Critical Analysis of SEBI (Prohibition of Insider Trading) Regulations, 2015

Balancing Transparency and Market Integrity: A Critical Analysis of SEBI (Prohibition of Insider Trading) Regulations, 2015

Abstract

The phenomenon of insider trading poses a significant threat to the fairness, transparency, and integrity of securities markets worldwide. In India, the Securities and Exchange Board of India (SEBI) has played a proactive role in curbing such unethical practices through a dedicated regulatory framework—most notably, the SEBI (Prohibition of Insider Trading) Regulations, 2015. This paper offers an in-depth examination of these regulations, analyzing their evolution, key provisions, landmark case law, comparative global frameworks, enforcement challenges, and recommendations for improvement. The study draws from statutory materials, judicial decisions, scholarly commentary, and SEBI enforcement data to assess the real-world effectiveness of the regulations in preventing misuse of unpublished price sensitive information (UPSI). In an increasingly digitized and globalized market environment, this article argues that India must further strengthen its insider trading framework with clearer definitions, technological integration, and enhanced institutional safeguards to ensure true parity among investors.

1. Introduction

1.1 What is Insider Trading?

Insider trading occurs when a person trades in securities based on material, non-public information that gives them an unfair advantage over other investors. This practice undermines the fundamental principle of equality in securities markets and weakens investor confidence.

In legal and financial terms, insider trading involves:

• Possession of Unpublished Price Sensitive Information (UPSI), and
• Trading in securities based on that information, often by insiders or individuals who are connected to them.

While trading by company insiders is not inherently illegal (e.g., executives buying their own company’s stock), it becomes illegal when it is based on UPSI that has not been made available to the general public.

1.2 Relevance to Indian Capital Markets

India’s financial markets have witnessed rapid growth and transformation over the past two decades. However, the incidence of insider trading has remained a critical concern. It erodes investor confidence, distorts fair price discovery, and damages the reputation of Indian capital markets in global forums.

To address this, SEBI has consistently updated its regulatory framework to introduce stricter controls, promote ethical conduct, and improve enforcement mechanisms. The most significant development in this regard came with the SEBI (Prohibition of Insider Trading) Regulations, 2015, which marked a paradigm shift from previous versions of the law.

1.3 Research Objectives and Methodology

This research article aims to:

• Explore the historical development of insider trading regulation in India.
• Analyze the structure and content of the 2015 regulations.
• Discuss judicial interpretation and enforcement actions.
• Compare India’s framework with international practices.
• Identify challenges and propose reforms.

Methodology:

• Doctrinal legal research using statutes, case laws, and SEBI circulars.
• Review of academic literature, white papers, and market reports.
• Comparative analysis with U.S. and U.K. regulations.

2. Evolution of Insider Trading Regulation in India

2.1 Pre-SEBI Era and Early Developments

Prior to SEBI’s formation in 1992, there was no standalone legal framework for insider trading in India. The Companies Act, 1956 had limited provisions to address fraud or mismanagement, but insider trading was largely unregulated. Due to the increasing complexity of markets, India needed a specialized agency to supervise securities-related misconduct.

2.2 SEBI Act, 1992 and the 1992 Regulations

With the establishment of SEBI as a statutory body under the SEBI Act, 1992, the first formal regulations on insider trading were issued in 1992. These were known as the SEBI (Insider Trading) Regulations, 1992.

Key features:

• Defined insiders and UPSI.
• Prohibited dealing in securities by insiders.
• Provided minimal compliance mechanisms.

2.3 2002 Amendment

In response to criticism of vague language and enforcement inefficacy, SEBI amended the 1992 regulations in 2002. Major changes included:

• Broadened definitions of connected persons.
• Strengthened disclosure requirements.
• Greater emphasis on directors’ and officers’ responsibilities.

Despite these changes, enforcement remained difficult due to:

• Burden of proving motive and intent.
• Limited surveillance capacity.
• Loopholes in the legal framework.

2.4 Formation of the High-Level Committee (2013)

SEBI appointed a High-Level Committee under Justice N.K. Sodhi in 2013 to overhaul insider trading laws. The committee observed that the 1992 regulations were outdated and inadequate in addressing modern trading practices. Based on its recommendations, SEBI introduced new regulations.

2.5 Introduction of SEBI (Prohibition of Insider Trading) Regulations, 2015

The PIT Regulations, 2015 replaced the 1992 framework and introduced several novel concepts, significantly strengthening insider trading law in India.

