A Comprehensive Guide to Insider TradingMay 4, 2023
The stock market is an important component of the Indian economy. Companies can enter the exchange to raise funds, improve liquidity and obtain a bigger and more diverse investor pool. But the stock market is riddled with issues for a company. The unpredictability of the demand and supply arc is a big one, but arguably the biggest concern is insider trading.
Insider trading happens when an individual uses undisclosed or non-public trade-related information and trades in the company’s stocks. The extra knowledge about the company helps this individual for or against the stock and earn a profit at the company’s expense. The activity is generally considered illegal, but it also depends on when the trade was made and the insider trading regulations of the country where the transaction was made.
SEBI’s role in the prohibition of Insider trading
In India’s stock exchange, the Securities and Exchange Board of India (SEBI for short) regulates the stock market. Thus, SEBI has issued provisions regarding the topic of insider trading. According to Regulation 4 of the SEBI (Insider Trading) Regulations, 2015, an individual cannot participate in stock trading of securities listed or proposed to be listed without prior knowledge of price-sensitive information.
The only exception to this rule is Regulation 5. An individual can prove against insider trading by quoting Regulation 5, which states that trading as per a trading plan can be started after 6 months from the plan’s public disclosure date. But this rule has some conditions;
- The trading plan should not be for less than a year.
- A second trading plan can only be started if the first trading plan ends.
- The trading plan should set out either the value of the trades or the number of securities, along with the nature of the trade and the intervals at or dates on which such exchanges shall be effective.
- Trading plans should not be used for trading in securities for market abuse.
If the individual doesn’t fall under the shade of Regulation 5, they might face serious consequences for their actions. The punishment for insider trading, as stated in Section 15, Chapter IV-A of the SEBI Act, may incur a fine of rs 25 crore or 3x the profit, whichever is higher.
Insider trading is an unfair practice. It puts the market at a disadvantage since the individual works with special knowledge, giving them an edge over the competition. The company also needs to ensure they invest in robust IT security measures; since hacking and leaks are the second biggest ways that lead to insider trading, the first one is the distribution of knowledge among employees.