Insider Trading – Discerning the distinction between Information and UPSI

Insider Trading
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Stock markets have been in India from as early as 1875. The first-ever stock market was set up in Bombay, which is now known as the Bombay Stock Exchange (BSE) and has over 5,500 companies listed. The other biggest stock exchange in India is the National Stock Exchange, set up in 1992 and commenced its trading activities in 1994, which has over 1,900 companies listed under it. With money comes greed, and with greed comes fraudulent ways to satiate the greed. Thus, insider trading was not something that could have ever been predicted. Insider trading refers to the trading in stocks, shares, bonds, or other instruments considered as securities of a company, by an insider with information that has not been released to the public yet or Unpublished Price Sensitive Index (UPSI).

Insider as defined by the Securities and Exchange Board of India (SEBI) can be anyone who is a connected person or who has access to sensitive company information. Insider trading is illegal and dissuaded to indulge by SEBI. 

With the establishment of various stock exchanges and several indexes to monitor and display the price fluctuations and the current price of the listed companies available to the public, anyone and everyone can become a potential investor if he/she decides to monitor and learn more about the stocks floated. SEBI was established in 1992 through the provisions in the Securities Exchange Board of India Act, 1992. The preamble of SEBI precisely puts down the main aim it wishes to achieve, states “…to protect the interests of investors in securities and to promote the development of, and to regulate the securities market and for matters connected therewith or incidental thereto”. 

The securities scam of 1992 brought to light various loopholes in the banking system and trading systems of the country. Several changes in the stock market functioning after the incident involves minimum balance requirement in any traders’ account to carry out any trading processes, days of settling the purchase or sale of stocks, and the digitization of all transactions through Demat accounts. There has also been an increase in various online apps such as Groww, Upstox, and Sharekhan to name a few that help individuals buy and sell stocks by themselves. These apps provide adequate information about the company’s financials and price fluctuations as per the updates on the stock exchanges.

Further, this has made it easier for individuals to enter the world of investing without the hassle of finding a stockbroker while being aware of the various procedures a trader might have to follow while trading. Due to the individualistic feature of trading currently, insider trading might rupture the growing stock market by allowing a few players to always take away the most profit. SEBI recognized insider trading while it was established but to suit the current circumstances it replaced the PIT, 1992 regulations with the newly amended one of 2015. All the parties to an insider trade will be liable for the crime. In the following segments let us try to understand more about the Unpublished Price Sensitive Index (UPSI) in insider trading and the regulations in place. 

Information and UPSI

Information and UPSI in the case of insider trading can be set apart by whether they are available for easy access to the public or not. All publicly disclosed information by the company would amount to material information for the public. Unpublished Price Sensitive Index (UPSI), on the other hand, includes decisions taken by a company that has not been disclosed yet and can have a bearing on the changes in the company’s stock prices. UPSI as under the SEBI (Prohibition of Insider Trading) Regulations, 2015 includes information related to financial results, dividends, change in capital structure, mergers, de-mergers, acquisitions, delisting, disposals, and expansion of business and such other transactions, and changes in key managerial personnel. 

In Hindustan Lever Limited (HLL) v. SEBI (1986), it was alleged that HLL conducted an insider trade by buying 800,000 shares of Brooke Bond Lipton India Limited (BBLIL) from Unit Trust of India (UTI) before their merger was officially published for the public. SEBI stated that HLL would be an insider as per Regulation 2(e) as per the 1992 regulation which stated that an insider can be any connected person or has access to such unpublished price-sensitive information (In the 2015 amendment to the regulations, the definition of insider comes under Regulation 2(g) of the 2015 regulation). Further, SEBI in the same order also stated that HLL had information that came under Regulation 2(k) of the 1992 regulation which stated information regarding demergers, mergers, acquisitions, and takeovers that have not been published by the company or are not yet generally known by the public.

Although HLL appealed to the Securities Appellate Authority stating that the information regarding the merger was already speculated by certain news publication houses. The other argument advanced by them was that both the companies were healthy and thus the price of stocks wouldn’t be affected to a great extent. However, the Appellate Authority agreed with SEBI and held HLL guilty of insider trade. The above case brought about certain changes in the 1992 amendment through the 2002 amendment. It includes the amendment of the definition of unpublished under Section 2(k): “unpublished” means information that is not published by the company or its agents and is not specific in nature.

