What is Insider Trading in Stock Markets

Insider trading is the buying or selling of securities of a company by a person who has direct or indirect access to unpublished price-sensitive information of the company. By engaging in insider trading, the trader or investor distorts the level playing field and fair play principles.

By practising insider trading, the person involved in the trades uses the unfair advantage of having the unpublished and unreported information that is not available to others, making it an unethical and illegal trading method. The company is legally obligated to protect the unpublished information and also keep a proper tab on the people who have access to that information.

While insider trading is banned across the world, the definition of an insider – the person in possession of price-sensitive information – and other key terms can differ in different jurisdictions. Insider trading in India is prohibited by the Securities and Exchange Board of India (SEBI), the regulatory body of the Indian securities market, under the Prohibition of Insider Trading Regulation, 2015.

The regulatory authorities use a multipronged strategy and data analytics techniques to identify cases of insider trading. The penalty for involvement in insider trading includes imposition of a fine, impounding of gains, a bar on future trading, and criminal prosecution (in extreme cases).

Who is an Insider?

Any person who has access to or knowledge of the unpublished price-sensitive information is considered to be an insider. It can be a director, an officer, an employee, an auditor, a legal advisor of the company, or it can be a person who is closely related to them or in frequent communication with them.

SEBI defines an insider as any person who is or has been, during the past six months, directly or indirectly associated with a company in any capacity. The association can even be by reason of frequent communication with the company’s officers or directors.

Thus, the company insiders are the following categories of people:

• A director, board member, official, executive or employee of a company, or their immediate relative;
• A holding company or associate company, or subsidiary company;
• An investment company, trustee company, asset management company or an employee or director thereof;
• An official of a stock exchange or a clearing house, or a corporation;
• A member of the board of trustees of a mutual fund, or a member of the board of directors of the AMC of a mutual fund, or an employee thereof;
• A banker of the company.

What is Unpublished Price Sensitive Information

Unpublished Price Sensitive Information (UPSI) refers to any information related to the company or its securities that is not in the public domain. The UPSI, when it becomes public, has the potential to affect the price of the company’s securities, leading either to a fall in the price of its stocks or a rise in the stock prices.

The UPSI can be related to the financial results of a company, dividends, change in capital structure, changes in key managerial personnel, acquisitions and mergers, demergers or delistings, or expansion of businesses. It is legally obligatory for insiders not to communicate and not allow access to anyone to the unpublished information of the company. It is also legally prohibited to procure UPSI from insiders.

The company is required to ensure that a structured digital database, which should be maintained internally with adequate internal checks, is maintained that contains the nature of unpublished price-sensitive information. The digital database should also contain the names of persons who have shared the information, and also the names of persons with whom the UPSI is shared, along with the PAN or an alternate identifier if the PAN is not available.

How is Insider Trading Detected? 

A regulatory body uses different data monitoring and analytics tools, surveillance mechanisms, and tips generated from informants and whistleblowers to detect and investigate incidents of insider trading.

The trade pattern analysis based on unusual spikes in trading indicators of the securities of a company, ahead of a major announcement by the company, serves as an immediate red flag warranting attention. The regulatory authority also gives immense importance to informants and whistleblowers, ensuring their identity remains secret and they are protected from any backlash.

Examples of Insider Trading in India

• On May 2, 2025, it was reported that SEBI sent a notice to Pranav Adani, director of several Adani group companies, accusing him of sharing UPSI about the 2021 acquisition deal with his brother-in-law.
• In March 2025, SEBI issued an administrative warning to Nestle India for violating insider trading regulations after a violation was detected to have been committed by a designated person within the company.
• On May 29, 2025, SEBI impounded gains of ₹19.78 crore and barred five former and serving officials of IndusInd Bank who were found involved in insider trading.
• On July 4, 2025, SEBI imposed a ₹10 lakh penalty on Deepak Shah for insider trading after he was found to be involved in trading the shares of a company for which it worked as financial adviser.

Conclusion

Insider trading is a serious offence that has the potential to disturb and distort the fair play and level playing field principles of the stock markets. The traders and investors should be careful in understanding the legalities involved in insider trading, who constitutes an insider, and what constitutes the Unpublished Price Sensitive Information (UPSI). While there are mechanisms to detect and investigate incidents of insider trading, the persons found involved in insider trading can have their gains impounded and be barred from trading in the future.

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