Insider trading is the buying or selling of a publicly traded company’s stock by someone who is within or part of the organization based on Unpublished Price Sensitive Information. Unpublished Price Sensitive Information (UPSI) means any information which relates to the internal matter of a company and is not disclosed by the company in the regular course of business. If such information is leaked, it affects the price of securities of the company in the stock market.
A person who qualify to be an ‘’Insider” can be classified in two ways.
- A “Connected person” who has been directly or indirectly associated with the company prior six months of the regulations. These “Connected persons” can be Director, Officers, employees or a person having temporary or permanent relationship with the company.
- Another, is an “outsider” who may not be part of the organization but have access to full or little of Unpublished Price Sensitive Information, making him an “Insider”.
In other words, insider trading is buying, selling or dealing in securities, bonds, and stocks of a company by a director, manager, employee or larger shareholder of the company who has confidential information that is not accessible to the public.
Although Insider trading is a common practice in many of the listed companies. It has caused a lot of illegal issues in terms of trading by UPSI holders by neglecting the public invertor’s rights.
As per SEBI – (PROHIBITION OF INSIDER TRADING) REGULATIONS 2015, Amended April 2019, every listed organization has to maintain a digital database of UPSI holder along with their Initial holdings. The Regulation also states that every UPSI holder has to get an approval for Trading (either for Self or Relative) and update their holding on periodic basis, to The Compliance Officer.
The amendment was put forward by SEBI due to the recent illegal activities put forward by traders of many organizations. Illegal Insider trading occurs when a trade such as the selling or buying of a stock, security or bond has been affected by the leakage of confidential information that the company has not made public. Because this confidential information is not accessible to other shareholders and investors, a person who uses such information is trying to expand unfair advantage over the rest of the market or public. This will create a huge loss to the public shareholders who are invested in the company due to lack of transparency between the firm and the people.
Ever since SEBI’s 2019 amendment, it has been protecting the rights and interest of the public. The new SEBI regulation appears to be very promising, more practical and largely in line with the global approach to insider trading. They also equipped to ensure better compliance and enforcement. Insider trading is perceived to be a deep rooted problem in India and the new regulations will ensure a level-playing field in the securities market while securing the interests of both insider traders and public investors at large.