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JFC
24,1
Insider trading in India –
regulatory enforcement
Anil Kumar Manchikatla and Rajesh H. Acharya
School of Management, National Institute of Technology Karnataka,
48 Mangalore, India

Abstract
Purpose – The purpose of this paper is to study the effectiveness of insider trading enforcement actions in
India and international dimensions.
Design/methodology/approach – The research is based on the insider trading regulations and
amendments made during the period 1992-2015.
Findings – The notable observation of the study is the dearth of insider trading conviction and the paucity
of prosecution for insider trading offences in India. It is difficult to resist the conclusion that surveillance and
enforcement matter more than the drafting of the relevant statutes and regulations in emerging markets.
Whereas, developed countries have a better record of prosecution than emerging markets.
Research limitations/implications – Future research may explore the factors that hinder effective
regulation and recommend new methods to increase the impact of Securities and Exchange Board of India
insider trading regulation.
Originality/value – The current paper presents guidance for the foreign institutional investors, regulators
and market participants on insider trading regulation and prosecution in India.
Keywords India, Emerging markets, Insider trading, Legal trading, Regulatory ambiguity,
Trade on disclosures
Paper type Research paper

1. Introduction
The stock exchanges of a nation are the key segment of its capital market. A healthy capital
market can be created if the stock exchanges are well regulated. In the current economic
environment around the world, an active enforcement of criminal laws and regulations has
increased its focus on punishing and preventing insider trading and market abuse. The
insider trading prosecution has to expose the evidence of insider trading by using forceful
devices such as wiretaps. The US Court juries have frequently been sentencing those who
have chosen to go to tentative and dishing out severe fines to the guilty defendants. Insider
trading means trading by any individual in the securities of a company by having
price-sensitive information of the company before it is available to the general public with an
intention of making abnormal profits or avoiding losses. “Insider means any individual who
has access to unpublished price sensitive information with respect to securities of a
company”, conferring to Securities and Exchange Board of India SEBI (Prohibition of Insider
Trading) Regulations (1992). In a similar vein, Section 195 of The Companies Act (2013)
states that insider trading is an act of buying, selling, subscribing or agreeing to subscribe in
the securities of companies directly or indirectly by the key management personnel or the
director of the company and sensibly anticipated to have access to Unpublished Price
Journal of Financial Crime Sensitive Information[1] (UPSI) with reference to the company as well as its securities is
Vol. 24 No. 1, 2017
pp. 48-55 deemed to be insider trading.
© Emerald Publishing Limited
1359-0790
The term insider trading is subject to many definitions and connotations, and it
DOI 10.1108/JFC-12-2015-0075 encompasses both legal and prohibited activity. When a corporate insider trades by adhering
to all the regulations, it is called legal insider trading, and any violation of that amounts to Insider trading
prohibited activity. However, general public holds a misperception that insider trading is a in India
prohibited activity. The past several decades have witnessed an increase in insider trading.
To discourage trading on material non-public information, corporate insiders face several
restrictions on their trading.
Insider trading is a word generally associated with prohibited behavior. It is an action of
purchasing and selling of securities by an individual having UPSI of the company before it is
accessible to the common public with an objective of creating abnormal earnings and
49
evading losses (Corporate Governance an Emerging Scenario, published by National Stock
Exchange, 2010).
Corporate insiders are allowed to trade in their own company’s stock, but are required to
disclose these transactions to avoid the misuse of any non-public price-sensitive information.
SEBI has framed numerous disclosure regulations for insiders to build investor confidence
and increase the transparency in securities trading. The aim of these disclosures is to create
a level playing field to all the participants in the market. When a corporate insider trades
by adhering to all the regulations, it is called legal insider trading, and any violation of that
amounts to illegal insider trading. Therefore, to monitor insider trading activities, they are
required to disclose their legal trades to SEBI in a timely manner.
The Companies Act (2013) passed by the Indian parliament also devised the code of
conduct for the administration of these regulations. The listed companies in India are guided
by Clause 36 of the Listing Agreement of the stock exchanges, which states that the issuer
will inform to the stock exchanges, where the company is listed, immediately of events such
as closure on account of power cuts, lockouts and strikes, and all events that have a posture
on the operations/performance of the firm as well as price-sensitive information together at
the period of happening of the event and consequently after the end of the event to facilitate
the shareholders and the public to assess the position of the issuer and to avoid the creation
of a false market in securities. To improve the fairness and transparency in the capital
markets, SEBI has made several amendments to its SEBI (Prohibition of Insider Trading)
Regulations (1992).
Insider trading takes place lawfully daily, when the employees, directors or officers and
corporate insiders purchase or sell securities of their own businesses within the restrictions
of the company policy and the code of practice prevailing for listed companies. The
mandatory disclosures which are to be made to SEBI are as follows: disclosure to the stock
exchange by the listed company, disclosure to the stock exchange by an individual who is a
director or officer of a listed company and disclosure to the stock exchange by a person who
is a promoter or portion of the promoter group of a listed company.
The liberalization of India’s economy in 1991 made a considerable development of capital
market and regulatory reforms. The stock market crash in India at the beginning of 1992,
stock manipulation by Harshad Mehta, has highlighted the issues of transparency and
motivated the enforcement of insider trading laws in India to regulate and supervise by
SEBI. The current paper centers on the way the SEBI has been aspiring to fulfill the
regulatory objectives established on this merge. The research is based on the SEBI
(Prohibition of Insider Trading) Regulations (1992) and amendments made during the period
1992-2015. The notable observation of the study is the dearth of insider trading conviction
and the paucity of prosecution for insider trading offences in India. SEBI in the year 2015 has
shown interest to increase the enforcement actions in line with the international standards.
The purpose of this paper is to conduct a comprehensive overview of insider trading
regulations in India. We divide our study into four sections. First, we present the insider
trading regulations around the world, and in the second section, we present an overview of
JFC SEBI (Prohibition of Insider Trading) Regulations (1992 and 2015). The third section
24,1 discusses insider trading investigations by SEBI, and the paper is concluded in the final
section.

