Regulating Insider Trading in India: Emerging Trends & Challenges

The article breaks down the idea of insider trading and explains why it should be regulated and made illegal, so in detail we will know about Regulating Insider Trading in India. After making many changes to the laws from 1992, SEBI passed a new rule in 2015 that made insider trade illegal. Recommendations have been made to improve India’s legal framework that guards against insider trading. This will be done by streamlining and strengthening the current laws and filling in any gaps.

What is Insider Trading?

Insider trading meaning involves trading company securities using confidential price-sensitive information. Unpublished price-sensitive information relating to firm board actions is not public. Insider trading involves misappropriating such information. Price-sensitive information affects a company’s stock price.

“Insider trading is an act of buying, selling, subscribing, or agreeing to subscribe in the securities of a company, directly or indirectly, by key management personnel or the director of the company who is anticipated to have access to Unpublished Price Sensitive Information with reference to securities of the company.

Who is an insider?

Company insiders have price-sensitive information. They profit from such information before it’s public. Partners, directors, officers, and employees of a company and related companies, persons with an official relationship with a company, professional or business (e.g., auditors, consultants, bankers, and brokers), stockholders, government officials, and stock exchange employees are “insiders.” The board and employees can use price-sensitive information immediately. An insider may leak information to avoid blame. The insider may commit further crimes unnoticed.

Meaning of unpublished price-sensitive information

If information is tied to company choices, is not publicly available, and has the potential to alter market prices, it is said to be price sensitive. Financial statements, dividend announcements, public rights issues, merger or amalgamation information, stock buybacks, information on de-mergers, revised business policies, and changes to operational procedures can all be considered unpublished price-sensitive information.

What are the effects of Insider Trading?

Now as we know what is insider trading, we must have a look at the effects of Insider trading too. The effects of Insider trading are:

• Decreased public confidence: Insider trading reduces public confidence in equity markets, which reduces their liquidity. This may discourage a lot of potential investors from entering the market.
• Increased transaction costs: Insider trading reduces investor profits by negatively affecting market liquidity and driving up transaction costs.
• Injustice: Insider trading violates trust and fiduciary obligation and has significant legal repercussions. The victims are frequently regular investors who lack access to confidential information.
• Reduced market efficiency: Opponents of insider trading contend that by permitting a small number of individuals to trade using significant non-public information, insider trading reduces the effectiveness of the markets.
• Diversion of wealth: Systematic wealth transfer from outsiders to insiders could lower share prices and increase the cost of capital for corporations.

Regulatory authority for regulating Insider Trading in India

As there is a need for regulating insider trading in India so SEBI regulates insider trading. SEBI protects India’s securities market and monitors insider trading. The Company Law Board (CLB), Reserve Bank of India, SEBI, and stock exchanges have worked to regulate and stimulate market investment in India. SEBI regulates insider trading and other market manipulations. The SEBI (Insider Trading) Regulation, 1992, was revised in 2018.

Emerging trends & challenges

Indian securities markets have long dealt with insider trading. Despite insider trading regulations, some insiders have committed crimes for personal gain. As India’s securities market grows, insider trading trends and challenges must be handled. Below are the new trends and upcoming challenges in insider trading that need to be addressed:

• Technology is being used to detect and deter insider trading. Artificial intelligence and machine learning allow companies to monitor and analyse trading patterns to spot questionable behaviour. This trend is likely to continue as companies invest in compliance technology.
• Globalization of the securities market creates additional insider trading challenges. As more corporations go global, the securities market is becoming more integrated, making international insider trading regulation harder. Regulators must collaborate to regulate insider trading and share information internationally.
• Social media growth complicates insider trading identification and prevention. Investors increasingly use Twitter and YouTube for information, but insiders might publish sensitive and confidential information on these networks. Regulators must develop new methods for monitoring social media for insider trading.
• A responsible investment development affects insider trading regulation. Responsible investors consider governance, social, and environmental issues. As investors comprehend transparency and disclosure, as a responsible investing prioritizes them. This trend may increase business vigilance and insider trading compliance.
• Recent high-profile cases of insider trading in India include Rakesh Agrawal v. SEBI (SAT), Equivalent citations: (2004) Comply 193 SAT, 2004 49 SCL 351 SAT dated 03.11.2003 and Shruti Vora v. SEBI (SAT), Appeal (L) No. 28 of 2020 dated 12.02.2020. These occurrences show that strong regulations are needed to stop insider trading and protect the securities industry.

