Insider Trading Through Unlawful Disclosure of UPSI in India: Legal Framework and Liability

Summary: Insider trading in India extends beyond buying or selling securities while possessing unpublished price sensitive information (UPSI). The unlawful communication or procurement of confidential price-sensitive information can independently attract regulatory liability, even where the person disclosing the information does not trade or receive a financial benefit. This research paper examines the legal framework governing such conduct under the Securities and Exchange Board of India Act, 1992 and the SEBI (Prohibition of Insider Trading) Regulations, 2015, with particular emphasis on Regulations 2, 3, 4, 9 and 9A. It considers the responsibilities of directors, employees, connected persons, professional advisers, recipients of UPSI and listed companies, and discusses the exceptions for communication in furtherance of legitimate purposes, performance of duties or discharge of legal obligations. The analysis addresses the December 2024 expansion of connected-person coverage and the March 2025 amendments broadening the illustrative categories of UPSI, together with structured digital database requirements and trading-window provisions. Drawing on the Supreme Court’s decisions in Chairman, SEBI v. Shriram Mutual Fund and SEBI v. Kishore R. Ajmera, it examines civil regulatory liability and the role of circumstantial evidence in securities-market proceedings. Comparative references to the United States and European Union illustrate alternative approaches to unlawful disclosure, tipping and the responsibilities of recipients. The paper identifies difficulties involving encrypted communications, proving information leaks, determining legitimate purposes, maintaining internal controls and prosecuting remote recipients. It recommends clearer regulatory guidance, stronger digital compliance systems, timely enforcement, effective informant protection and proportionate sanctions while maintaining safeguards for legitimate commercial information-sharing.

Insider Trading Through Unlawful Disclosure of Unpublished Price Sensitive Information in India: A Critical Analysis of the Legal Framework and Liability

Abstract

Insider trading is not only about a person who buys or sells shares using secret information. In many cases the real wrong begins earlier, when someone inside a company passes on price sensitive information to another person who then trades on it. This paper examines the law on unlawful disclosure of unpublished price sensitive information (UPSI) in India. It analyses the Securities and Exchange Board of India Act, 1992 and the SEBI (Prohibition of Insider Trading) Regulations, 2015, with special attention to Regulation 3 on communication of UPSI and the recent amendments of 2024 and 2025. It also discusses the liability of insiders, connected persons, advisors and the persons who receive the information, and refers to decisions of the Supreme Court and to the position in the United States and the European Union. The paper argues that Indian law is broad and strict, but that it faces real difficulty in proving the act of communication, especially in the age of messaging applications, and that the idea of a legitimate purpose is not defined clearly enough. It suggests stronger digital surveillance, clearer standards for sharing information and better use of the informant mechanism.

Keywords: Insider trading, unpublished price sensitive information, unlawful disclosure, tipping, SEBI, connected person, legitimate purpose, India.

1. Introduction

A securities market works on the belief that all investors are acting on the same basic information. When a few persons know something important about a company before the public does, and use it to make a profit or avoid a loss, this belief is damaged. Ordinary investors then start to feel that the market is a game that is already decided.

Most people think of insider trading as a director buying shares just before good news is announced. But the law also punishes the person who gives the information to someone else. This is often called tipping. The person who tips may not trade at all and may not earn any money, yet the harm to the market is the same. In India, the SEBI (Prohibition of Insider Trading) Regulations, 2015 deal with this problem and make unlawful communication of UPSI a separate wrong from the act of trading.

The problem has become more serious with technology. Quarterly results, merger plans and similar news can now be shared through a message or a forwarded screenshot in a few seconds, and groups on messaging applications have been found to be a regular route for leaks. At the same time, companies have to share sensitive information with auditors, lenders, lawyers and bankers for genuine reasons, so the law cannot simply ban all sharing. Where to draw the line is the central question of this paper.

2. Research Gap and Question

Much of the writing on insider trading in India deals with the act of trading, the trading window and the disclosure of shareholding. Comparatively little attention has been paid to the act of unlawful communication itself, the meaning of a legitimate purpose, and the difficulty of proving a leak when the only evidence is a pattern of trades and phone records. The recent amendments to the Regulations have also received limited analysis. This research tries to examine these issues together.

Is the existing legal framework in India adequate to prevent and punish insider trading arising from the unlawful disclosure of unpublished price sensitive information?

3. Objectives and Research Methodology

The main objectives of this research are:

• To understand the meaning of insider trading, UPSI and unlawful disclosure.
• To examine the Indian laws and regulations dealing with the communication of UPSI.
• To analyse the liability of insiders, connected persons, advisors and recipients of the information.
• To study important judicial decisions and compare the Indian position with other jurisdictions.
• To identify weaknesses in the present framework and suggest reforms.

This research follows the doctrinal method. It relies on statutes, regulations, decisions of courts and tribunals, committee reports and secondary legal materials.