2. Insider trading regulations around the world

There is a considerable cross-country variation in the quality and quantity of corporate
50 reporting, information intermediation and information dissemination structures (Bushman
et al., 2004). The USA has strict insider trading regulations in the world today. The USA
Securities Exchange Act of 1934 was the first to enact the insider trading law to place
restrictions on insider trading. The Securities Exchange Commission (SEC) of USA has zero
tolerance for insider trading activities. The verdicts for the culprits of insider trading will be
imprisonment and huge penalties. Thereafter, most developed economies as well as several
emerging markets have followed and prohibited insider trading. Eradicating insider trading
has become one of the most important goals of market regulators. Bhattacharya and Daouk
(2002) collected information on the existence of insider trading laws from 103 countries. The
existence and enforcement of insider trading laws were first established in the USA in 1934,
and it is the first nation to prosecute the insider trading case in 1961; however, it took 27 long
years to report its first insider trading case for prosecution. Malaysia has taken 23 years to
report their first insider trading prosecution among all the other nations. Canada and France
have framed insider trading regulations in the 1970s, and the prosecution was reported
during 1970s only. The UK and Germany have prosecuted insider trading cases within one
year of their insider trading regulations, whereas Sweden and Canada have taken 19 years
and 10 years, respectively, in the first prosecution of insider trading case. Whereas, India has
framed its insider trading regulations in 1992, and in 1998, it has reported the prosecution of
insider trading, that is in six years of framing such regulations. By 2000, 87 countries had
passed insider trading laws and 38 had prosecuted at least one insider trading case
(Bhattacharya and Daouk 2002).
The following are the three sections which infer the insider trading regulations in the
various nations. These imply the strength of the stock markets of a nation:
(1) Level playing field: The market should be fair to all the participants. The regulatory
bodies in all countries aim primarily at a level playing field by promoting fair and full
disclosure of all material information by the listed companies, so that insiders will not
have any unfair advantage.
(2) Investor confidence: Restricting insider trading will increase the investor confidence
in financial markets. Permitting insider trading does not seriously threaten the
investor’s confidence. Further, investor participation depends not only on the laws in
place but also on the confidence that they will be enforced fairly (Eleswarapu, 2006).
(3) Market efficiency: Fama (1970) used the concept of strong-form efficiency in his
Efficient Market Hypothesis (EMH) to characterize a market where private
information is fully reflected in stock prices. EMH states that most of the developed
countries’ stock markets fall under the semi-strong category. The securities markets
are informational efficient, and the securities prices reflect all the publicly available
information but not the private information. The insiders’ private information will
affect the securities prices positively/negatively on the markets.

