What Is Insider Trading and When Is It Legal?

Insider trading is a major concern in securities law because it affects fairness, transparency and investor confidence in the stock market. It occurs when a person trades in securities while having access to confidential information that is not available to the public. However, every trade by an insider is not illegal. The law mainly prohibits the misuse of unpublished price sensitive information for unfair gain.

Meaning Of Insider Trading

Insider trading is based on the unfair use of information. The concept becomes easier to understand when it is divided into its basic meaning, its securities market context and the difference between being an insider and committing an offence.

Add LawBhoomi as your preferred source on Google.

Add Now →

Simple Meaning Of Insider Trading

Insider trading means buying, selling or dealing in securities of a company on the basis of information that is not generally available to the public. Such information must be material in nature, meaning that it is capable of affecting the price of the company’s shares or securities once it becomes public.

For example, if a senior officer of a listed company knows that the company is about to announce a merger and purchases shares before the announcement is made public, such conduct may amount to insider trading. The officer is using confidential information to gain an advantage over ordinary investors.

Insider Trading In The Securities Market

In the securities market, prices are expected to reflect information that is publicly available. Investors buy and sell shares after considering company announcements, financial results, business prospects and other market information.

Insider trading disturbs this balance. It allows certain persons to trade on hidden information while other investors remain unaware of the same facts. This creates an unfair market situation because one class of investors has an advantage that is not available to the rest of the market.

Difference Between Insider Status And Illegal Trading

A person does not become guilty of insider trading merely because he or she is connected with a company. Directors, employees, auditors, lawyers, bankers, consultants and advisors may naturally come across confidential information while performing their duties.

The illegality arises when such information is misused. Therefore, the difference lies in conduct. Holding an insider position is not unlawful. Trading on unpublished price sensitive information, communicating it improperly or helping another person trade on that basis may attract liability.

Why Insider Trading Is Prohibited

The prohibition on insider trading is not only about punishing individual misconduct. It protects the foundation of the securities market by ensuring that investors operate in an environment of fairness, equal access and transparency.

It Creates Unfair Advantage

Insider trading gives a special advantage to persons who possess confidential information. Such persons can buy shares before favourable information is announced or sell shares before negative information becomes public.

This advantage is unfair because ordinary investors do not have access to the same information. The market then becomes unequal, and trading no longer takes place on a level playing field.

It Affects Investor Confidence

The securities market depends on trust. Investors participate with the belief that prices are shaped by fair and publicly available information.

If insiders are allowed to secretly profit from confidential information, public confidence in the market weakens. Investors may feel that the market is controlled by persons with internal access, making ordinary participation risky and unfair.

It Disturbs Fair Price Discovery

Price discovery means the process through which the market determines the value of securities. This process works properly only when information is disclosed fairly.

Insider trading distorts price discovery because trades are made on information that has not yet reached the market. As a result, prices may move before proper disclosure, causing loss to investors who traded without knowing the hidden facts.

It Violates Fiduciary Duty

Many insiders receive information because they hold positions of trust. Directors, key managerial personnel and senior employees owe duties to the company and its shareholders.

Similarly, professionals such as lawyers, auditors, consultants and bankers may receive confidential information for a limited and legitimate purpose. Using such information for personal gain amounts to breach of trust and defeats the purpose for which the information was shared.

Legal Framework Governing Insider Trading In India

Indian law regulates insider trading through securities law and corporate governance principles. The main regulatory authority is SEBI, which supervises the securities market and takes action against unfair trading practices.

SEBI Act, 1992

The Securities and Exchange Board of India Act, 1992 gives SEBI the power to protect investors and regulate the securities market. Section 12A prohibits manipulative, deceptive and fraudulent practices in connection with securities.

Section 15G deals specifically with penalties for insider trading. It applies where a person deals in securities while possessing unpublished price sensitive information, communicates such information or advises another person to trade on its basis.

SEBI (Prohibition Of Insider Trading) Regulations, 2015

The SEBI (Prohibition of Insider Trading) Regulations, 2015 form the central legal framework for insider trading in India. These regulations define important concepts such as insider, connected person and unpublished price sensitive information.

The 2015 Regulations replaced the earlier 1992 Regulations and made the law more detailed. They focus not only on punishment but also on prevention. They require listed companies and market participants to maintain internal codes, restrict trading during sensitive periods and control access to confidential information.

Companies Act, 2013

The Companies Act, 2013 also recognised the concern of insider trading as part of corporate regulation. However, for listed companies and securities market transactions, the SEBI framework remains the primary source of regulation.