4. Legal Framework Governing Unlawful Disclosure of UPSI

India does not have a separate statute only for insider trading. The subject is governed mainly by the SEBI Act, 1992 and the Regulations made under it, which are enforced by the Securities and Exchange Board of India (SEBI).

4.1 Securities and Exchange Board of India Act, 1992

Section 12A of the SEBI Act prohibits a person from engaging in insider trading. It also prohibits dealing in securities while in possession of material or non-public information, and communicating such information to any other person, in contravention of the Act or the Regulations. This gives the statutory basis for treating communication of information as a wrong in itself.

Section 15G provides for a monetary penalty for insider trading. The penalty is not less than ten lakh rupees and may extend to twenty-five crore rupees or three times the profit made, whichever is higher. Section 24 provides for criminal prosecution, with imprisonment up to ten years, or a fine which may extend to twenty-five crore rupees, or both. SEBI can also issue directions under Sections 11 and 11B, such as restraining a person from the market or ordering disgorgement of unlawful gains. Appeals against SEBI orders lie to the Securities Appellate Tribunal and then to the Supreme Court.

4.2 SEBI (Prohibition of Insider Trading) Regulations, 2015

The 2015 Regulations replaced the earlier 1992 Regulations after the report of the High Level Committee headed by Justice N.K. Sodhi. Several provisions are important for the present topic.

Regulation 2(1)(n) defines UPSI as information relating to a company or its securities that is not generally available and which, on becoming available, is likely to materially affect the price of the securities. The definition lists examples such as financial results, dividends, changes in capital structure, mergers, demergers and acquisitions, and changes in key managerial personnel.

Regulation 2(1)(d) defines a connected person. It covers a person who is or has been associated with the company in any capacity in the previous six months, including through an employment, contractual or fiduciary relationship, or even by frequent communication with its officers. Certain categories, such as immediate relatives, are treated as connected persons unless they show otherwise.

Regulation 3(1) is the key provision on disclosure. It says that no insider shall communicate, provide or allow access to any UPSI relating to a company or its securities to any person, including other insiders, except where the communication is in furtherance of legitimate purposes, performance of duties or discharge of legal obligations. Regulation 3(2) is the other side of the same rule. It prohibits any person from procuring UPSI from an insider, or causing the insider to communicate it, except in the same limited cases. So both the giver and the taker of the information are covered.

Regulation 3(2A) explains what is a legitimate purpose. It includes sharing UPSI in the ordinary course of business with partners, collaborators, lenders, customers, suppliers, merchant bankers, legal advisors, auditors, insolvency professionals and other advisors or consultants, provided that sharing is not done to evade or circumvent the Regulations. Regulation 3(4) requires that the person who receives UPSI for a legitimate purpose be given notice that the information is confidential, and be made an insider for that purpose. Regulation 3(5) requires the board of directors to maintain a structured digital database with the names of such persons, the nature of the information and time stamps.

Regulation 4 deals with trading while in possession of UPSI. It prohibits an insider from trading when in possession of UPSI, with limited exceptions and defences, such as trading plans and transactions between promoters carried out after the information has been disclosed. Regulation 9 and Regulation 9A require listed companies and intermediaries to frame a code of conduct and put internal controls in place, including identification of UPSI and the maintenance of confidentiality.

4.3 Recent Amendments

The Regulations have been changed several times. In 2019, a framework for informants was added, under which a person who gives original information to SEBI about an insider trading violation can be rewarded, and the identity of the informant is kept confidential. The 2019 amendments also introduced the structured digital database and strengthened internal controls.

In 2024 SEBI widened the meaning of connected persons and relatives, and strengthened the presumption against persons who are close to the company or its insiders. Persons who fall in these categories now have a greater burden to show that they did not have access to UPSI.

The SEBI (Prohibition of Insider Trading) (Amendment) Regulations, 2025, notified on 11 March 2025 and in force from June 2025, expanded the definition of UPSI. A larger number of events, which are also disclosure events under the Listing Obligations and Disclosure Requirements Regulations, are now treated as UPSI. These include matters such as fraud or default, resignation of key persons and certain regulatory approvals. The amendment also allows companies to record externally sourced UPSI in the structured digital database within a short period after receiving it, and states that the trading window need not be closed for such information. This responds to the practical problem that companies cannot control information that comes from outside.

4.4 Bharatiya Nyaya Sanhita, 2023

The general criminal law may also apply where the facts fit. For example, a person who dishonestly misuses confidential information entrusted to him may face a charge of criminal breach of trust, and persons who agree to carry out a scheme of leaking and trading may be charged with criminal conspiracy. In practice, however, SEBI proceedings and the special provisions of the SEBI Act are used much more commonly, because they are better suited to the nature of the offence.

5. Liability in Cases of Unlawful Disclosure

A single leak can involve many persons. Their liability depends on their role.

