What is insider trading and is it legal in India?
Trading in a company's securities while possessing non-public, potentially market-moving information is known as "insider trading". Trading on such information is illegal because it hasn't been made public yet, and the unpublished price-sensitive information (UPSI) about the company's Board of Directors' choices is unknown to the broader public. Insider trading refers to making an unauthorised profit from such exclusive information. The term "price-sensitive" indicates that the data can affect the market value of a company's stock.
Who is an insider?
Insiders are people with access to material, non-public knowledge about the firm that could impact its stock price. They exploit this information to take advantage of general investors who are not privy to this exclusive information, and make massive profits before the news reaches the general public. Partners, directors, officers, and employees of a company and related companies, persons holding an official relationship with a company, professional, or business (such as auditors, consultants, bankers, and brokers), stockholders, government officials, and stock exchange employees are all examples of people who could be considered "insiders". When an insider helps an outsider by sharing the exclusive information, using which the latter reaps huge profits, and share it with the insider, it is said to be a case of insider trading. In this case, the insider is able to commit financial crime without being exposed. To avoid such situations, it is crucial to highlight the gaps in the system.
Penalty for insider trading
By definition, insider trading happens when an insider:
• Trades in securities of a public company based on unpublished price-sensitive information
• Shares such information with others, except as necessary, in the ordinary course of business or as required by law
• Counsels or procures any person to trade in the securities of a public company based on unpublished price-sensitive information. They may face penalties under Section 15G of the Securities and Exchange Board of India Act, 1992.
Insider trading in the stock market is a punishable crime. Under Indian law, an individual who engages in insider trading may be subject to severe penalties, including prison time.
Q. Why it's wrong to engage in insider trading
Since an insider can acquire an unfair advantage by trading on a piece of unpublished price-sensitive information, insider trading is unethical since it goes against the interests of many investors and other stakeholders.
Q. When does insider trading affect people?
As well as harming shareholders and the stock market, insider trading harms the public. Furthermore, such incidents harm a company's reputation and the market as a whole.
Q. Can I get caught in insider trading?
Market authorities, such as SEBI, maintain a close check on trading activity to uncover insider traders, especially around significant events. They utilise software scanners, AI, and NLP techniques to spot insider trading.
Bulk and block deals refer to transactions that include a significant number of shares traded on the stock exchanges in a single block.
Pump-and-dump schemes involve an individual or group of investors advertising a stock they own to drive up its price, so they can benefit from the price rise by dumping the shares.