Prohibition of Insider Trading under the SEBI Act

Prohibition of Insider Trading under the SEBI Act

Prohibition of Insider Trading under the SEBI Act

In India, insider trading is basically regulated by SEBI laws which control the whole trading in the national stock exchange. The key purpose of this law is to make sure the traders that no person is gained by trading on ‘insider’ or ‘unpublished’ information. This law also aims to make the information accessible to all the participants. The enforcement of insider trading laws expands market liquidity and reduces the cost of equity. Lawson Insider Trading are found in developed countries where strong trading regulations are adopted. The key purpose of government in the enactment of insider trading laws is that all the participants in the market have the same information. insider trading laws

In India, SEBI (Insider Trading) Regulation, 1992 framed under Section 11 of the SEBI Act, 1992 intends to curb and prevent the threat of insider trading in securities. An insider is a human being who is an accepted member of an organization or a group who has special knowledge concerning his firm. The term ‘insider’ has been defined under Regulation 2(e) of SEBI (Prohibition of Insider Trading) Regulations, 1992. Mostly, the term ‘insider’ can be arranged into three broad categories, which are:

  1. Persons who are connected to the company,
  2. Persons who were connected with the company,
  3. Persons who are deemed to be connected to the company.

In order to become an insider a person has to fulfil three elements, viz;

  1. The person should be a natural person or legal entity;
  2. The person should be connected person or deemed to be connected;
  3. Acquisition of unpublished price sensitive information by virtue of such connection.
Power and Roles of SEBI in curbing Insider Trading

SEBI is established as a statutory body which works under the framework of Securities and Exchange Board of India, 1992. The power and roles of SEBI have been discussed under Section 11 of the SEBI Act,1992.

  1. The main duty of SEBI is to safeguard and protect the investors and also ensure proper trading.
  2. The main power of SEBI is that if any person has violated the provisions of this Act then SEBI sets up an enquiry committee.
  3. In order to inspect, SEBI may assign officers who look after the books and records of insider and other connected persons.
  4. Reasonable notice is to be provided by SEBI to the insider before starting the inspection.
  5. The board can also assign an auditor who may examine the books of accounts and inspect affairs of an insider.
  6. It is the duty of insider to require necessary documents to the investigating authority. However, it has neither any power to examine on oath nor does it have the same power as are vested in a civil court under the Code of Civil Procedure,1908 while trying a suit.
  7. After all the examinations and investigations, the officer has to submit the report within one month as per SEBI 1992 regulations. It also depends on the investigating officer to take a long time if he finds that the work could not be completed within the stipulated time.
  8. After the submission of the final report, SEBI has to communicate the findings to the insider and issue a show cause to the insider or other people within a duration of twenty-one days of the receipt of the communication.
  9. The person to whom the finding has been communicated has to give the reply to the notice within the duration of 21 days notice. The Expert Group (headed by Justice M.H. Kania) constituted by the SEBI in August 2004, recommended in its Report that, Section ll(2)(i) of SEBI Act be amended to empower SEBI to call for information from professionals, subject to the professional’s rights (for not parting with the privileged information in their possession).
  10. Anyone who feels aggrieved by the directions of the SEBI can appeal to the Securities Appellate Tribunal (Regulation 15).
  11. An appeal can be filed within the duration of forty-five days of the receipt of the copy of the order from the date on which appeal had been filed. SEBI (insider trading) regulations, 1992 consists of three chapters and twelve regulations.
Penalties for committing insider trading

The punishments and penalties for committing insider trading have been defined under Chapter IV-A of the SEBI Act. The penalties have been discussed below in accordance with the SEBI (Amendment) Act, 2002.

  1. Section 15G (i)– if an insider either on its own or on behalf of any person has dealt on behalf of his company any unpublished information then he may be fined with RS. 25 crores or 3 times the profit made, whichever is higher.
  2. Section 15G (ii)– if an insider has given any price sensitive information then he may be fined up to RS. 25 crores or 3 times the profit made.
  3. Section 15G (iii)– if an insider has procured any other person to deal in securities of anybody corporate on basis of published information then he may be fined up to RS. 25 crores or 3 times the profit made which is higher.
Case Laws

Hindustan Lever Limited v. SEBI (1996):

This case is mainly concerning the purchase of Eight lakh shares by HLL of BBLIL from the Unit Trust of India on March 25, 1996. This purchase was made only just two weeks prior to a public statement for a proposed merger of HLL and BBLIL. Upon investigation, it was found by SEBI that HLL was an insider at the time of purchase. Upon investigation, SEBI found that at the time of purchase of shares of BBLIL from UTI, HLL was an insider under Section 2(e) of the 1992 Regulations. HLL filed an appeal before the appellate authority asking on what basis they can be termed as an insider. But after hearing the evidence of HLL, the authority acknowledged the evidence but it was not enough to prove it. Accordingly, the appellate authority found that the SEBI investigations were right.

TISCO case (1992):

In this case, the profit of TISCO for the first half of the financial year 1992-93 was Rs. 50.22 crore in comparison to the profit of Rs. 278.16 crore for the financial year 1991-92. Before the declaration of the half-yearly results, there was intense activity in the trading of shares between October 22, 1992, and October 29, 1992. However, the SENSEX saw a decrease of 8.3% during the same period. The insiders who had the knowledge of the same had manipulated the market to make short sales. Small investors were hit badly. Due to the absenteeism of insider trading regulations in India at that time, it was impossible to investigate the case.


The substantive law in relation to insider trading has been substantially strengthened over the years. SEBI has also obtained greater enforcement powers, which it is likely to exercise, given that insider trading can cause a serious dent on market integrity. Regulations issued by SEBI, their enforcement by SEBI as well as rulings by SAT and many courts have emphasized the need for companies to take serious note of insider trading concerns. In any event, insiders and companies would be well-advised to take measures to not fall in conflict with the legal regime.