Actions taken by SEBI to prevent Insider Trading

SEBI (Securities and Exchange Board of India) has implemented regulations to track insider trading in India. These SEBI regulations include:

• The SEBI (Prohibition of Insider Trading) (Amendment) legislation 2018, which reinforced and broadened the legislation, was one of several suggested modifications to address the insider trading issues by SEBI. The revisions required trading plan disclosure, UPSI access database upkeep, and insider trading education for workers.
• the SEBI (Prohibition of Insider Trading) Regulations, 2015, which underwent its most recent revision in August 2021. The rules seek to safeguard investors’ interests and establish a framework for avoiding insider trading.
• To control, monitor, and report insider trading, there is also the Code of Conduct for Prevention of Insider Trading.
• The code also forbids insiders from sharing or granting access to any person any unpublished price-sensitive information about the company or its securities.
• The SEBI can initiate action against an individual for insider trading if their employer has already penalized them.
• Insider Trading Database: SEBI maintains a centralized online database known as the “SCORES” (SEBI Complaints Redress System) platform. This database provides public access to information on complaints, investigations, and enforcement actions related to insider trading which helps to track insider trading in India.

More about SEBI Regulations for regulating Insider Trading in India

Indian law prohibits insider trading There are various insider trading regulations implemented by SEBI. The SEBI (Prohibition of Insider Trading) Regulations, 2015 govern Insider Trading in India. The Securities Exchange Board of India’s SEBI (Prohibition of Insider Trading) (Amendments) Regulations, 2018, cover “dealing in securities,” which includes “buying, selling or agreeing to buy, sell or deal in any securities by any person either as principal or agent, by insiders based on any private confidential information.” The Regulations apply solely to listed securities exchanges.

The Regulations state that it is against the law for insiders to communicate or disseminate any confidential information. The information that is shared or spread cannot be unapproved. The individual may use the information personally or through any third party on his or her behalf. Any violation of a SEBI Regulation is an offense under the Act and is punishable by up to 10 years in prison or a fine of up to 25 crores, whichever is higher.

Anyone who violates the SEBI Regulations, except for an offense committed in under Section 24 of the Act, may face a penalty from the adjudicating authority. Additionally, SEBI has the authority to investigate cases of insider trading in India and similar issues as there is an urgent need for regulating insider trading in India

The powers of Investigation may be exercised by SEBI for two main reasons:

• To investigate complaints from investors, intermediaries, or any other person on any matter related to insider trading; and to investigate its own knowledge or information to protect securities investors from violation of these regulations.
• The Regulations hold promoters accountable regardless of their shareholding level if they violate insider trading regulations by exploiting unpublished price-sensitive firm information for illegitimate purposes.

BSE Insider Trading

The Bombay Stock Exchange (BSE), one of India’s largest stock exchanges, regulates and monitors insider trading.  Here are some key aspects of BSE insider trading regulations and monitoring by BSE:

• The BSE Listing Agreement prohibits insider trading for BSE-listed companies. Companies and insiders must report and trade under the agreement.
• BSE respects SEBI’s insider trading restrictions. These restrictions prohibit insider trading on unpublished price-sensitive knowledge and require disclosure.
• BSE uses sophisticated surveillance techniques to detect insider trading. Advanced algorithms examine trading patterns, volumes, and price fluctuations to identify questionable transactions.
• BSE-listed companies must report insider trades to the exchange. To prevent insider trading, directors, officers, and key managers must report their trading actions within a certain timeframe.
• BSE and SEBI prosecute insider traders. Fines, disgorgement of earnings, suspension or debarment from trading, and other penalties are possible.
• BSE educates investors about insider trading laws and ethics. These programs raise investor, professional, and other stakeholder awareness and compliance.
• BSE enforces regulations, ensures compliance, and maintains market integrity alongside SEBI, India’s insider trading regulator. BSE, SEBI, and other stakeholders monitor and regulate BSE insider trading.

Loopholes in regulating Insider Trading in India

There are certain loopholes which need to be taken care of for regulating insider trading in India. They are as follows:

• In 2016, SEBI investigated 34 insider trading instances, up from 12 in 2015.
• Each year, insider trading and the need for tougher laws grow. Only 15 of 34 cases investigated were resolved, which is also a worry.
• Circumstantial evidence of insider trading makes it hard to detect and prove.
• Despite the extensive regulatory structure, case success is low.
• SEBI lacks the technological expertise to effectively investigate.
• SEBI failed due to resource and staff shortages.
• Foreigners who commit Insider Trading are not covered by Indian law. Such cases are not punished or investigated.
• The Acts do not cover extraterritorial restrictions.

Conclusion

Even though the SEBI (Prohibition of Insider Trading) Regulations 2015 and other laws regulate insider trading and protect the Indian securities market, it remains a major issue. Regulators and market participants must adjust to such changes to protect the securities market and address emerging trends and future challenges.

By implementing strong compliance processes, we can stop insider trading and ensure an honest and open Indian securities market. Market participants must obey the law and foster accountability and transparency.