The relationship between company law and securities law is important because insider trading is both a corporate governance issue and a market fairness issue. It involves misuse of corporate information as well as unfair dealing in securities.

Who Is An Insider?

The meaning of insider is broad. The law does not focus only on official designation. It also considers access to confidential information and the relationship through which such access becomes possible.

Connected Persons

A connected person is someone who is associated with a company in a manner that allows access to unpublished price sensitive information. This association may be direct or indirect.

A person may become connected with a company because of:

• Employment or directorship.
• Professional or business relationship.
• Contractual or fiduciary relationship.
• Frequent communication with company officers.
• Temporary or permanent association with the company.

The main test is whether the relationship allows access to UPSI or is reasonably expected to allow such access.

Deemed Connected Persons

Certain persons are treated as connected persons unless the contrary is proved. This is because they may not hold a formal position in the company but may still have access to confidential information.

Such persons may include:

• Immediate relatives of connected persons.
• Holding, subsidiary or associate companies.
• Intermediaries and their employees or directors.
• Investment companies, trustee companies and asset management companies.
• Stock exchange and clearing corporation officials.
• Public financial institution officials.
• Bankers of the company.
• Concerns, firms, trusts, Hindu undivided families, companies or associations where insiders or their immediate relatives hold significant interest.

This wide coverage prevents insiders from misusing relatives, associates or controlled entities for indirect trading.

Immediate Relatives

Immediate relatives are important in insider trading law because confidential information may easily pass within close family circles. A relative may not be part of the company, but may still receive UPSI from an insider.

If such a person trades on the basis of UPSI, the transaction may attract regulatory scrutiny. The law, therefore, places responsibility not only on formal insiders but also on persons who may receive information through close personal relationships.

Professionals And Advisors

Professionals outside the company may also be treated as insiders in certain circumstances. Lawyers advising on a merger, auditors reviewing financial results, bankers working on a fundraise or consultants assisting in restructuring may all have access to UPSI.

Such professionals receive information for a specific professional purpose. They are expected to maintain confidentiality and avoid trading or communicating the information for personal benefit.

What Is Unpublished Price Sensitive Information?

UPSI is the core concept in insider trading law. A trade becomes problematic when it is connected with information that is confidential, material and capable of affecting securities prices after public disclosure.

Meaning Of UPSI

Unpublished Price Sensitive Information means any information relating to a company or its securities that is not generally available and which, upon becoming generally available, is likely to materially affect the price of securities.

Two requirements are important. First, the information must not be publicly available. Secondly, the information must be price sensitive. Information that is purely internal but has no material effect on securities prices may not always qualify as UPSI.

Examples Of UPSI

Common examples of UPSI include:

• Financial results, especially profit, loss, revenue or major financial changes.
• Dividend declarations or decisions affecting shareholder returns.
• Change in capital structure, including issue of securities, rights issue, bonus issue or buy-back.
• Mergers, demergers, acquisitions, delisting, disposals and major restructuring.
• Expansion of business or sale of important business assets.
• Changes in key managerial personnel.
• Important corporate events that may affect investor decisions.
• Major changes in business policy, operational plans or corporate strategy.

These categories are important because they may influence how investors value the company.

When Information Becomes Generally Available

Information becomes generally available when it is disclosed to the public in a manner that provides equal access to investors. Disclosure to stock exchanges, public announcements and official filings are common methods of making information public.

Selective sharing of information with a few persons is not enough. The law requires fair and uniform access so that no investor or group of investors receives an unfair advantage.

How Insider Trading Takes Place

Insider trading may happen in several ways. It may involve direct trading, communication of confidential information, use of relatives or associates, or selective disclosure to a limited group of persons.

Trading While Possessing UPSI

The most direct form of insider trading occurs when a person trades in securities while possessing UPSI. The trade may involve buying shares before positive news or selling shares before negative news.

For example, a person aware of poor financial results before their public announcement may sell shares to avoid loss. Similarly, a person aware of a proposed acquisition may buy shares before the market reacts to the news.

Communicating UPSI To Others

Insider trading law also restricts communication of UPSI. A person who possesses UPSI must not communicate it to another person except for legitimate purposes, performance of duties or discharge of legal obligations.

Communication itself may be a serious violation if it enables another person to trade. The law recognises that insider trading may occur indirectly through others.

Tipping And Tippee Liability

Tipping occurs when an insider shares UPSI with another person. The person receiving such information is often called a tippee.

If the tippee trades on the basis of such information, liability may arise. The tippee may be a relative, friend, business associate or any other person. The objective of the law is to prevent insiders from avoiding direct liability by passing information to others.

