Insider trading refers to the practice of purchasing or trading securities based on material non-public information (MNPI). In simple terms, insider trading involves buying or selling stocks based on information not available to the public. However, it is critical to highlight that not all insider trading is illegal. Insiders can buy or sell securities legally if they follow certain procedures.
Differentiating between Legal Insider Trading and Illegal Insider Trading
Legal insider trading refers to transactions made by individuals who hold a position of trust or have access to privileged information. This includes company directors, officers, or employees. These insiders must comply with certain regulations and file a public report of their trade within specific timeframes to ensure transparency best trading platform in India. On the other hand, illegal insider trading refers to trades made based on material non-public information, such as earnings reports, merger announcements, or other similar information.
The Concept of Material Non-Public Information (MNPI)
MNPI refers to information that, if disclosed publicly, could affect a security’s price. Examples of MNPI include earnings guidance, merger or acquisition announcements, and any other information that could affect a company’s stock price. Using MNPI to trade stocks is illegal and punishable by hefty fines and imprisonment.
Insider Trading Regulations in India
In India, the Securities and Exchange Board of India (SEBI) oversees the securities market and regulates insider trading. The SEBI (Prohibition of Insider Trading) Regulations, 2015 lay down strict guidelines on insider trading and ensures that all individuals and entities know their obligations when it comes to insider trading.
SEBI (Prohibition of Insider Trading) Regulations, 2015
The SEBI (Prohibition of Insider Trading) Regulations, 2015 lay down the framework for insider trading prevention in India. The regulations require listed companies, their directors, officers, and connected persons to follow specific procedures when buying or selling securities. The regulations also require the maintenance of an insider trading compliance program and the filing of a public disclosure when a transaction is made by an insider.
Compliance and Penalties for Violating Insider Trading Regulations
Individuals or entities who violate insider trading regulations face severe penalties, including fines and imprisonment. Companies that violate the rules can be penalized up to INR 25 crores or 3 times the profits made, whichever is higher. Additionally, individuals found guilty of insider trading can be sentenced to imprisonment up to 10 years.