Understanding SEBI (Prohibition of Insider Trading) Regulations, 2011: Shedding Light on SEBI’s Vigilance Against Insider Trading

 INTRODUCTION

In India, insider trading is not only a tort but also a crime. Unchecked insider trading can result in market instability and sudden and unexpected price movements can make it difficult for investors to make the best investment decision. The promoters and insiders take advantage of price-sensitive information, causing retail investors to suffer huge losses. When insiders trade based on information not generally available to the public, they can cause significant financial harm to other investors who unknowingly invest their hard-earned money based on outdated or incomplete information. One of the fundamental principles of the financial market is that all investors should have equal access to relevant information about a company. So it's necessary to prohibit insider trading as it will have a huge impact on economic growth and to maintain investor's confidence.

In this blog post, we will explore the depth of SEBI(PIT) Regulations,2011. How SEBI gets to know about insider trading, and also the mechanism to control the same.

Understanding SEBI(PIT) REGULATIONS,2011

1. Restriction on Communication 

SEBI restricts the communication of UPSI(UNPUBLISHED PRICE SENSITIVE INFORMATION i.e. some important information that is not known to the general public and it may affect the prices of the company for instance the information can be related to financial results, declaration of dividends, future merges, etc) by an insider. And under these regulations, any person in receipt of UPSI will also be considered an insider.

This regulation imposes a duty on the listed entity to maintain a structured digital database which should contain the name of persons with whom information is shared along with their PAN. For example, if the company has appointed a Consultancy or Law firm then it should obtain their PAN and ask for names with whom they have shared the UPSI.

2. Restriction on Trading

SEBI restricts an insider from trading in securities when having such information or the trades should be in accordance with the trading plan which is presented in advance to the Compliance Officer

3. Incentives by SEBI

These regulations prescribe incentives for the informants(person or individual who submits to the SEBI a voluntary information disclosure form relating to alleged violation of insider trading laws). SEBI made it necessary for listed companies and market intermediaries to make public disclosure of information that would impact the prices to make that information accessible to everyone. The company is also required to formulate a code of practices and procedures for fair disclosures and formulate a code of conduct. 

4. Whistleblower Policy

The employees and other stakeholders can report suspicious activities confidentially to SEBI. Whistleblower complaints often serve as the initial leads for SEBI's investigation. 

5. Market Intelligence

SEBI actively gathers market intelligence through various sources, including intermediaries, analysts, and market participants. Unusual market rumors or activities can trigger SEBI’s attention.

SEBI takes strict action towards insider trading by imposing a fine which may extend to 25 crore rupees or three times the amount of profits made because of insider trading.