2.1 Evolution of insider trading regulation in India

Evolution of insider trading regulation dates back to 1978 when The Sachar Committee
stated that company personnel such as board members, accountants and company
secretaries might have certain price-sensitive information. Such information may be used to
influence stock prices, which could affect the market sentiments of the capitalizing public. Insider trading
The Committee suggested that the Companies Act, 1956 must be amended to prevent such in India
practices. In 1986, The Patel Committee recommended amendments to Securities Contracts
(Regulation) Act, 1956 to en route for restraining insider trading through the supervisory
machinery. In 1989, the Abid Hussein Committee suggested that insider trading actions
could be fined by civil and criminal actions. Besides, it put forward that SEBI has to
formulate the guidelines and regulations to avoid insider trading (Misra, 2011).
In light of the recommendations of various Committees by means of the endorsements, 51
SEBI formulated the SEBI (Prohibition of Insider Trading) Regulations (1992) and outlawed
this misconduct. All the listed companies and market intermediaries have to act in
accordance with the directions of these regulations.

3. Insider trading regulation in India

3.1 An overview of SEBI (Prohibition of insider trading) Regulations (1992)
SEBI has framed insider trading regulations through SEBI (Prohibition of Insider Trading)
Regulations (1992) which came into force in 1992. It has imposed several restrictions on
insider trading. The listed companies must have a compliance officer and preserve the
price-sensitive information. It has introduced a trading window for the insiders to trade and
timely report their transactions in securities to the compliance officer and stock exchanges.
The disclosures made by the listed companies or their directors/officers have to be displayed
by the respective stock exchange on their official websites instantly or by way of an alert on
trading terminals.
SEBI has amended its regulations in February 2002 by mandating the policy on
disclosures and internal procedures for prevention of insider trading. It is mandatory for any
individual who holds more than 5 per cent shares or voting rights in any listed company to
disclose their holdings to the company within four working days. It also made compulsory
continual disclosures by the director/officer whenever there is a change in their holdings
exceeding INR 5 lakh in value or 5,000 shares or 2 per cent of the total shareholding or voting
rights, whichever is lesser. All the listed companies have to report to the respective stock
exchanges where the company is listed within five days of such disclosures. SEBI has
prepared a model code of conduct for deterrence of insider trading for other entities and also
introduced penalties for contravention of the code of conduct.
In July 2003, SEBI has made further amendments with introduction of disclosure forms
‘A’ ‘B’ ‘C’ and ‘D’ for directors/officers. Form A consists of the details of the acquisition of
shares in a listed company in respect of individuals holding about 5 per cent or more. Form
B contains details of the listed company shares held by the director or officer. Form C entails
the details of change in listed company shareholding in respect of individuals holding more
than 5 per cent shares. Form D comprises details of listed company shareholding of directors
or officers.
SEBI added regulation 11A, that is the manner of service of summons and notices issued
by the board in case of insider trading in April 2007.
SEBI has amended its regulations in November 2008, added e-filing of the disclosures to
the stock exchanges and regulation 14 involving the actions in case of default. It made
obligatory for a director/officer and his dependents to disclose to the company the holdings
of derivative contracts in a listed company in Form B within two working days of becoming
a director. They also cannot take positions in derivative contracts in the shares of the
company. The directors/officers/designated personnel of the listed companies who buy or
sell any number of shares will not take the reverse position, that is sell or buy any number of
shares through the next six months subsequent to the prior transaction. In the case of Initial
JFC Public Offering, they have to hold the share(s), if allotted, for a minimum period of 30 days.
24,1 It also made compulsory continual disclosures by the director/officer whenever there is a
change in their holdings beyond INR 5 lakh in value or 25,000 shares or 1 per cent of the total
shareholding or voting rights, whichever is lesser. All the listed companies have to report to
the respective stock exchanges where the company is listed within two working days of such
disclosures. Measures were taken to prevent insider trading and to strengthen disclosure
52 requirements for the insiders which were implemented.
In order to bring uniformity in disclosure requirements among several SEBI regulations,
it has amended the Act in August 2011, the disclosure requirement with respect to continual
disclosures by the director/officer whenever there is a change in their holdings beyond INR
5 lakh in value or 25,000 shares or 1 per cent of the total shareholding or voting rights,
whichever is lesser. Takeover regulations have been amended in line with SEBI (Prohibition
of Insider Trading) Regulations (1992). Form B and Form D were also amended accordingly
in relation to the promoter and his/her dependent holdings in derivative contracts of the
listed companies.
SEBI constituted the high-level committee to review insider trading regulations with a
retired Chief Justice of Karnataka High Court and a former presiding officer of the Securities
Appellate Tribunal (SAT) Mr N.K. Sodhi, in March 2013.
Later on in December 2013, the high level committee under the chairmanship of N.K.
Sodhi submitted a report on SEBI (Prohibition of Insider Trading) Regulations (1992) to the
SEBI Chairman, Shri U.K. Sinha. The Committee recommended strengthening the legal and
enforcement framework, aligning insider trading norms with international standards and
clarity in the definitions and concepts of insider trading. As an outcome of which, the new
regulations originated into practicality, that is SEBI (Prohibition of Insider Trading)
Regulations (2015) which has come in the gazette on 15th January, 2015, and came into force
with effect from 15th May, 2015.