Objectives:

• Simplify and clarify definitions and scope.
• Focus on possession of UPSI rather than intent.
• Ensure fairness in market conduct.
• Harmonize with international best practices.

3. Key Provisions of the 2015 Regulations

3.1 Definitions: Insider, Connected Person, UPSI

The core terms defined in the 2015 regulations shape the scope and application of the law:

• Insider: Includes (i) connected persons, and (ii) those in possession of or having access to UPSI.
• Connected Person: Any person who has a relationship with the company that gives them access to UPSI, including employees, directors, consultants, auditors, legal advisors, and close relatives.
• UPSI: Information that:
  • Is not publicly available;
  • Is likely to materially affect the price of securities; and
  • Relates to financial results, dividends, mergers, acquisitions, delistings, or significant changes in capital structure.

3.2 Trading While in Possession of UPSI

The regulations prohibit any insider from trading in securities while in possession of UPSI unless it can be demonstrated that the trades were not influenced by such information. This shifted the burden of proof significantly onto the insider.

This “possession standard” differs from the earlier “use standard”, which required proving that the insider used the UPSI—a much harder task for regulators.

3.3 Trading Plans

To balance regulation with legitimate trading needs of insiders (e.g., employee stock options), the 2015 regulations introduced the concept of Trading Plans.

Features:

• Pre-scheduled trades for a future period.
• Subject to a cooling-off period.
• Must be disclosed to the company and stock exchange.
• Once submitted, cannot be revoked.

This safe-harbor provision allows insiders to trade without violating the law, provided they are not acting on UPSI at the time of execution.

3.4 Disclosure Obligations

There are two types of disclosures mandated under the regulations:

• Initial Disclosure: Required from promoters, directors, and key managerial personnel about their holdings at the time of appointment or listing.
• Continual Disclosure: Any change exceeding a prescribed threshold (currently ₹10 lakh in market value) must be reported within two working days.

The responsibility also extends to intermediaries and fiduciaries, such as merchant bankers, auditors, and law firms, who must ensure internal compliance.

3.5 Code of Conduct and Internal Controls

Every listed company, market intermediary, and fiduciary is required to:

• Formulate a Code of Conduct to regulate, monitor, and report trading by designated persons.
• Maintain a structured digital database of persons with whom UPSI is shared.
• Implement safeguards like Chinese Walls, restricted access to UPSI, and regular audits.

These codes must be approved by the Board of Directors and must align with SEBI’s minimum standards for compliance.

4. Amendments to the PIT Regulations, 2015

Since their introduction, the PIT Regulations have undergone several amendments to address gaps, technological changes, and practical enforcement issues.

4.1. 2018 Amendment—Based on the Fair Market Conduct Committee Report

SEBI formed the Committee on Fair Market Conduct under T.K. Viswanathan to enhance market integrity. Based on the committee’s recommendations, SEBI notified amendments on December 31, 2018.

Key Changes Introduced:

• Expanded definition of UPSI: Clearer language to include unpublished material information about mergers, acquisitions, and delistings.
• Inclusion of mutual fund units: Extended the scope to trading in mutual fund units if based on insider knowledge.
• Digital Structured Database: Mandatory for listed companies to maintain a digitally secure record of all persons with whom UPSI is shared, along with timestamps.
• Code of Conduct enforcement: Obligatory for intermediaries and fiduciaries to implement internal compliance policies.

4.2. 2021 and 2023 Amendments—Further Reinforcement

• Mandated whistleblower frameworks in listed companies.
• Enhanced penalty structures and gave SEBI authority to seek disgorgement of unlawful gains.
• Introduced compliance certificates from compliance officers to ensure code of conduct is implemented effectively.

4.3. 2024 Updates and Consultations

SEBI, in consultation papers from late 2023 and early 2024, proposed:

• Clarification on information symmetry: Ensuring equal access to financial disclosures.
• Expansion of “designated persons” to include more roles in IT, legal, and communication departments.
• Encouraging AI-powered compliance systems for proactive detection.

These amendments reflect SEBI’s intent to keep pace with changing technologies and trading practices.

5. Landmark Cases and Enforcement Trends

SEBI has increasingly relied on a mix of surveillance technology, whistleblowers, and inter-agency collaboration to investigate and prosecute insider trading.

