Insider trading is a practice where a person who has access to non-public information about a company uses that information to buy or sell securities for personal gain. In simpler terms, it’s like using secret information to make a profit on the stock market.
So, before you choose a trading platform or install an app for trading or trade app or trading app for online trading, it is therefore important to be cautious about this concept.
Insider Meaning: Who Are Insiders In Company
So, what is insider trading or the definition of insider trading? An insider in insider trading in India refers to any individual who has access to non-public information about a company. This information could be of a material nature and could significantly affect the price of the company’s securities.
Insiders typically fall into one of the following categories:
- Directors: Members of a company’s board of directors.
- Officers: Senior executives of a company, such as the CEO, CFO, or COO.
- Employees: Individuals who work for the company, regardless of their position.
- Related Persons: Individuals who are closely related to insiders, such as spouses, children, or parents.
Essentially, anyone who is in a position to know non-public information about a company due to their relationship or association with it can be considered an insider.
The IPO allotment process ensures fair distribution of shares to investors, while insider trading involves illegal advantage gained by trading based on confidential, non-public information. It is important to note that insider trading is strictly prohibited in India, and any insider who uses non-public information to trade securities for personal gain can face severe penalties, including imprisonment, fines, and disgorgement of profits. So, is insider trading illegal?
Legal Vs Illegal Insider Trading
Insider trading refers to the practice of using non-public information about a company to buy or sell its securities. While the term often carries a negative connotation, not all insider trading is illegal. The key distinction lies in the timing and manner in which the insider acts on the information.
To open Demat account is the first step toward participating in the stock market, including activities like IPOs, while insider trading is monitored to ensure market transparency.
Legal Insider Trading
- Compliance with Regulations: Legal insider trading involves insiders trading securities in accordance with the prescribed disclosure regulations.
- Public Disclosure: Insiders must report their transactions to the relevant stock exchange and regulatory authorities.
- Open Trading Windows: Such trades typically occur during open periods when no material non-public information is pending disclosure.
Illegal Insider Trading
- Misuse of Non-Public Information: Illegal insider trading involves using non-public information that could significantly affect a company’s stock price to make a profit before the information becomes public.
- Breach of Fairness: This practice undermines the principle of fair and transparent markets.
- Examples: Buying shares of a company before a positive earnings announcement or selling shares before a negative announcement.
In India, the Securities and Exchange Board of India (SEBI) has strict guidelines to prevent insider trading. Any insider who misuses non-public information to make a profit can face severe penalties, including fines and imprisonment.
While insider trading is a sensitive topic, it’s important to understand that not all insider activities are illegal. The legality of an insider trade depends on whether the insider has complied with disclosure requirements and acted ethically.
Key Points About Insider Trading In India
- Prohibition: Insider trading is strictly prohibited in India under the Securities and Exchange Board of India (SEBI) Act, 1992, and its regulations.
- Insider: An insider can be a director, officer, employee, or anyone who has access to non-public information about a company due to their position or relationship with the company.
- Non-Public Information: This refers to any information that is not publicly available and could significantly affect the price of a security.
- Trading: Insider trading involves using this non-public information to buy or sell securities for personal gain, or for the benefit of someone else who knows about the information.
- Penalty: If found guilty of insider trading, a person can face severe penalties, including imprisonment, fines, and disgorgement of profits.
Major Types Of Insider Trading
- Tip-Offs: An insider providing confidential information to a friend or family member who then trades on that information.
- Front-Running: An insider placing a personal order before executing a large order for the company.
- Misappropriation of Information: An employee using non-public information is insider trading.
While you might be looking for an app for traders or an online trading app, you must first be aware of SEBI guidelines for insider trading.
Why Is Insider Trading Banned In India
Insider trading is banned in India to protect the integrity of the securities market and ensure fair play for all investors. SEBI regularly publishes press releases and orders related to insider trading cases. You can find the SEBI guidelines for insider trading on their official website.
Here are the main reasons why insider trading is prohibited:
- Unfair Advantage: Insider trading gives individuals an unfair advantage over other investors who don’t have access to the same non-public information. This can distort the market and lead to price manipulation.
- Erodes Investor Confidence: When investors believe that the market is not fair and transparent, they are less likely to invest. Insider trading can erode investor confidence and discourage participation in the market.
- Damages Market Reputation: Insider trading can damage the reputation of the securities market and make it less attractive to foreign investors.
- Undermines Corporate Governance: Insider trading can undermine corporate governance by encouraging unethical behaviour and conflicts of interest.
- Discourages Disclosure: If insiders can profit from non-public information, they may be less inclined to disclose it to the public, which can harm transparency and efficiency in the market.
By prohibiting insider trading, India aims to create a level playing field for all investors and ensure that the securities market operates fairly and efficiently.
SEBI’s Role In Preventing Insider Trading
- Regulations: SEBI has implemented various regulations to prevent insider trading, such as requiring insiders to report their trades and restricting their trading activities during certain periods.
- Surveillance: SEBI conducts surveillance to identify suspicious trading patterns that may indicate insider trading.
- Enforcement: SEBI takes strict action against individuals and entities found guilty of insider trading.
Conclusion
In conclusion, insider trading remains a significant concern in the Indian securities market. While legal insider trading is permitted under specific regulations, illegal insider trading poses a serious threat to the integrity and fairness of the market.
To combat insider trading, SEBI has implemented stringent regulations and enforcement mechanisms. However, it is essential for all stakeholders, including investors, companies, and market intermediaries, to be vigilant and report any suspicious activity.
By promoting transparency, disclosure, and ethical practices, we can collectively contribute to a more robust and equitable securities market in India. Check out the best trading app to solve your trading and investing hassles. HDFC Sky trading online app and portal can be your guide on-the-go.
