Introduction: The Unfair Advantage
Imagine a cricket match where one team knows the opponent’s strategy in advance. That’s unfair, right?
Insider trading is similar—it’s when someone uses secret, non-public information to buy or sell stocks for profit, giving them an illegal edge over regular investors.
But how does it work? Why is it banned? And what happens if you get caught? Let’s break it down.
What Is Insider Trading?
Insider trading refers to:
✔ Buying or selling stocks based on confidential company information.
✔ Doing so before the information is public, to profit or avoid losses.
Who Is an “Insider”?
- Company executives, directors, employees.
- Family/friends of insiders (“tippees”).
- Lawyers, bankers, auditors with access to secrets.
Types of Insider Trading
1. Illegal Insider Trading
- Trading using material non-public information (e.g., merger news, poor earnings before announcement).
- Example: A CEO sells shares before announcing huge losses.
2. Legal Insider Trading
- Insiders reporting their trades (e.g., CEO buying shares openly).
- Must be filed with SEBI (India) / SEC (US).
Why Is Insider Trading Illegal?
- Unfair Advantage – Regular investors can’t compete.
- Undermines Trust – Hurts confidence in the stock market.
- Market Manipulation – Can artificially inflate/deflate prices.
SEBI’s Rules in India:
- Prohibited under SEBI (Prohibition of Insider Trading) Regulations, 2015.
- Penalties: Fines up to ₹25 crore or 3x the profit made, whichever is higher + jail time.
Famous Insider Trading Cases
1. Harshad Mehta Scam (1992)
- Exploited bank loopholes to manipulate stock prices.
- Impact: Caused a market crash; SEBI strengthened regulations.
2. Rajat Gupta (US, 2012)
- Ex-Goldman Sachs director leaked insider info to hedge funds.
- Punishment: 2 years in jail + $5M fine.
3. Reliance Petroleum Case (2007)
- Alleged insider trading before selling shares; SEBI fined Reliance.
How to Spot Insider Trading?
- Sudden, unusual stock movements before big news.
- Insiders buying/selling heavily before announcements.
- Whistleblower reports (employees leaking info).
What If You Accidentally Insider Trade?
- Example: Your friend (a company insider) tells you about a merger, and you trade on it.
- Even if unintentional, you can be penalized.
- Always verify if info is public before trading.
How SEBI Detects Insider Trading
✔ Data monitoring – Tracks unusual trading patterns.
✔ Whistleblower tips – Employees/experts report fraud.
✔ Forensic audits – Checks company records.
Final Takeaways
✔ Insider trading = Using secret info for stock gains (illegal).
✔ SEBI bans it to keep markets fair for all investors.
✔ Penalties include heavy fines + jail time.
✔ Always trade only on public information.