5.1. Infosys Case (2020 & 2024)

In 2020 and again in 2024, SEBI investigated Infosys Ltd. for instances where insiders allegedly leaked financial results before public announcement. SEBI’s probe led to multiple individuals being penalized under the 2015 regulations. Infosys was directed to strengthen internal controls and review data access processes.

5.2. Axis Bank Merger Case (2023)

A former Axis Capital executive was penalized in connection with trading based on UPSI relating to a large merger. SEBI imposed fines over ₹1.13 crore, emphasizing that employees of intermediaries are also under the PIT regulations’ purview.

5.3. HDFC-HDFC Bank Merger (2022–2024)

Multiple entities were investigated for trading on merger-related UPSI. Though the case is ongoing, SEBI has emphasized stringent due diligence and audit mechanisms in such mega-deals.

5.4. Jagsonpal Pharmaceuticals (2021)

SEBI penalized employees and their relatives for trading based on financial results. This case clarified that relatives and family members can also be held accountable if they benefit from UPSI.

Trends Noted:

• SEBI uses call data records, email trails, and bank transactions as evidence.
• SEBI has adopted a settlement mechanism allowing violators to settle without admitting guilt (subject to conditions).
• Increased reliance on whistleblower tips through SEBI’s Informant Mechanism (introduced in 2019).

6. Comparative Legal Analysis: Global Frameworks

Understanding how India’s insider trading regulations compare globally offers valuable perspective.

6.1. United States: SEC and Rule 10b-5

The Securities and Exchange Commission (SEC) enforces insider trading laws through Rule 10b-5 under the Securities Exchange Act of 1934.

Key Features:

• Uses a “use” standard, requiring proof that insider trading was based on non-public information.
• Recognizes “constructive insiders”—e.g., lawyers and consultants—who owe fiduciary duty.
• Offers generous whistleblower incentives, including 10-30% of monetary sanctions collected.

Case Example: The famous Martha Stewart case highlighted prosecution under Rule 10b-5 despite limited evidence of direct benefit.

6.2. United Kingdom: Market Abuse Regulation (MAR)

The EU’s MAR, applicable in the UK (pre-Brexit and retained post-Brexit), covers insider dealing, unlawful disclosure, and market manipulation.

Features:

• Emphasizes public disclosure of inside information.
• Requires issuers to maintain insider lists.
• Strict rules on deferred publication, disclosures during earnings blackout periods.

6.3. Key Differences and Lessons for India

Takeaways:

• India should bolster whistleblower mechanisms to enhance detection.
• Need to invest in automated market surveillance tools.
• Cross-border data sharing protocols are essential due to global capital flows.

7. Challenges in Enforcement and Compliance

Despite the progress made by SEBI, the effective enforcement of insider trading laws in India continues to face several hurdles:

7.1. Difficulty in Proving Insider Trading

• While the 2015 Regulations use a “possession standard” rather than a “use standard,” enforcement still requires circumstantial and documentary evidence.
• Many tip-offs are passed verbally or through informal channels, making detection difficult.
• Establishing motive, access to UPSI, and trading benefit is often complex and time-consuming.

7.2. Technological Gaps

• SEBI’s surveillance systems have improved, but still lag behind global regulators like the SEC.
• Use of encrypted apps, burner phones, and social media by insiders creates digital blind spots.

7.3. Insider Networks and Proxy Trading

• Insiders often use relatives, shell entities, or close associates to trade on their behalf.
• These proxy trades make linking the insider to the transaction difficult without forensic audits.

7.4. Compliance Culture in Indian Firms

• Many Indian companies, particularly mid-cap and small-cap firms, lack robust internal compliance mechanisms.
• The role of compliance officers is sometimes perfunctory, and codes of conduct are inadequately enforced.

7.5. Judicial Delays

• SEBI’s orders can be challenged before the Securities Appellate Tribunal (SAT) and the Supreme Court, often causing delays in final enforcement.
• Some high-profile insider trading cases have remained unresolved for years, affecting the deterrence value.

8. Literature Review and Academic Perspectives

8.1. Academic Commentary on Indian Regulations

Several scholars have written on insider trading in the Indian context:

• Umakanth Varottil (NUS Law) has argued that India’s framework is “over-reliant on definitional breadth and under-reliant on enforcement capacity.”
• Sandeep Parekh, former SEBI Legal Advisor, has emphasized the need for statutory presumptions in favor of regulators to shift the burden of proof.
• In India Law Journal, scholars have noted that the Infosys case and others signal a more serious regulatory posture by SEBI but inconsistent penalties have blunted the deterrent effect.

