Insider trading is a term subject to many definitions and connotations and it encompasses both legal and prohibited activity.
Insider trading is the buying, selling, or dealing in securities of a listed company by a director, member of management, employee of the company, or by any other person such as internal auditor, advisor, consultant, analyst, etc, who have knowledge of material inside information which is not available to the general public.
Insider trading takes place legally every day, when corporate insiders – officers, directors, or employees – buy or sell stock in their own companies within the confines of company policy and the regulations governing this trading. Hence Insider trading can be legal as long as it conforms to the rules set forth by SEBI
Legal examples of Insider Trading
CEO or a board member of company ABC buys 2,000 shares of stock in the company ABC. The trade is reported to the SEBI.
An employee of a company exercises his stock options and buys 500 shares of stock in the company that he works for.
Illegal examples of Insider Trading
A member of the leadership team of a company overhears a meeting where the CFO is talking about how the company is going to be driven into bankruptcy as a result of severe financial problems. The employee knows that his friend owns shares of the company. The employee warns his friend that he needs to sell his shares right away.
A government employee is aware that a new regulation is going to be passed that will significantly benefit an electricity company. The government employee secretly buys shares of the electricity company and then pushes for the regulation to go through as quickly as possible
Latest Regulations in India
On 18th January 2019, the Securities and Exchange Board of India (SEBI) decided to hold promoters of the company, irrespective of their shareholding status, responsible for violation of insider trading norms if they possess non-published price-sensitive information (UPSI) regarding the company without any a legitimate purpose.
SEBI specified “that the term legitimate purpose will include sharing of the non-published price-sensitive information (UPSI) in the ordinary course of business by an insider with partners, collaborators, lenders, customers, suppliers, merchant bankers, legal advisors, auditors, insolvency professionals or other advisors or consultants, provided that such sharing has not been carried out to evade or circumvent the prohibitions of these regulations.”
This amendment is introduced under “Prohibition of Insider Trading”.
Read more information on Insider Trade regulations