable connections or insider knowledge, with little legal significance or repercussion.

However, public opinion was drastically changed by the pervasive abuse and deceptive insider trading that occurred prior to the catastrophic 1929 stock market crash. The first significant regulatory framework was created as a result of the public outcry that followed, which called for action. A turning point was reached with the Securities Act of 1933 and the Securities Exchange Act of 1934, which established rules intended to increase openness and specifically address securities market fraud.

This historic legislation served as the cornerstone for modern insider trading regulations. In addition to laying the foundation for stricter enforcement and sanctions, they established the premise that undue advantages obtained from access to non-public information were undesirable. Regulations designed to preserve just and moral behaviour in international financial markets are still being shaped by the 1929 crisis.

Bar Chart showing the number of insider trading investigations completed by SEBI from FY 2010–11 to FY 2023–24:

The bar chart "Number of Insider Trading Investigations by SEBI (FY 2010–11 to FY 2023–24)" shows the sharp rise in insider trading investigations that the Securities and Exchange Board of India (SEBI) experienced between FY 2010–11 and FY 2023–24.

• After FY 2018–19, the number of investigations — which had previously ranged from 10 to 15 — showed steady annual growth.
• Between FY 2020–21 and FY 2023–24, there was the biggest growth, with over 130 probes in the last year.
• Improved monitoring, a greater focus on market integrity, and increased market complexity and trade volumes contributed to this trend.
• These factors have raised both the risk and the detection rate of insider trading.

Penalties Imposed by SEBI for Insider Trading:

• In August 2024, Anil Ambani and 24 others received a ₹250 million fine and a five-year market ban for fund diversion from Reliance Home Finance Ltd. (Reuters).
• In June 2024, Infosys and its CEO, Salil Parekh, settled insider trading charges by paying ₹2.5 million for insufficient preventative controls (Reuters).
• In September 2023, SEBI imposed a total of ₹6.5 million in fines on five individuals involved in insider trading related to the ABC Bearings Ltd. and Timken India Ltd. merger (Business News India).

Key Developments in Indian Insider Trading Regulations:

• India's efforts began in 1992 with SEBI regulations based on the Abid Hussain Committee's recommendations, defining key terms and aiming to prevent unfair gains using non-public information.
• The 2002 amendments expanded definitions, increased penalties, and clarified price-sensitive information.
• The 2015 regulations refined the definition of UPSI, broadened the scope of "insider," introduced trading plans, increased disclosures, and boosted enforcement.
• Amendments in 2018 and 2019 focused on:
  • Handling of UPSI
  • Whistleblower protection
  • Accountability and digital record-keeping
  • Defining "legitimate purposes"
• Recent amendments in 2024 and 2025:
  • Broadened definitions of "connected person" and "relative"
  • Expanded the scope of UPSI
  • Introduced greater flexibility for entries in the structured digital database

These ongoing refinements demonstrate India's commitment to adapting its regulatory framework to combat insider trading effectively.

Key Aspects of India's Current Insider Trading Regulations:

Indian law strictly forbids insider trading. Anyone possessing Unpublished Price Sensitive Information (UPSI) is explicitly banned from trading on it. The distribution of UPSI is severely restricted, permitted only for justifiable business reasons, job responsibilities, or legal obligations. Companies must meticulously define and implement this "legitimate purpose" exception to avoid misuse.

Mandatory disclosures are central to India's regulatory framework. Insiders and connected persons must report their trading activities to both the company and SEBI. Companies must also implement internal codes of conduct to manage UPSI and prevent insider trading. This timely and accurate disclosure is essential for effective monitoring, placing compliance responsibilities on individuals and their associated companies.

Companies commonly use trading window restrictions, closing them before major announcements like financial results, to prevent informed trading. Recent amendments suggest a move toward more flexible rules for specific types of UPSI.

India imposes strict penalties for insider trading. Fines can amount to ₹25 crore or three times the illicit profits, whichever is greater. Furthermore, convictions result in a possible ten-year prison sentence under the SEBI Act and the Companies Act, 2013, along with forfeiture of all illegally obtained gains. The severity of these financial and penal consequences demonstrates India's strong opposition to insider trading, serving as a significant deterrent.

Globally, preventing insider trading is paramount for maintaining market integrity and investor confidence; while enforcement specifics differ, major financial centres employ strong systems to detect and prosecute this offence.

Key Regulatory Approaches around the World:
The SEC in the US, under the Securities Exchange Act and subsequent laws, aggressively combats insider trading by defining "insider" and "material non-public information," prosecuting violations with significant penalties, and incentivizing whistleblowers. The "tipper-tippee" doctrine and Rule 10b-5 expand liability and require proof of intent to deceive and financial loss. Legislation like the Insider Trading Sanctions Act of 1984 and the Insider Trading and Securities Fraud Enforcement Act of 1988 increased fines and rewards.

