WHAT IS INSIDER TRADING?

Insider trading can be legal or illegal, depending on the type of material information available
to the insider. If the insider has non-public information, they are prohibited by law from
trading their existing stock for that company. On the other hand, if the information is already
public, these people can trade safely without taking legal action against them1

What do one mean by Unpublished Price Sensitive Information: As per Regulation 2(1)
(n) of the SEBI (Prohibition of Insider Trading) Regulations, 20152

This group examined, among other things, US laws governing short swing profits under
Section 16 of the Securities Exchange Act of 1934. Following that, Sections 307 and 308 of
the Companies Act of 1956 were added that addressed insider trading and mandated that a
company's managers and directors disclose their ownership of shares.3

Abid Hussain Committee, 1989: It was created in 1989. The committee recommended the
declaration of insider trading as a civil as well as a criminal offence. It advised SEBI to
form regulations in this regard. In furtherance of the recommendations by the committees,
SEBI enacted regulations to curb the practice of insider trading: –
• ‘SEBI [Insider Trading] Regulation-1992’
• SEBI [Substantial Acquisition of Shares & Takeover] Regulations 1994.’
‘SEBI [Prohibition of Fraudulent & Unfair Trade Practice relating to securities market]
Regulations-1995.’4

Key Provision of the regulation

• Definition of Insider: The regulations define an insider as any person who

is connected with the company or deemed to be connected with the
company, including its directors, officers, and employees.
• Prohibition on Insider Trading: The regulations prohibit insiders from
1
Insider trading regulations, available at: https://blog.ipleaders.in/insider-trading-regulations/ (last visited on
Mar 20, 2023).

2
Indian Law With Respect To Insider Trading: An Analysis Of Landmark Judgements, available at: Indian
Law With Respect To Insider Trading: An Analysis Of Landmark Judgements (lawyersclubindia.com)
(last visited on Mar 20, 2023).

3
Insider Trading in India, available at: Insider Trading in India (legalserviceindia.com) (last visited on Mar
21, 2023).
4
Indian Law With Respect To Insider Trading: An Analysis Of Landmark Judgements, available at: Indian Law
With Respect To Insider Trading: An Analysis Of Landmark Judgements (lawyersclubindia.com) (last visited on
Mar 21, 2023)
 trading in the securities of the company when in possession of UPSI.
• Disclosure Requirements: The regulations require insiders to disclose
their shareholding and trading activity in the company's securities to the
stock exchanges and the company within a specified time frame.
• Prevention of Unpublished Price Sensitive Information Leakage: The
regulations require companies to establish internal procedures to prevent
the leakage of UPSI, and to maintain a record of persons who have
access to UPSI.
• Penalty Provisions: The regulations provide for penalties for violation of
the provisions, including monetary fines, imprisonment, and disgorgement
of profits made from insider trading.5
SEBI (Prohibition of Insider Trading) Regulations, 2015: Insider trading in India is
prohibited by the Companies Act, 2013 and the SEBI Act, 1992. SEBI has formed the SEBI
(Prohibition of Insider Trading) Regulations, 2015 which prescribe the rules of prohibition
and restriction of Insider Trading in India.6

Some of the key differences between the 1992 and 2015 regulations are7

Five landmark case 8

ANALYSING THE CASE OF HINDUSTAN LEVER LIMITED VS. SEBI, 1998910

5
SEBI (Prohibition of Insider Trading), Regulations, 1992, available at: https://taxguru.in/sebi/sebi-
prohibition- insider-trading-regulations-1992.html (last visited on Mar 21, 2023).

6
Overview of SEBI’s Prohibition of Insider Trading Regulations (PIT Regulations), available at:
https://www.taxmann.com/post/blog/overview-of-sebis-prohibition-of-insider-trading-
regulations/#:~:text=Regulation%204%20of%20the%20SEBI,of%20unpublished%20price
%20sensitive
%20information (last visited on Mar 21, 2023).

7
Comparison Between SEBI (Prohibition Of Insider Trading) Regulations, 2015 & 1992 Regulations, available
at: https://taxguru.in/sebi/comparison-sebi-prohibition-insider-trading-regulations-2015-sebi-prohibition-insider-
trading-regulations-1992.html (last visited on Mar 21, 2023)
8
Five landmark cases on insider trading, available at: Five landmark cases on insider trading - iPleaders (last
visited on Mar 24, 2023
9
Indian Law With Respect To Insider Trading: An Analysis Of Landmark Judgements, available at: Indian Law
With Respect To Insider Trading: An Analysis Of Landmark Judgements (lawyersclubindia.com) (last visited on
Mar 25, 2023
10
India: Insider Trading: Hindustan Lever Limited v. SEBI, available at: Insider Trading: Hindustan Lever
Limited v. SEBI - Securities - India (mondaq.com) (last visited on Mar 26, ‣
Shadow insider trading is when a corporate insider trades shares of a company that is
"economically linked" to their own while having material nonpublic information (MNPI)
about their own company.

The case against Matthew Panuwat represented the SEC's first charge of "shadow trading":
the practice of a corporate insider trading shares of an "economically linked" company while
in possession of material nonpublic information ("MNPI") about the insider's own company.

According to academic studies, shadow trading is a real-world phenomenon where employees

avoid insider trading regulations by trading in their firm's competitors or business partners
instead of their own employer's securities.

The SEC's first "shadow trading" case, SEC v. Panuwat, represents the practice of shadow
trading. The Panuwat decisions mean that employees and companies may not be able to buy
or sell stock of another company if they have material, nonpublic information about it.

Private companies and their employees should be aware of the changing landscape of insider
trading laws and consider creating or updating controls for the use or disclosure of
MNPI. Companies should evaluate and, if appropriate, make adjustments to, their internal
policies and controls related to information access and handling. They should also train
employees on corporate expectations.