All you wanted to know about insider trading

Last week, the securities market regulator found two Infosys employees guilty of insider trading. In July 2020, the two apparently passed on price-sensitive information to six others for trades in Infosys shares in the F&O market and pocketed a few crores worth of gains. SEBI has banned all the parties involved in these trades from buying and selling any shares, and Infosys has initiated an internal investigation into the matter.

Insider trading refers to trading of shares by an ‘insider’ based on unpublished price sensitive information (UPSI). It involves buying or selling shares of a listed company using information that can materially impact the stock price, but has not been made public yet. The key words here are ‘insider’ and ‘UPSI’.

SEBI regulations define an ‘insider’ as someone who is a connected person or has access to UPSI. A connected person can be anyone who during the six months preceding the insider trade has been associated with the company in some way. This could be a company director or employee or their close relatives, or a legal counsel or banker to the company or even an official of the stock exchanges or trustees or employees of an asset management company who interacted with the company.

UPSI includes but is not restricted to information relating to a company’s quarterly results, merger and acquisition deals, major capacity expansion or shutdown plans or any such significant activities that have not been disseminated to the public at large. When insiders use the UPSI they possess to conduct trades, they can be taken to task by the regulator.

For instance, a company manager informs his father about a yet-to-be-announced business deal and the latter passes on this information to his friends who buy the company’s shares. Then, the manager, his father and his friends can be booked for violation of insider trading norms. In India, insider trades are regulated by SEBI under its 2015 Insider Trading Regulations. SEBI can impose fines and debar individuals/entities from trading in the market if found in violation of these rules.

Note that while trading on UPSI in illegal, all insider trading is not barred. By virtue of their position, many senior company personnel will always possess material information and yet periodically trade in shares, say by selling their ESOPs, etc., for personal needs. If such trades are disclosed to the stock exchanges as per SEBI rules, it isn’t illegal. But a company must notify the exchanges within a few days about the trading details of the promoter/member of the promoter group or a director if securities worth ₹10 lakh plus are traded.

Insider trading hurts the integrity of capital markets. In stock markets, symmetric information levels the playing field as it allows investors to pit their interpretation and analysis of events against each other. But trading on UPSI gives insiders an unfair advantage over regular investors. Unsuspecting retail investors, many of whom may have spent time and effort in selecting stocks for investing may end up at the losing end of a trade. If investors, both regular retail investors as also foreign investors, suspect insider trading to be rampant, they lose faith in the stock market. To strengthen retail participation in the stock market, insider trading must be dealt with firmly.

If insiders are exploiting their knowledge to make profitable trades, then retail investors like you and me don’t stand a chance of making any money in the markets. All the time and effort put into understanding a company or short-listing stocks will be laid to waste when insiders come in and swoop down just in time to pocket all gainsbecause of their access to company- and stock-specific information. If you have friends or family working in listed companies, you must take extra care not to use any insider information you may come by.

Being in the inside circle may be cosy, but with that position comes great responsibility.

A weekly column that puts the fun into learning

COMMENT NOW