Insiders and connected persons: A director, officer or employee who passes UPSI to an outsider without a legitimate purpose violates Regulation 3(1). It is not necessary that the person trades or makes any profit. The act of communication is itself the violation.

Recipients of the information: A person who receives UPSI from an insider and trades on it is liable under Regulation 4, because he is in possession of UPSI. Where he asked for the information, he may also be liable under Regulation 3(2). The more difficult question is how far the chain of recipients can be followed, for example when the information passes from a friend to another friend.

Advisors and intermediaries: Auditors, lawyers, bankers and consultants who receive UPSI for a legitimate purpose are bound by confidentiality. If they misuse the information or pass it on, they are liable under the Regulations and may face action under the rules governing their own profession.

Companies: Listed companies and intermediaries must maintain codes of conduct and internal controls. Failure to do so can lead to a separate penalty, even if the company did not itself trade.

Informants: A person who reports a leak to SEBI is protected from retaliation, and may receive a reward. This was meant to overcome the main problem in these cases, which is that the people who know about a leak are usually inside the same group.

It is also important to see that the consequences are of three kinds. SEBI can impose penalties and issue directions in its adjudication and quasi-judicial proceedings. SEBI can launch criminal prosecution under Section 24 of the SEBI Act. And the employer of the person concerned can take disciplinary action. These are separate processes with different purposes and standards of proof.

6. Important Judicial and Comparative Developments

6.1 Chairman, SEBI v. Shriram Mutual Fund, (2006) 5 SCC 361

The Supreme Court held that for imposing a civil penalty for breach of a regulatory statute, it is not necessary to prove mens rea. The breach of the statutory obligation is enough, and the penalty follows from the contravention. This approach is important for unlawful disclosure cases, because it means SEBI does not have to prove a guilty intention in order to impose a penalty in adjudication proceedings, though intention may still matter in a criminal prosecution.

6.2 SEBI v. Kishore R. Ajmera, (2016) 6 SCC 368

The Supreme Court held that in securities cases the standard of proof is the preponderance of probabilities and not proof beyond reasonable doubt, and that the regulator can draw reasonable inferences from the circumstances. This was a case on fraudulent and manipulative trading and not insider trading, but its reasoning is regularly applied in insider trading proceedings. It is especially useful in leak cases, because direct proof of a conversation is rarely available and SEBI usually has to rely on call records, meeting records and trading patterns.

6.3 The Position in the United States

In Dirks v. SEC, the United States Supreme Court held that a tipper is liable only if he discloses the information in breach of a duty and for a personal benefit, and that the recipient is liable if he knows of the breach. In United States v. O’Hagan, the Court accepted the misappropriation theory, under which a person who uses confidential information in breach of a duty owed to the source of the information is liable. In Salman v. United States, the Court held that a gift of confidential information to a trading relative or friend satisfies the personal benefit test. This shows that American law generally looks for a breach of duty and a benefit to the tipper. The Indian Regulations are broader, because Regulation 3 does not require any personal benefit to the person who communicates.

6.4 The Position in the European Union

The Market Abuse Regulation of the European Union separately prohibits unlawful disclosure of inside information. The offence is not committed if the disclosure is made in the normal exercise of employment, profession or duties. This is similar to the idea of a legitimate purpose in the Indian Regulations, but the European text applies the exception directly and does not give a list of examples.

7. Critical Analysis of the Existing Legal Framework

The Indian framework is wide and has been regularly updated, but several difficulties remain.

First, proving the act of communication is hard. A leak usually leaves no document. A phone call, a meeting or a message that has been deleted may be the only link between the insider and the trader. SEBI has to depend on circumstantial evidence, and the accused can argue that the contact was for personal reasons. This puts pressure on the standard of proof, and the practice of drawing inferences from the pattern of trades is open to challenge.

Second, the idea of a legitimate purpose is not clear. The list in Regulation 3(2A) is useful, but the phrase ‘in the ordinary course of business’ and the requirement that the sharing is not meant to evade the Regulations leave room for argument. A company may share information with a large number of consultants and each of them may claim that the sharing was necessary.

Third, the framework puts a very high burden on companies and connected persons. The presumption against connected persons and the expanded list of UPSI are useful for enforcement, but they carry the risk of treating routine information as price sensitive. Operational information that is not really price sensitive may be brought within the definition, and this may increase compliance costs without improving investor protection.

Fourth, the real source of leaks today is digital communication. Messaging groups, personal phones and email forwards are not easily monitored by companies. The structured digital database records the persons who have been told about UPSI formally, but it does not capture the informal leaks which cause the most damage.

Fifth, criminal prosecution is rare and slow. Most cases end in monetary penalties or directions, and the amounts are small compared to the profits that can be made from a large trade. If the penalty is only a fraction of the gain, it may be treated as a cost of doing business. Appeals also take long, and the penalty is often reduced or set aside on procedural grounds.