8.2. Behavioral Insights and Insider Trading

• Research shows that corporate insiders consistently outperform markets—indicating possible information asymmetry.
• A 2022 NIPFP report emphasized the role of behavioral surveillance tools like trade clustering, social proximity analytics, and voice recognition.

8.3. Empirical Studies on SEBI’s Actions

• A 2021 study by NSE and IIM Ahmedabad found that only a small fraction (less than 10%) of suspected insider trading cases led to conclusive penalties.
• Another study by Vidhi Legal Centre (2023) emphasized SEBI’s growing use of disgorgement orders, which helps in deterrence but requires quicker recovery mechanisms.

9. Suggestions for Reform

Based on the analysis above, several reforms are necessary to strengthen the framework:

9.1. Strengthening Surveillance Capacity

• Invest in AI-powered trade surveillance tools, similar to FINRA’s “SMARTS” in the U.S.
• Create real-time monitoring dashboards to detect unusual trading spikes before announcements.

9.2. Expand Whistleblower Rewards and Protections

• Increase financial incentives for informants.
• Provide anonymity guarantees and protection from retaliation, as done under the U.S. Dodd-Frank Act.

9.3. Define “Reasonable Expectations of Access”

• Clarify ambiguous terms like “likely to access UPSI” in the definition of connected persons.
• This would help distinguish between casual associations and genuine insider relationships.

9.4. Mandatory Audit of Compliance Frameworks

• Annual third-party audit of insider trading controls should be mandatory for all listed entities.
• Stock exchanges should maintain a compliance rating for companies based on adherence to PIT regulations.

9.5. Cross-border Enforcement Protocols

• With foreign investors and firms operating in India, SEBI must strengthen MOUs with global regulators for joint investigations.
• Adopt uniform data-sharing standards to pursue cross-border insider trading.

10. Conclusion

The SEBI (Prohibition of Insider Trading) Regulations, 2015 represent a significant step in aligning India’s capital markets with global standards of fairness and transparency. By replacing intent-based enforcement with a possession-based standard, the regulations removed one of the major hurdles in penalizing insider trading.

However, regulatory success depends on implementation, surveillance, and cultural compliance. Insider trading continues to evolve, often outpacing traditional regulatory methods. SEBI’s proactive amendments, increased reliance on data analytics, and focus on whistleblower mechanisms mark the way forward.

For India to sustain investor trust and market credibility, it must:

• Continue evolving technologically,
• Close definitional gaps, and
• Build a strong culture of corporate integrity and market fairness.

Only then can the spirit of the PIT Regulations—that no investor should have an unfair advantage—truly be realized.

References

1. Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015. Retrieved from: https://www.sebi.gov.in
2. SEBI (Prohibition of Insider Trading) (Amendment) Regulations, 2018 & 2021. Available at: https://www.sebi.gov.in/legal/regulations
3. Committee on Fair Market Conduct Report (T.K. Viswanathan Committee), 2018. SEBI. Link: https://www.google.com/search?q=https://www.sebi.gov.in/reports/reports/jun-2018/report-of-committee-on-fair-market-conduct_39268.html
4. Securities and Exchange Board of India Act, 1992.
5. HDFC Ltd. & HDFC Bank Merger Insider Trading Probe (2022–2024). News coverage from Business Standard and LiveLaw.
6. SEBI v. Kanaiyalal Baldevbhai Patel (2017) — SAT decision on insider trading burden of proof.
7. Umakanth Varottil, “Insider Trading Law in India: A Blueprint for Reform,” NUS Law Working Paper Series.
8. Sandeep Parekh, Fraud, Manipulation and Insider Trading in the Indian Securities Markets (2nd ed., 2013).
9. Vidhi Centre for Legal Policy, “Reforming Insider Trading Law in India” (2023). Available at: https://vidhilegalpolicy.in
10. U.S. Securities Exchange Act of 1934, Rule 10b-5. SEC Website: https://www.sec.gov
11. UK Market Abuse Regulation (MAR), FCA Handbook. Link: https://www.handbook.fca.org.uk
12. NIPFP Report on Insider Trading & Behavioral Surveillance Tools