What is Insider Trading

Insider trading meaning is a practice that involves the buying or selling of shares in a publicly traded company based on non-public or material information. This information can significantly impact investment decisions. Also, insiders can be anyone working in the company such as corporate executives, directors, or government officials. Insiders use this privileged information to earn significant returns or avoid losses.

However, the Securities and Exchange Board of India (SEBI) regulates insider trading. By monitoring share market activity, the government tries to stop and detect rigged markets. Moreover, there are penalties for insider dealing in India under SEBI laws. In this article, we'll explore what is insider trading, who is an insider, and some insider trading examples in India.

Types of Insider Trading

The term "insider trading" refers to a variety of unethical and frequently criminal actions involving the trading of securities using material, non-public information. These activities fall into a number of categories, each with, special traits and consequences of its own. The following are a few basic types of insider trading:

1. Classic Insider Trading

The purchase or sale of a firm's stocks by insiders (such as officers, directors, or employees), based on significant non-public knowledge about the company is known as classic insider trading. 

For instance, the business executive develops inside information about its planned merger before the release of the same and then uses such information to decide when to buy or sell his shares.

2. Trading During Blackout Periods

Companies may have blackout periods when selected people are not allowed to trade in the security of the company. Insider trading occurs when transactions take place during these prohibited times.

Example: When a publicly traded company has announced a blackout because of upcoming financial results, an employee of the company sells shares at that time.

3. Front-Running

When an insider, such as a broker or financial advisor, trades ahead of major orders on behalf of clients or the company, they are engaging in front-running, which is the practice of profiting from anticipated price movement.

xample: Before fulfilling the client's order, a broker purchases the same stock for their account after learning that a sizable institutional client intends to acquire a significant quantity of the stock.

4. Tipper-Tippee Trading

This kind of insider trading happens when someone (the tipper), gives others (the tippees) access to private information, which they, subsequently exploit to trade stocks. It is possible to hold tippers and tippees accountable.

Example: An accessible earnings report is leaked to a friend by a company official, and the friend uses the inside information to buy or sell stock.

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Who is an Insider?

• An insider is a person who has unique access to material, confidential knowledge about the business. It is because of their position or affiliation with the company. Insiders are typically top-level executives, directors, officials, and employees. 
• They have access to insider information which may critically affect the stock price of the company. Insiders are those who can enter into a financial decision based on their insider knowledge. 
• It is important to keep in mind that trading based on inside information is strictly prohibited by law.  
• Insiders are legally required to act in the best interests of the company and its shareholders.

How Does SEBI Regulate Insider Trading?

The following restrictions apply to insider trading. 

1. Insiders are prohibited from communicating, supplying, or providing unpublished price-sensitive information (UPSI) regarding publicly traded companies or securities to anyone. 
2. By these regulations, one cannot purchase a UPSI from an insider of a publicly traded company or sell securities to another insider. 
3. An insider is restricted/prohibited from dealing in securities listed on a recognized exchange when he has UPSI. 

What is the Consequence of Insider Trading?

The following are the consequences of insider trading. 

1. Whenever insiders gain access to a person's information, they take unfair advantage of them. 
2. This creates a conflict of interest, as the insider's actions prioritize their own interests over those of the company. 
3. Moreover, insider trading undermines the integrity of the market and may deter potential investors from participating. 

Real-life Examples of Insider Trading in India

Here are a few examples of real-world examples of insider trading in India.  

• Pia and Mehul Johnson Case: Indiabulls Venture, former non-executive director Pia Johnson, and her husband Mehul Johnson were fined by SEBI for exchanging the company's shares using USPI (Unpublished Price Sensitive Information). 
• Rakesh Jhunjhunwala Case: Mr. Rakesh Jhunjhunwala, a billionaire investor, was summoned by SEBI for insider dealings at Aptech. In addition, SEBI investigated the role played by a member of Jhunjhunwala's family. 
• Balram Garg Case: In December 2019, SEBI issued a notice to PC Jeweller's Managing Director, Mr. Balram Garg, regarding alleged Insider dealing. The government agency also confiscated about ₹8 crore. 
• Reliance Industries: RIL was banned from the derivatives sector and fined by the Securities and Exchange Board of India. The exchange regulator accused the company of skirting its legally permissible trading limits and lowering its stock price in cash to make profits.

Conclusion
Insider trading is a severe offence that compromises honesty and fairness in financial markets. Buying or selling shares based on substantial non-public information is illegal. Furthermore, investing decisions are greatly impacted by this significant non-public information. An insider can be a director, government official, or business executive who uses proprietary information to increase profits. Real-world examples of insider trading are also available in India. Insider dealing results in penalties, investigations, and legal action for numerous individuals. Laws and penalties have been implemented, by regulatory bodies like SEBI to curb this illicit behaviour and protect market integrity, even on platforms like a stock market app.