3.2 An overview of SEBI (Prohibition of insider trading) Regulations (2015)

SEBI (Prohibition of Insider Trading) Regulations (2015) seem to be more optimistic,
pragmatic and substantially in line with the global perspective to insider trading. They also
seem to be equipped to strengthen superior compliance and prosecution. It has improved the
insider trading norms with clarity in the definitions and concepts of insider trading. It has
widened the scope of who is a connected person and also clearly detailed about the UPSI. It
has imposed restrictions on communication and trading by insiders. Insiders with
price-sensitive information can trade with pre-scheduled trading plan, which has to be
disclosed to the public six months in advance. Under Regulation 5(2)(ii), insiders are not
allowed to trade 20 days prior to the interim financial results and two trading days after such
announcements (even under trading plan). The initial disclosures of holdings have to be
made to the stock exchange by the promoter/director within seven days of their appointment
with the company. Under continual disclosures, Regulation 7(2)(a) made it mandatory for
every listed company’s promoter/employee and director to disclose the number of shares/
derivatives purchased or sold within a period of three months valuing INR 10 lakh or more
and report within two trading days. It has formulated minimum standards for the code of
conduct to regulate, monitor and report trading by insiders. SEBI is empowered to
investigate any complaint received from the investors, intermediaries or any other
individuals on any matter having a bearing on allegations of insider trading.
SEBI (Prohibition of Insider Trading) Regulations (2015) ban an insider from dealing on
his/her behalf or on behalf of any other individual in the securities of a firm listed on any
stock exchange when he/she is in ownership of UPSI. Additionally, it also prohibits any
insider from communicating, recommending or providing (directly or indirectly) any UPSI to Insider trading
any individual who, while in the ownership of such UPSI, should not trade in securities. in India
Price-sensitive information means any information that is related directly or indirectly to a
business concern, and if published, is expected to substantially affect the price of the
securities of a company. It includes information such as the financial results, dividends,
change in capital structure, mergers, de-mergers, acquisitions, delisting, changes in key
management personnel and disposals and expansion of business. The penalties upto INR
25 crore or three times of the amount of profits made out of fraudulent and unfair trade 53
practices or 10 years imprisonment can be imposed.
There have been cases where certain listed companies were given monthly disclosures of
certain price-sensitive information such as production/turnover/sales to their relevant
industry associations, without disclosing the same to the stock exchanges. To limit this
exercise, SEBI has made it obligatory for the listed companies to disclose such price-sensitive
information first to the stock exchanges (Indian Securities Market a Review, 2013, published
by National Stock Exchange of India Ltd (NSE)).

4. Insider trading investigations by SEBI

The first insider trading case in India was reported in the year 1996-1997. The total number
of insider trading cases registered since 1996 to 2014 are 203, out of which 185 investigations
are carried out by the end of March, 2014. The number of investigations carried out in
2007-2008 was 28, and 28 more insider trading cases were registered in 2010-2011. It was
found that SEBI has not resolved any cases during 2008-2009, 2009-2010 and 2013-2014
among its investigations (Figure 1).
The insider trading prosecutions and convictions in the USA will be done by the Justice
Department and SEC. They had set criminal and civil charges for the ruling for insider
trading to ensure the integrity of securities markets. In 2014, the SEC imposed a penalty of
$13.9m on an Indian-born former Goldman Sachs director Rajat Gupta in civil insider trading

Insider Trading invesgaons by SEBI from 1996-2015

30

25
Number of cases

20

15

10

Year

Invesgaons taken up Invesgaons Completed Figure 1.