The EU's Market Abuse Regulation (MAR) harmonizes rules against market abuse across member states. Similarly, Australia's Corporations Act 2001 prohibits insider trading, with ASIC actively enforcing these regulations. Numerous other countries, including Canada, the UK, Hong Kong, and Singapore, have robust frameworks to combat insider trading, creating a global network focused on market fairness.

Global Principles and Objectives

• Globally, the fight against insider trading shares core principles despite differing legal frameworks.
• Trading on undisclosed, non-public information (UPSI) is universally prohibited to ensure market fairness and investor protection.
• The definition of "insider" is broad, covering anyone exploiting UPSI, not just company insiders.
• Stiff penalties, including fines and imprisonment, deter insider trading.
• Market surveillance identifies suspicious activity and prosecutes offenders to maintain market integrity and transparency.

Detrimental Effects of Insider Trading

• Damages market integrity and fairness by giving unfair advantage.
• Erodes investor trust and reduces market participation.
• Leads to misallocation of capital due to distorted prices.
• Hinders fair price discovery and increases market volatility.
• Harms corporate reputations and leadership credibility.
• Exacerbates inequality and undermines efficient markets.

Challenges in Combating Insider Trading

• Difficulty in proving use of material non-public information (UPSI).
• Circumstantial evidence often insufficient to establish guilt.
• Use of nominee accounts and coded communication obscures detection.
• Globalization requires international collaboration hindered by differing laws.
• Resource constraints limit thorough investigation.
• Ambiguity in defining "material" and "non-public" information leads to inconsistent rulings.
• Fear of retaliation discourages whistleblowing.
• Technology advancements demand continuous regulatory innovation.

Definitions

• Insider Trading: Using confidential, non-public information (UPSI) to gain unfair profit in the stock market.
• SEBI (India): Continuously updates regulations since 1992 to broaden definitions, increase penalties, strengthen enforcement, manage UPSI, and protect whistleblowers.
• Penalties (India): SEBI Act of 1992 and Companies Act impose fines (up to ₹25 crore or 3x profit) and imprisonment (up to 10 years).
• US SEC: Enforces laws via the Securities Exchange Act of 1934 with civil and criminal penalties.
• EU MAR: Market Abuse Regulation (MAR) ensures transparency and deters insider trading, unlawful disclosures, and manipulation.
• Australia (ASIC): Corporations Act 2001 prohibits insider trading; penalties include imprisonment (up to 10 years) and heavy fines.
• Global Principles: Prohibit trading on UPSI, broadly define "insider," and uphold market integrity with strict penalties.
• Challenges: Detection and prosecution hindered by UPSI proof issues, market complexities, concealment methods, legal ambiguities, and international collaboration gaps.

Drawbacks of Anti-Insider Trading Laws

• Difficult to prove misuse of non-public information.
• Limited enforcement resources.
• Vague definitions cause legal uncertainty.
• Potential for selective enforcement benefiting powerful individuals.

A Comparison of Insider Trading Laws: India vs. the USA

• The US enforces laws under the 1934 Securities Exchange Act with robust SEC enforcement, strong case law, and high-profile convictions.
• India follows the 2015 SEBI (Prohibition of Insider Trading) Regulations but faces enforcement delays and low conviction rates.
• The US adopts broader definitions including "misappropriation" and "tippee" theories.
• India uses a rules-based, stricter approach with less regulatory flexibility.

Strengthening Insider Trading Laws in India

• Enhance surveillance with advanced technology.
• Expedite SEBI adjudication processes and enhance autonomy.
• Broaden definitions of insider and UPSI.
• Promote corporate compliance and protect whistleblowers.
• Train regulators and ensure transparent enforcement.

Conclusion:
Insider trading globally erodes the fairness, efficiency, and integrity of financial markets, prompting countries and international organizations to develop robust regulatory frameworks. While legal definitions and prohibitions exist, detection and prosecution remain difficult. Addressing this requires enhanced monitoring, increased cooperation between international regulatory bodies, stronger whistleblower protections, and vigorous enforcement of existing laws.

These actions are crucial for rebuilding investor trust and fostering transparent, healthy markets. Despite extensive regulations and evolving legal approaches, insider trading persists, posing a significant challenge to the fairness and efficiency of global securities markets. Combating this requires a multi-pronged approach focused on improved surveillance, international collaboration, whistleblower protection, and aggressive enforcement to ultimately safeguard investor confidence and promote fair, transparent financial markets worldwide.

Written By:

• Md. Imran Wahab, IPS, Inspector General of Police, West Bengal, India, and
• Farzana Olakkodu Ismail, Senior Lecturer at British University College, Ajman, UAE.