Insider Trading and it’s regulation in India

Insider Trading and it’s regulation in India

In the contemporary era, investing in the stock market has become accessible to a broader spectrum of the public, thanks to smartphones and stable internet connections. Gone are the days when only the affluent could afford to participate in the stock market. Many individuals have built fortunes from scratch by investing in stocks. In essence, the stock market allows companies seeking additional investments to go public, offering equity in exchange for capital. Investors, in return, become entitled to a share of the company’s profits and have the opportunity to trade these stocks for a profit. While the stock market presents opportunities for financial growth, it also carries inherent risks, which not everyone is willing to take, particularly in countries like India, where traditional savings methods such as property and jewelry remain more prevalent and trusted. However, trust in India’s stock market has been on the rise over the past few decades, thanks to established channels like SENSEX and the NSE, along with the effective regulations enforced by the Securities and Exchange Board of India (SEBI).

Nevertheless, the shadow of unethical and illegal practices, such as insider trading, looms over the growing confidence in India’s stock market. In this research article, we will delve into the intricacies of insider trading and explore how it is regulated in India.

What Is Insider Trading?

Insider trading is the practice of trading a company’s securities by individuals who, due to their positions within the company, have access to non-public information that can significantly impact investment decisions. In simpler terms, insider trading refers to key employees or executives utilizing confidential information about their company to trade in its stocks or securities. Regulatory bodies like SEBI strongly discourage insider trading, as it undermines the principles of transparency, fairness, and equality that are fundamental to well-functioning financial markets. The unfair advantage it grants to insiders with privileged information disadvantages other shareholders who do not possess access to that information, compromising the integrity of the financial system.

Introduction of SEBI and Its Functions

SEBI, the Securities and Exchange Board of India, plays a pivotal role in regulating India’s securities market. It is a statutory organization tasked with overseeing and managing the securities market while safeguarding the interests of investors. SEBI exercises control over stock exchanges, ensuring the rights of shareholders and the security of their investments. It is SEBI’s goal to combat fraudulent activities by implementing a blend of statutory regulations and self-regulation in the industry. Additionally, SEBI fosters a competitive and professional marketplace for intermediaries. One of its most significant roles is overseeing insider trading, as it recognizes the threat it poses to India’s financial markets. To address this concern, SEBI introduced the “SEBI Prohibition of Insider Trading Regulations” in 2015. The SEBI Insider Trading Prohibition Regulations, 2015, came into effect on May 15, 2015. These regulations are structured into various chapters, each addressing different aspects related to the handling of Unpublished Price-Sensitive Information (UPSI) and insider trading.

Insider Trading and it’s regulation in India

Recent Landmark Judgment of the Supreme Court

Shruti Vora v. SEBI:

This case revolved around the dissemination of WhatsApp messages just before the release of financial statements, which closely resembled the actual financial statements of six involved companies. The challenge was to determine whether such information qualifies as UPSI and whether transmitting these messages onward would trigger insider trading regulations. The Securities Appellate Tribunal (SAT) emphasized the inability to identify the originator of the forwarded messages, questioning the absence of a direct link between the potential source of UPSI and those allegedly in possession of it. The SAT concluded that without this link, the information could not be classified as UPSI. SEBI’s appeal to the Supreme Court was dismissed, leaving several legal questions unanswered.


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