Insider Trading
Source: Handbook of statistics on Indian Securities Market and SEBI Annual investigations by
Reports SEBI
JFC conviction of 2012. He was banned for life from serving as a director of a public company.
24,1 Under criminal charges, two years of imprisonment and $5million penalty was also imposed.
In India, the capital market regulator SEBI has investigated insider trading cases. In 2007,
SEBI has initiated insider trading charges against Reliance Industries Limited (RIL)
erstwhile arm Reliance Petroleum in the futures market segment. RIL has appealed to the
SAT against SEBI in the insider trading case. In India, the individuals and companies can
54 settle disputes by paying penalty without admitting or denying the alleged wrong doing,
through consent settlement allowed by SAT. In May 2012, SEBI has tightened the consent
mechanism framework.
SEBI in its probe against foreign hedge fund Factorial insider trading case, Bloomberg
has refused to share information with SEBI. So, it has sought help from the SEC.

5. Conclusion
Although the debate about the pros and cons of allowing insider trading in stock markets has
been quite contentious in the law and finance literature, to retain market integrity and
investor confidence, insider trading prohibitions are crucial. Developed countries have a
better record of prosecution than emerging markets (Bhattacharya and Daouk, 2002).
Meanwhile, in the mid-1990s, several cases of insider trading comprising reputed business
groups were probed and brought to court by SEBI, but unlike the USA SEC, the Indian
regulator was unable to secure a conviction in most of them. In the USA, insider trading
activities are generally detected premature through various stock watch mechanisms of
individual exchanges as well as the SEC. Both the exchanges and SEC examine any
suspicious transactions, and heavy penalties are imposed on the violators either by the
exchanges or SEC.
It is difficult to resist the conclusion that surveillance and enforcement matter more than
the drafting of the relevant statutes and regulations. Publicized cases of insider trading are
remarkably rare in India. However, tougher laws work better in reducing the incidence of
illegal insider trading and delayed disclosures to the regulating bodies. We thus suggest
SEBI to design detection mechanisms to eliminate illegal insider trading. It has to impose
huge penalties on those who violate the law. Future research may explore the factors that
hinder effective regulation and recommend new methods to increase the impact of SEBI
insider trading regulation.

Note
1. As per SEBI (Prohibition of Insider Trading) Regulations (2015), it is referred as “generally
available information”.

References
Bhattacharya, U. and Daouk, H. (2002), “The world price of insider trading”, The Journal of Finance,
Vol. 62 No. 4, pp. 75-108.
Bushman, R., Joseph, P. and Smith, A. (2004), “What determines corporate transparency?”, Journal of
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Eleswarapu, V.R. (2006), “The impact of legal and political institutions on equity trading costs: a
cross-country analysis”, Review of Financial Studies, Vol. 19 No. 3, pp. 1081-1111, doi: 10.1093/
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Finance, Vol. 25 No. 2, pp. 383-417.
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Crime, Vol. 18 No. 2, pp. 162-168.
Reports Insider trading
The Abid Hussein Committee report. in India
The Companies Act (2013).
Corporate Governance: An Emerging Scenario, published by National Stock Exchange (2010).
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The Patel committee report.
The Sachar committee report.
55
SEBI (Prohibition of Insider Trading) Regulations (1992).
SEBI (Prohibition of Insider Trading) Regulations, 2015.
SEBI (Prohibition of Insider Trading) (Amendment) Regulations (2002).
SEBI Annual Report, 2009-2010.
SEBI Annual Report, 2012-2013.

About the authors

Anil K. Manchikatla is a doctoral student at the School of Management, National Institute of
Technology Karnataka. Prior to 2013, he obtained NSE’s Certified Market Professional (NCMP-Level 1).
His current research draws broadly on insider trading and implications for market efficiency. Anil
Kumar Manchikatla is the corresponding author and can be contacted at: [email protected]
Rajesh H. Acharya is an Assistant Professor in the School of Management, National Institute of
Technology Karnataka. He received his PhD in Economics from the University of Hyderabad in 2010
and has published in various national and international journals. His research interest is presently
focused on financial economics, market micro structure of Indian capital market, applied financial
econometrics and energy finance.

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