Selective Disclosure

Selective disclosure means sharing material information with only a few persons before public disclosure. This may include selected investors, associates or market participants.

Such disclosure is harmful because it creates unequal access to information. All investors must receive material information through proper public channels.

Is Insider Trading Always Illegal?

Insider trading is often used as a negative expression, but the legal position is more nuanced. Trading by insiders can be lawful if it is transparent, compliant and not based on unpublished price sensitive information.

Legal Insider Trading

Legal insider trading takes place when directors, employees, promoters or other insiders trade in company securities without misusing UPSI and while complying with legal requirements.

Many insiders lawfully own shares in their companies. They may buy or sell such shares for personal financial planning, retirement, liquidity or investment reasons. Such trading is not illegal merely because the trader is connected with the company.

Illegal Insider Trading

Illegal insider trading occurs when a person trades while possessing UPSI, communicates UPSI improperly or advises another person to trade on the basis of such information.

The illegality lies in the unfair use of confidential information. The law seeks to prevent profit-making or loss-avoidance through information that is not available to ordinary investors.

Role Of Timing And Disclosure

Timing is crucial in insider trading. A trade made before public disclosure of material information may be suspicious if the trader had access to UPSI.

Disclosure is equally important. If an insider trades after proper disclosure and after the information becomes generally available, the trade may be lawful, subject to compliance with trading window and other requirements.

When Is Insider Trading Legal?

Insider trading may be legal when there is no misuse of UPSI and the transaction follows the safeguards prescribed under law, company policy and SEBI regulations.

Trades Without UPSI

A trade by an insider may be lawful if the person does not possess UPSI at the time of trading. For example, an employee may sell shares for personal reasons when no confidential price sensitive information is in possession.

The focus is on whether the trade was influenced by unpublished information. If the transaction is independent of UPSI and complies with law, it is not automatically illegal.

Pre-Approved Trading Plans

A trading plan allows an insider to plan future trades in advance. Such plans are useful because insiders may frequently possess confidential information due to their role.

For example, a senior employee may decide in advance to sell a fixed number of shares after retirement or at regular intervals. If the plan is made before acquiring UPSI and executed according to legal requirements, it may protect the trade from being treated as suspicious.

Trades During Open Trading Window

Companies generally permit designated persons to trade only when the trading window is open. The trading window is usually closed when UPSI exists or when important announcements, such as financial results, are being prepared.

Trading during an open window does not automatically remove all legal risk, but it shows compliance with the company’s internal control mechanism.

Proper Disclosure And Compliance

Legal insider trading also requires proper disclosure. Certain transactions by promoters, directors, designated persons and other insiders may require reporting to the company or stock exchanges.

Compliance may include:

• Pre-clearance before trading beyond a specified value.
• Disclosure of trades within prescribed timelines.
• Adherence to trading window restrictions.
• Compliance with the company’s code of conduct.
• Avoidance of contra trades where restricted.

These requirements help maintain transparency and prevent misuse of information.

Trading Window And Pre-Clearance

The trading window and pre-clearance system are preventive tools. They reduce the risk of insider trading by controlling when designated persons may trade and by requiring prior review of certain transactions.

Closure Of Trading Window

The trading window is usually closed when unpublished price sensitive information exists. This commonly happens before declaration of financial results, major corporate transactions or other material events.

During closure of the trading window, designated persons are prohibited from trading in the company’s securities. This protects both the company and the insiders from allegations of unfair trading.

Pre-Clearance Of Trades

Pre-clearance means obtaining prior approval before executing certain trades. Companies may require designated persons to seek approval when the value of proposed trades exceeds a specified threshold.

The compliance officer may examine whether the person is in possession of UPSI and whether the proposed trade is allowed under the company’s code of conduct.

Role Of Company Code Of Conduct

Listed companies are required to frame codes of conduct for regulating, monitoring and reporting trading by designated persons. The code helps identify persons who may have access to UPSI and places restrictions on their trading.

A strong code of conduct generally includes rules on confidentiality, trading window closure, pre-clearance, disclosure requirements and consequences of violation.

Role Of SEBI In Regulating Insider Trading

SEBI plays a central role in maintaining market fairness. It regulates insider trading through preventive regulations, market surveillance, investigations, penalties and directions against violators.

Monitoring Suspicious Trades

SEBI and stock exchanges monitor unusual trading activity. Sudden price movement or abnormal trading volume before a major announcement may indicate possible insider trading.

Such patterns do not automatically prove wrongdoing, but they may justify further inquiry. Regulators examine whether persons involved had access to UPSI and whether their trades were timed around material corporate events.

