Insider trading is when a certain individual acts/trades upon the companies securities or bonds based on certain confidential information not known to the public. Unpublished Price Sensitive Information (hereinafter ‘UPSI’) forms the core of insider trading, it is certain information that is highly confidential which is unknown to the general public, which is acquired through the due diligence process. In a situation where a company is being sold off, the acquirer company will conduct a thorough inquiry into the affairs of the target company (i.e. company that is to be sold) before they decide to proceed with the acquisition, which is what the due diligence process entails. Public information would not be enough to decide this acquisition, hence need access to the company’s confidential information. Access to UPSI is also crucial since it determines the price offered by the acquirer for the target company.
UPSI is crucial to every company since it helps maintain the balance in the market and ensures parity of information (every shareholder must have equal access to the same information). It is important since it determines the company’s growth and business; in a situation where UPSI is known to other individuals, it can affect the business of said company which is detrimental to its growth and directly challenges the investors’ confidence in the fairness and integrity of the company and market. Inside trading is a breach of the fiduciary duties of the director or any connected person towards the shareholders. Therefore, the regulatory body- Securities and Exchange Board of India (hereinafter ‘SEBI’) came out with the (Prohibition of Insider Trading) Regulations, 1992 which was then replaced by the SEBI (Prohibition of Insider Trading) Regulation, 2015 which came into effect from 15th May 2015.
Insider according to section 2(g) of the 2015 Regulations is defined as someone who is either a connected person or someone in possession of UPSI. The definition was intended to bring anyone who was in possession of or has access to unpublished information. However, being in possession or having such knowledge is not always relevant, as seen in the V.K Kaul Vs SEBI case. The court in said case stated that knowledge of UPSI would only be relevant if the insider were to act upon the said information. Section 2(d) of the Regulation defines a ‘connected person’ as any person who has had contact with the company (through the employer, director or any person that has a connection with the company) which gives them any form of reasonable access to the confidential information for the purpose of trading. This section is quite elaborate in identifying a connected person.
Moreover, Section 2(g) also helps determine whom the burden of proof lays with- it is usually the person/individual who brings forth the complaint that the accused was in possession of price sensitive information who must show/prove the same. The burden then shifts to the accused to justify how he was not in possession of such information.
The only valid exception to insider trading would be when it is for a legitimate purpose- where the law allows the price sensitive information to be shared- for compliance purposes. Ordinary course of business was also considered to be another exception to the rule, however was changed in the Mrs. Chandrakala Vs SEBI case. Although the defense of ordinary course of business was sufficient argument to rebut the presumption made by SEBI in the present case, the amendment regulation paves way for a higher standard- if an insider deal with securities on a daily basis it was originally presumed that they traded based on their knowledge, since it was within their course of business however that had changed from the case above. Now, unless otherwise proven, an insider trading with securities of a listed company may be presumed to be trading based on the UPSI. The threshold should match that of a legitimate purpose. This ensures higher scrutiny and better regulation, but most importantly it places liability on the individual in possession of such information. It is necessary to place stringent rules as it protects the business and makes sure that the information doesn’t end up in the wrong hands.
Insider trading has been taken very seriously, and the regulatory authorities put in their best efforts to control the same, however it should also be the individuals/shareholders duty to ensure that they comply with the given rules, and take reasonable steps to ensure that they are within the ambit of these rules. Although the regulations are quite comprehensive, the growing ambit of the said regulations can pave way for unnecessary disputes/suits hence should also be the duty of the regulatory body to make proper demarcations for the same.
 (2012) 116 SCL 24
 Appeal No. 209 of 2011
 CS Saibal Chandra Pal, ‘SEBI (Prohibition Of Insider Trading) Regulations, 2015 & Companies Act, 2013’ (TaxGuru, 2015) accessed 6 July 2020.
Author Details: Janavi Venkatesh (OP Jindal Global University)