Insider Trading: SEBI's Measures to Prevent Unfair Trading Practices

Published on: Fri Apr 28 2023

Insider trading is an unfair trading practice in the financial markets where individuals with privileged information trade on stocks or securities for their own benefit. It is a highly unethical and illegal practice that undermines the fairness and transparency of financial markets, and can lead to significant financial losses for investors. In order to prevent insider trading and protect investors, the Securities and Exchange Board of India (SEBI) has implemented several measures over the years. In this blog, we will discuss SEBI's measures to prevent insider trading in the Indian financial markets.

Prohibition on Insider Trading

The first and foremost measure taken by SEBI to prevent insider trading is the prohibition on insider trading. SEBI has made insider trading a punishable offence under the SEBI (Prohibition of Insider Trading) Regulations, 2015. Under these regulations, any person who is in possession of unpublished price-sensitive information (UPSI) is prohibited from trading in securities or communicating such information to any other person. Any person who contravenes this regulation is liable to be penalized or imprisoned.

Disclosure of UPSI

Another measure taken by SEBI to prevent insider trading is the disclosure of UPSI. Companies are required to disclose any UPSI to the stock exchanges as soon as possible. This helps in ensuring that all investors have access to the same information, thereby preventing unfair trading practices.

Code of Conduct

SEBI has also mandated that companies have a code of conduct in place for prevention of insider trading. The code of conduct outlines the policies and procedures that companies need to follow in order to prevent insider trading. It also outlines the roles and responsibilities of various stakeholders, including directors, employees, and other connected persons.

Trading Window

SEBI has mandated that listed companies have a trading window in place to prevent insider trading. The trading window is a period of time during which insiders are not allowed to trade in securities of the company. This ensures that insiders do not take advantage of any UPSI that they may possess. The trading window is closed for insiders during the period of 48 hours before the announcement of financial results, dividends, or any material events, and opens 24 hours after the announcement of such events.

Insider Trading Surveillance

SEBI has also set up a surveillance mechanism to detect and prevent insider trading. The surveillance mechanism uses sophisticated technology to monitor trading patterns and identify any abnormal activity. SEBI also regularly conducts investigations and audits to ensure that companies are complying with the regulations.

Penalty and Punishment

SEBI has the power to impose penalties and punishments on those found guilty of insider trading. The penalties and punishments include monetary fines, disgorgement of profits, and imprisonment. These penalties and punishments act as a deterrent for those who may be considering insider trading.

Whistleblower Mechanism

SEBI has also implemented a whistleblower mechanism to encourage the reporting of insider trading. The mechanism allows for the reporting of any suspicious activity related to insider trading without fear of retaliation. This helps in ensuring that any insider trading activity is reported and investigated promptly.

In conclusion, SEBI has taken several measures to prevent insider trading in the Indian financial markets. These measures include the prohibition of insider trading, disclosure of UPSI, a code of conduct, a trading window, insider trading surveillance, penalties and punishments, and a whistleblower mechanism. These measures have helped create a level playing field for investors and ensure that the financial markets are fair and transparent. However, it is important for companies and individuals to be vigilant and comply with the regulations to ensure that insider trading is completely eradicated from the financial markets.

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