Investigation Powers

SEBI may investigate suspected insider trading by collecting information from companies, intermediaries, stock exchanges and market participants. It may examine trading records, communication patterns, relationships between parties and financial links.

Since insider trading often happens privately, investigations usually depend on circumstantial evidence. Timing of trades, access to UPSI and connection between persons become highly relevant.

Penalties And Directions

SEBI may impose monetary penalties and issue directions against persons involved in insider trading. It may also order disgorgement of unlawful gains and restrict persons from accessing or dealing in the securities market.

These powers are intended to punish violations and deter future misconduct.

Penalties For Insider Trading

Insider trading attracts serious legal, financial and reputational consequences. The penalty framework reflects the seriousness of unfair trading in the securities market.

Monetary Penalty

Section 15G of the SEBI Act provides monetary penalties for insider trading. The amount may depend on the nature of violation, unlawful gain, loss avoided and the circumstances of the case.

Monetary penalties are imposed to ensure that insider trading does not remain profitable.

Disgorgement Of Gains

Disgorgement means giving up unlawful gains obtained through insider trading. If a person profits from trading on UPSI, SEBI may direct that such gains be disgorged.

This remedy is important because insider trading may otherwise allow violators to retain unfair profits even after regulatory action.

Market Restrictions

SEBI may restrain a person from buying, selling or dealing in securities for a specified period. Such restrictions prevent violators from participating in the market after serious misconduct.

In some cases, directors, promoters or market participants may also face restrictions affecting their future role in listed companies or securities transactions.

Reputational Consequences

Insider trading allegations can cause serious reputational harm. Even where a matter is settled, public scrutiny may affect companies, directors, promoters, professionals and investors.

For listed companies, such allegations may also raise questions about internal governance, disclosure standards and control over confidential information.

Notable Insider Trading Matters In India

Several insider trading matters in India have involved listed companies, promoters, senior executives and market participants. These examples show how insider trading law operates through investigations, settlements, penalties and regulatory scrutiny.

General Insurance Corporation

In 2019, SEBI issued notice to General Insurance Corporation in relation to alleged insider trading concerns. The matter was later settled by payment of a settlement amount.

This instance is important because it shows that SEBI may resolve certain proceedings through settlement mechanisms. Settlement does not necessarily mean admission of guilt, but it reflects the regulator’s scrutiny of possible violations.

Infosys

Infosys came under regulatory attention in connection with disclosure issues arising from allegations made by an insider. The matter involved concerns around whether material information was disclosed in a timely and proper manner.

The case highlights that insider trading regulation is not limited to actual trading alone. Failure to disclose material information properly may also create regulatory concerns because delayed or selective disclosure can affect market fairness.

Rakesh Jhunjhunwala And Aptech

SEBI also examined alleged insider trading in relation to trades connected with Aptech Limited. The matter attracted attention because of the involvement of well-known investor Rakesh Jhunjhunwala and the scrutiny of related persons.

This matter shows that insider trading investigations may extend to promoters, investors, family members and connected entities where trading patterns raise regulatory questions.

Balram Garg And PC Jeweller

Another notable matter involved SEBI action in relation to PC Jeweller and its Managing Director, Balram Garg. SEBI examined suspected trading by promoters and connected entities and ordered impounding of alleged unlawful gains.

This instance reflects SEBI’s power to take interim and preventive steps where it believes that gains from suspected insider trading need to be secured during proceedings.

Reliance Industries

Reliance Industries has also faced regulatory action in connection with securities market transactions. SEBI imposed restrictions and penalties in relation to certain trades, including action connected with derivatives and market conduct.

The matter is relevant because it shows that large corporate entities may also come under close regulatory scrutiny where trading activity raises concerns about compliance with securities law.

Conclusion

Insider trading is illegal when a person uses unpublished price sensitive information to trade in securities or to help others trade unfairly. It creates an unequal market, harms investor confidence and violates the principle that all investors should have fair access to material information.

At the same time, every trade by an insider is not unlawful. Directors, employees, promoters and other connected persons may legally trade if they do not possess UPSI and comply with disclosure, trading window, pre-clearance and code of conduct requirements. The distinction between lawful and unlawful insider trading depends on access to information, timing of trade, purpose of transaction and regulatory compliance.

The purpose of insider trading law is not to stop insiders from ever trading. Its true purpose is to prevent misuse of confidential information and preserve fairness in the securities market. SEBI’s regulatory framework plays a central role in maintaining this balance.

Note: This article was originally written by Janavi Venkatesh (OP Jindal Global University) and published on 24 August 2020. It was subsequently updated by the LawBhoomi team on 11 June 2026.