Explanation.—Speculative reports in print or electronic media shall not be considered as published information.”. In another case, Shruti Vora v. SEBI, also called the WhatsApp leak case, 26 members of a group chat were investigated by SEBI for insider trading. The investigation resulted in the seizure of over 190 documents but the originator of the messages was not traced due to the WhatsApp privacy policy. The arguments advanced by the appellants included “Heard on the Street” which is often used by many stockbrokers.

Further, the Securities Appellate Tribunal (SAT) as presented by the appellants noted that SEBI had highlighted only a few companies’ financials that had matched the ones that were published and failed to acknowledge the reports of companies that didn’t match the published reports. The interpretation of UPSI in this case by SAT is important to understand as it highlighted that for a person to be termed an insider or to be guilty of sharing sensitive information must be aware that the information is a UPSI. The “forwarded as received” contention can cause issues in digital times as it can cause more incidents of insider trading when the origin message owner cannot be tracked down. Therefore, an amendment to define what UPSI would entail if it has digital footprints must be made by SEBI.

Regulations on Insider Trading


Transactions involving huge amounts of money and profit are always expected to have some people greedy trying to make the most profit through any legal or illegal means. Insider trading is one such issue. The consequence of such a trade existing is that the common man who relies on the publication of material information through means such as announcements, notifications, articles, and any other publication about company matters which could affect the price of securities, is always left in the dark until notified.

Insiders have information that when published may affect the prices of the stocks traded and thus, they have an unfair advantage over manipulating the amount of profit or loss they could make over the trade of stocks. The SEBI (Prohibition of Insider Trading) Regulations, 2015 is one such provision that seeks to prevent insider trading while ensuring that every participant in the stock market is protected and ensures that the trading system is a fair and just space for all. 

The 2015 regulations which were last amended in August 2020, include details about the definition of terms, disclosure of trade details when it is by a connected person, UPSI sharing guidelines, and other ways that could help legalize the transaction. Regulation 3 talks about the steps that a company can take to the prevention of the spread of UPSI through confidentiality agreements between the party and the company. This could ensure that the information is not misused later by the third party who knows about the UPSI. Regulation 4 talks about trading while in possession of UPSI.

Only off-market inter-se transfers when not in violation of regulation 3 and the details are disclosed to the company within 2 days of the trade. The second exception is the trade through block deal window mechanism which is basically when there is a single transaction of a minimum amount of 5 lakh shares or a minimum value of Rs. 5 crores between two parties. This type of transaction occurs generally between institutional members and takes place on a separate trading window and happens at the beginning of the first 35 minutes of the trading hours. The recent amendment also suggested that all companies must have a digital database where information of the individuals with whom unpublished material information is shared along with any legally recognized identity proof. 

Regulations 8 and 9 talk about the formulation of a code of fair disclosure and code of conduct respectively by the board of directors of the company. this is to ensure that all trading activities by individuals who may be termed as “connected persons” will be monitored and to ensure that no breach of trust through sharing of UPSI has motivated the trade. The penalty for insider trading, however, is stated under Section 15 G of the SEBI, Act. The penalty imposed on members dealing through insider information will vary from ten lakhs rupees to 25 crore rupees or three times the profit made through the trade, whichever is the highest. Although such regulations are in place insider trading continues to take place. 

Strengthening the technical base to monitor and govern the transactions of traders can help in the internet era today. SEBI must also enhance their proof collecting systems as most of the leaked information can be through digital platforms like the WhatsApp leak case where the message origin could not be tracked down. Thus, employing a set of hackers and well-equipped technicians can help SEBI track down the insider. Further, as SEBI is the sole initiator and governing body of the securities market it can cause excess pressure in fulfilling all of its duties by overbearing its tasks. Hence, bifurcating the workload through an additional subordinate body to SEBI can make it easy for managing and overlooking its various functions.


SEBI’s main function is to protect and safeguard all parties in the stock market, but insider trading is one of the most difficult and complex activities to monitor and control. Insider trading can be considered as an inevitable outcome of the trading system however, it must be put under extreme scrutiny with stringent provisions to ensure that all traders have an equal footing to make a profit. At any given time, there will be a few members in a company in possession of material price-sensitive information thus, more laws and regulations related to insider trading are vital for the healthy growth of the stock market. 

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