Every company operates by their code and rules. Companies do not reveal the strategies or specific information to the public for security reasons. However, some people have found a way to make a considerable amount of money by revealing those secrets to the public or other companies. It is commonly known as insider trading. It has been on the rise since earlier times. Other companies try to gain those secrets in order to overtake their rival and gain substantial financial success. By way of insider trading, the investors and potential investors can gain substantial financial success as they know the sensitive information about the company. This eventually damages the company’s reputation and goodwill in the market. The person trading that information could be an employee of that company as well. Insider trading can also be said to be illegal trading under the company’s veil.  

History of Insider Trading

Insider trading has been in existence since the 1920s. The people who received the inside information had a good connection inside the company, which helped them make a substantial financial profit at the expense of other traders. The year 1940 was the year where the first demand for regulation of insider trading was requested. In 1948, the Thomas committee was presented where it was requested that all the agents, officers, auditors must reveal their information responsibly. When the Companies Act came into existence in 1956, sections 307 and 308 stated that the directors and employees who have a crucial position in a company should reveal pertinent information to the shareowners and keep a proper record about the shareholding in a register. Due to the continuous practice of sharing inside information to select people, the shareholder received substantial financial losses and stopped investing in the market. This led to a decline in foreign investment, which led to considerable losses in the Indian economy. Sachar committee presented their findings to the government and stated that there is a requirement for legislation that can end the practice of insider trading. The document presented by the Abdul Hussain Committee that the act of insider trading should be made a crime in law and a body known as SEBI should be created that can help the smooth functioning of the market and also act as a watchdog. After all the suggestions from the committee, the Securities Exchange Board of India was formed to supervise the proper functioning of the market and was given the power to do investigation, proceedings and to give a penalty to entities who defy any law or carry out any activity which is against the law.


Legal safeguards against insider trading

The term insider trading has been defined under section 2(e) of prohibition of Insider Trading Regulation Act, 1992 as “Insider is the person who is connected with the company, who could have the unpublished price sensitive information or receive the information from somebody in the company”. This act allows the person who commits insider trading to have strict punishment imposed on them. The punishment may include exclusion from the company’s future, suspending wages and other rights etc. Although insider trading has not been defined anywhere, section 195 of the act restrict the director or any person who have a crucial position in the company from committing insider trading. Section 458 empowers the SEBI to take action against the companies that they suspect to have insider trading taking place regardless of the company to be registered or not. 

There is a specific provision mentioned in the Prohibition of Insider Trading Act which deals with insider trading. 

Section 2(c) defined connect person as a person who might be directly or indirectly involved in the company’s work. It could be an employee or a person who has access to the company’s information to hide from public view. 

The definition of the term ‘insider’ has been defined under section 2(e). It says that an insider means a person who is associated with the company or has access to classified data of the company that has not been published for public view or data related to the functioning of the company and pricing policy. 

Under section 3 of this act, a nod person or insider can reveal the classified data of the company to the public as it might be dangerous for the company’s security and can influence the company’s financial position.

Under section 12 says that every company registered with SEBI, including pubic finance institution self-regulatory organization, corporate or professional firm, is advised to make rules and regulations for internal structure so that insider trading can be stopped. These rules and regulations must be consonant with the rules mentioned in schedule 1 of the Prohibition of Insider Trading Act. There have been amendments brought to this act by SEBI. These include provisions like

  • The companies who not listed yet will also come under the observance of SEBI.
  • The cash incentive up to 1 crore to the person who brings light into the insider trading done in any company
  • More stringent rules have been unveiled to prevent insider trading.
  • There has been a new Informant Mechanism system that started where the people who know about insider trading happening in a company can report to. The person who has the knowledge known as an informant needs to submit the Voluntary Information Disclosure Form (VIDF). The informant can remain anonymous if he wishes to do so, and he also must have a legal representative.  

In Hindustan Lever Limited v SEBI, the petitioner purchases eight lakhs shares from Unit Trust of India. The shares were purchased after an amalgamation of HIL and some subsidiaries. After a probe was done in this deal, the SEBI found that there was insider trading done. HIL filed an appeal in the appellate court, stating that they had no awareness about insider trading. The appellate court held the SEBI’s claim to be valid. After the decision of this case, the SEBI reformed the rules by defining the term “unpublished”.


Insider trading is not an isolated crime. It affects the public at large. It is good to see strict reforms taken by the governments to curb this practice, but even after that, the practice of insider trading is still prevalent. There is a need for the SEBI to continue to monitor insider trading in India and reform the laws from time to time to better deal with this crime.    

Animesh Sharma

Animesh Sharma is from Jaipur, Rajasthan. He has completed B.A. LL.B (Hons) from Manipal University Jaipur. He like to play football, listen to music, play piano, play games.

Related Articles

Leave a Reply

Your email address will not be published.

Back to top button
Hey, wait!

Before you go, Subscribe to our Newsletter.