Insider Trading Penalty in India: SEBI Rules, Fine & Jail Term Explained (2025)
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| Insider Trading |
Introduction
Insider Trading means misusing confidential information of a company for trading in the stock market. When a person or an official takes advantage of his position to buy or sell shares before confidential information such as quarterly results, mergers, acquisitions or major changes of the company are known, it is called insider trading.
This is a type of illegal trading because it goes against the fairness of the market and causes losses to normal investors.
Insider Trading (Example)
Suppose an employee or CFO of a company knows that the company is going to make profits next month and he gives this information to his friends, then his friends sell the shares of that company, we call this insider trading.
Who can do insider trading?
Anyone who has access to sensitive information of the company in any way can do insider trading. Such as:
- Company directors
- Promoters
- Employees
- Auditors
- Legal advisors
- Consultants
- Relatives of insiders
How does SEBI stop insider trading and what is SEBI?
- The full form of SEBI is Securities and Exchange Board of India. It is India's stock market regulator.
- The main job of SEBI is to keep the stock market fair, transparent and investor friendly.
- SEBI has made some strict rules to stop insider trading, under which if a person is found guilty, he can face penalties and even jail.
What do SEBI (Prohibition of Insider Trading) Regulations, 2015 say?
SEBI introduced the "Prohibition of Insider Trading Regulations" law in 2015, whose aim is to stop insider trading.
The main points of this regulation:
- Insiders are prohibited from using unpublished price sensitive information (UPSI) for trading.
- Insiders cannot share this information even with their relatives or friends.
- Listed companies have to maintain an internal code of conduct.
- Companies have to create proper policies for disclosure of UPSI.
Insider Trading Penalty in India: SEBI Rules Explained
SEBI can take several types of actions against a person found guilty of insider trading:
If someone is caught doing insider trading, this is what happens
1. Civil Penalty (as per SEBI rules)
Penalty of up to ₹25 crore or 3 times the profit made, whichever is higher. SEBI decides the penalty depending on the seriousness of the violation.
2. Criminal Punishment
Insider trading can also be a criminal offence. It means:
Jail up to 10 years/Fine up to ₹25 crore These penalties can be given under Companies Act, 2013 and SEBI Act.
3. Ban from Market
SEBI can ban insider traders from trading in the stock market. This means that the guilty person cannot trade in shares or securities for a few years.
How is Insider Trading Penalty Decided?
SEBI considers some important factors:
- How much profit did the insider earn or avoid loss?
- How serious was the nature of UPSI?
- Did the insider commit the violation for the first time or was he involved in some cases earlier?
- Did the insider cooperate in the investigation?
What harm does insider trading do to investors?
Insider trading reduces trust in the stock market. Small investors who make fair trades suffer losses because insiders take unfair advantage.
Example
If an insider sells shares after knowing bad news, then the normal investor gets shares at a higher price, which later falls.
How does insider trading come to light?
SEBI has several surveillance tools that track unusual trading activities:
- Bulk or unusual volume trades
- Sudden transactions by a promoter or insider
- Change in stock price or volume before unlisted information
- SEBI detects all these patterns and starts investigation.
Famous Insider Trading Cases in India
1. Rajiv Gandhi Trust vs SEBI
In 2016, SEBI found Rajiv Gandhi Charitable Trust guilty of insider trading and imposed a fine of ₹10 lakh.
2. Reliance Petro Case
Reliance Industries was charged with insider trading in a case where SEBI charged them a penalty of more than ₹1,000 crore.
3. HDFC Bank Employee Case
In 2021, an HDFC Bank employee was accused of leaking confidential merger information and SEBI imposed a fine of ₹60 lakh.
How to Avoid Insider Trading?
1. Do not use UPSI
Do not use any unpublished price sensitive information for trading.
2. Follow Code of Conduct
Insiders of listed companies should strictly follow their internal policies and SEBI guidelines.
3. Trading Window Policies
Companies open and close the trading window around results or announcements. Insiders should trade only in the open window.
4. Pre-Clearance of Trades
For some trades, insiders have to take prior approval from the company. This maintains transparency.
How does SEBI's Watchlist and Monitoring work?
SEBI has an Integrated Market Surveillance System (IMSS) and Data Analytics Tool which monitors stock movements 24x7. If there is any unusual activity in any stock, it comes under SEBI's radar.
Conclusion:
(Protection of Market Fairness is Necessary) Insider trading is against the fairness and integrity of the market. SEBI's role is to ensure that all investors get equal opportunity, and no one takes unfair advantage. It is the duty of every investor to invest in an ethical and legal way.
If you are also active in the stock market, do not misuse UPSI and follow SEBI rules. This is beneficial for you, the market and the economy.
FAQs on Insider Trading in India
Q1. What is the minimum punishment for insider trading?
The minimum punishment is decided by SEBI. Generally, the penalty can be up to ₹25 crore or 3 times the profit.
Q2. Can insider trading happen accidentally?
If a person shares UPSI without intention, it can be considered accidental, but SEBI will still investigate.
Q3. Can relatives also plead guilty?
Yes, if a relative of an insider misuses the information, he can also plead guilty.
