Insider trading means buying and selling of stocks of a company by having the knowledge of unpublished price sensitive information. In simple words when stocks or other securities of company are traded by the individuals who are closely associated with the company, or they have access to material Non published information which can effect the price of the shares once it comes in public domain, is known as Insider trading.
Example : If a Board member of a company who have the information that merger is going to be announced and as a result of which the shares of the company will go up, buys the shares of the company in his spouse’s name or passes this information to his relative and directs him to buy the shares, then this will result in Insider trading. In much easier words trading of company’s stock by the insider of the company is known as Insider trading.
Who is Insider ?
Insider has been defined under sec 2(e) of SEBI Regulations’ 1992. A person is Insider if he has access to
Unpublished price sensitive information about the company
Any person holding more than 10% of the voting shares.
What is UPSI ( Unpublished price sensitive information)
Unpublished price sensitive information is defined under sec 2(k) of SEBI Regulations 1992. UPSI is any information which is closely associated with companies functioning, has not been published in public domain and has the ability to affect the price of the shares of the company once it is in public domain. Understanding UPSI and Insider with the help of above-mentioned example. Board Member is an Insider as he is closely connected with company and has the information about its functioning. The information that company is going to announce merger is an UPDI as it has the ability to affect the price of the company stocks.
Whether the Insider trading legal or illegal ?
]S. Ramesh, S. Padmalata And Asis … vs Securities And Exchange Board Of India on 22 June 2004
Insider trading is legal when an insider buys the stocks of his company but at the same time reports the trade to the competent authority that Security Exchange Commission.
Insider trading is illegal when the insider wants to get benefitted by the use of material information of company for trading in companies stocks.
Competent Authority to have a check on Insider trading
SEBI is established as a statutory body which works under the framework of Securities and Exchange Board of India, 1992. The various roles and power of SEBI have been discussed under Section 11 of the SEBI Act,1992.