Finally, the remote tippee problem remains. When information passes through several persons, it is difficult to show that the last person knew or should have known that the information was UPSI and had been passed on unlawfully.

8. Suggestions and Recommendations

8.1 Clearer Standard for Legitimate Purpose

SEBI should issue detailed guidance on the meaning of legitimate purpose, with examples of what is and is not allowed. The guidance should apply a need-to-know test, so that UPSI is shared only with those persons who actually require it for the specific transaction.

8.2 Control of Digital Communication

Listed companies and intermediaries should be required to restrict the use of unofficial messaging channels for discussing UPSI, to keep records of official communication and to train employees on the consequences of forwarding sensitive information. Insiders who have access to UPSI should be told clearly that sharing it in a group is a violation.

8.3 Use of Data Analytics by the Regulator

SEBI should continue to improve its surveillance systems, so that unusual trading before major announcements can be detected quickly and linked with call and message data collected through lawful means. Early detection makes it easier to prove the case.

8.4 Stronger and Faster Penalties

Penalties should be set at a level that removes the benefit of the offence. Disgorgement of the full profit with interest, and a proportionate penalty, should be the usual course. Adjudication and appeals should be completed within a fixed time, so that the deterrent effect is not lost.

8.5 Better Use of Criminal Prosecution

SEBI should consider criminal prosecution under Section 24 in serious and repeated cases, especially where an insider has leaked information for a reward or where there is an organised group. A few well-prosecuted cases can have a stronger message than many small penalties.

8.6 Strengthening the Informant Mechanism

The informant framework should be made better known, and the process for submitting information should be simple and confidential. Protection against retaliation by employers should be given real effect, because the fear of losing a job is the main reason why employees remain silent.

8.7 Defining the Chain of Liability for Recipients

The Regulations should state clearly when a remote recipient is deemed to know that the information is UPSI. A reasonable test, such as whether a person in the same position would have understood that the information was confidential and came from inside the company, would help the regulator and give fairness to innocent recipients.

8.8 Balanced Treatment of Routine Information

The list of UPSI should be reviewed regularly to ensure that it covers information which is really price sensitive. Companies should be allowed to apply a materiality assessment, so that routine information is not treated as UPSI only because it is on a list.

8.9 Awareness and Training

Regular programmes should be conducted for directors, employees, advisors and professionals such as company secretaries, auditors and lawyers, explaining what UPSI is and what the consequences of sharing it are. Many leaks occur because persons do not realise that a casual conversation can be a violation.

8.10 International Cooperation

Since securities are traded across borders and information is shared through global platforms, SEBI should continue to strengthen its cooperation with foreign regulators and use the information-sharing arrangements that are available to it to trace trades and communications outside India.

9. Conclusion

Unlawful disclosure of unpublished price sensitive information is one of the main routes through which insider trading takes place. Indian law has dealt with it seriously. The SEBI Act gives wide powers of penalty and prosecution, the 2015 Regulations prohibit both the communication and the procurement of UPSI, and the amendments of 2024 and 2025 have widened the coverage of connected persons and the definition of UPSI.

However, the strength of the law on paper is not matched by the ease of enforcement. Leaks are hard to prove, legitimate sharing is not clearly separated from unlawful sharing, and penalties often arrive late and may not match the profit made. The informal digital channels that are now used for most leaks are not covered effectively by the existing compliance system.

India therefore needs clearer guidance on legitimate purpose, better control of digital communication, faster and more effective enforcement, and a well-used informant mechanism. At the same time, the law should avoid treating ordinary business communication as a violation. A fair and open market depends on equal access to information, and protecting that equality is a responsibility of the regulator, the companies and every person who is trusted with confidential information.

References

Statutes and Regulations

• The Constitution of India, 1950.
• The Securities and Exchange Board of India Act, 1992.
• The Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015, as amended.
• The Securities and Exchange Board of India (Prohibition of Insider Trading) (Amendment) Regulations, 2025.
• The Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015.
• The Bharatiya Nyaya Sanhita, 2023.

Cases and Reports

• Chairman, SEBI v. Shriram Mutual Fund, (2006) 5 SCC 361.
• SEBI v. Kishore R. Ajmera, (2016) 6 SCC 368.
• Dirks v. SEC, 463 U.S. 646 (1983).
• United States v. O’Hagan, 521 U.S. 642 (1997).
• Salman v. United States, 580 U.S. 39 (2016).
• Report of the High Level Committee to Review the SEBI (Insider Trading) Regulations, 1992 (Justice N.K. Sodhi Committee), 2013.
• Regulation (EU) No 596/2014 on market abuse.

Authors: Vasee and Harini (Co-author), Vinayaka Mission’s Law School, Vinayaka Mission’s Research Foundation.