Prof. Anand S
It is trading of shares by an insider based on unpublished price-sensitive information (UPSI). Trading involves buying or selling shares of a listed company using information that can materially affect the stock price, but has not been made public yet. The operative words are 'insider' and 'UPSI'.
<aside> 👉🏽 SEBI regulations define an insider as someone who is a connected person or has access to UPSI. A connected person can be anyone who during the six months preceding the insider trade has been associated with the company in some way. A company director or employee or their close relatives, or a legal counsel or banker to the company or even an official of the stock exchanges or trustees or employees of an asset management company who interacted with the company is a connected person.
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It includes but is not restricted to information relating to a company's quarterly results, merger and acquisition deals, major capacity expansion or shutdown plans or any such significant activities that have not been disseminated to the public at large. When insiders use the UPSI they have to conduct trades, the regulator pulls them up and penalizes them.
A company manager informs his father about an impending business deal who passes on this information to his friends who buy the company's shares. The manager, his father and his friends can be booked for violation of insider trading norms. In India, SEBI regulates insider trades under its 2015 Insider Trading Regulations. It can impose fines and debar individuals and entities from trading in the market if they are found guilty of violation of these rules.
<aside> 👉🏽 While trading on UPSI is illegal, all insider trading is not barred. Senior company personnel will always possess information yet periodically trade in shares for their personal needs. As long as such trades are disclosed to the stock exchanges as per SEBI rules, it isn't illegal. The company must notify the exchanges within a few days about the trading details of the promoter or a director if securities worth more than ₹10 lakh are traded
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Insider trading hurts the integrity of capital markets. In stock markets, equal access to information is the bedrock for fair trading. Trading on UPSI gives insiders an unfair advantage over regular investors. Retail investors who spend time and effort in selecting stocks for investing may end up on the losing end of a trade. If they suspect insider trading, they lose faith in the fairness of the system.