Insider trading: what the law actually prohibits

The popular idea of insider trading is almost right, but the law is narrower and stranger. Most people think it means an employee buying or selling their own company’s stock. That is not what the law bans. The prohibition targets something else entirely: the use or leak of information the public does not have.

Under Indian law, insider trading is either of two things: trading in a company’s securities while holding important non-public information, or passing that information to someone else outside a legitimate purpose. The person doing it need not be an employee, need not work in finance. They just have to know something the market does not — and act on it, or share it improperly.

What insider trading is not

Two misconceptions need clearing before the real rules make sense.

First, employees can own shares. No rule says a person who works for a company cannot buy or hold its stock. The ban is on trading while in possession of unpublished price-sensitive information. An employee who knows nothing sensitive can buy freely. A director who knows next week’s results cannot.

Second, an insider with a pre-arranged, SEBI-compliant trading plan can trade even while being an insider. Because the plan is disclosed in advance, the trade is not treated as motivated by inside knowledge. ¹ This matters for executives who are permanently in possession of sensitive information and still need a lawful way to sell.

Who counts as an insider

The regulations define an insider two ways, and the second is broader than most people expect.

The first is a connected person: anyone associated with the company in the prior six months in a way that gives access to unpublished price-sensitive information — directors, employees, advisers, contractual partners, even people in frequent communication with its officers. The definition is deliberately wide, covering anyone whose position or professional or business relationship allows such access, or is reasonably expected to. ¹

The second is anyone who simply possesses or has access to that information, connected or not. ¹ This is the catch-all. A stranger who overhears a confidential board discussion in a coffee shop and trades on it is an insider under the regulations. The law does not care about job title. It cares about what a person knows.

What counts as unpublished price-sensitive information

The regulations call it UPSI, and it has three elements: it relates to a company or its securities; it is not generally available — not accessible to the public on a non-discriminatory basis; and if it became available, it would likely materially affect the share price. ¹ The information can be good or bad for the stock; the law treats both the same way.

The regulations give a non-exhaustive list of categories that ordinarily qualify: ¹

Category	Example
Financial results	Quarterly profit or loss figures before the exchange filing
Dividends	A surprise dividend, or a dividend cut
Change in capital structure	A bonus issue, a stock split, a buyback
Mergers, acquisitions, major contracts	A takeover bid, or a large order win outside normal business
Changes in key managerial personnel	The CFO resigning or being replaced
Changes in credit ratings	An upgrade or downgrade by a rating agency

What does not count is information already released to the exchanges or published broadly — once it is “generally available”, it is no longer UPSI. ¹ A newspaper report based on publicly filed documents is not inside information. A WhatsApp message with the same numbers before they are filed is.

The two things an insider cannot do

The regulations create two independent prohibitions. Breaking either is insider trading.

Regulation 3 bans communicating UPSI. No insider shall communicate, provide, or allow access to any unpublished price-sensitive information to any person — including other insiders — except in furtherance of legitimate purposes, performance of duties, or discharge of legal obligations. ¹ Leaking a secret to a friend, mentioning upcoming results at a dinner, forwarding a confidential email to someone who does not need it: all violate this. The prohibition applies even if the recipient never trades. The leak itself is the offence.

Regulation 4 bans trading while in possession of UPSI. No insider shall trade in securities that are listed or proposed to be listed when in possession of unpublished price-sensitive information. ¹ Trading covers buying, selling, pledging, any transaction. Holding a WhatsApp message with upcoming results and then selling can trigger it. The knowledge taints the trade.

The two are independent. A person who never trades but leaks UPSI breaks Regulation 3; a person who never leaks but trades while holding UPSI breaks Regulation 4.

The presumption that makes the rule bite

The regulations shift the burden of proof. When a person has traded while in possession of UPSI, the trade is presumed to have been motivated by that knowledge. ¹ SEBI does not have to prove intent — the insider has to prove innocence.

This is what makes enforcement practical. Proving what was in someone’s head when they placed a trade is nearly impossible; the presumption flips it. The regulations do allow specific defences — for instance an off-market inter-se transfer between two insiders who both held the same UPSI, a transaction through the block-deal window, or a trade under a pre-approved trading plan. ¹ But the burden sits with the insider.

How to trade while being an insider

An insider permanently in possession of UPSI — a CFO who sees results months early, a director on the audit committee — has a problem: under the general rule they can almost never trade, because they always know something. The regulations solve it with a safe harbour, the trading plan.

An insider can formulate a trading plan, present it to the compliance officer for approval and public disclosure, and then trade according to it. ¹ Because the plan is set in advance, before the insider knows about specific upcoming UPSI, trades made under it are not treated as motivated by inside knowledge. A CFO who wants to sell part of her holding to fund a family expense can set up and disclose a plan in January and have the sale execute in June — even if April’s results turned out better than expected. The plan was fixed before she knew. The trade is compliant.

The law of insider trading in India is not about punishing employees for owning stock. It is about keeping the market fair — everyone trading on the same information at the same time. The person who knows the results before they are published has an unfair edge. The regulations close that gap not by banning knowledge, but by banning what can be done with it.

Footnotes

1. SEBI (Prohibition of Insider Trading) Regulations, 2015, last amended on 12 March 2025. sebi.gov.in. Citations are to Regulations 2 (definitions of insider, connected person, UPSI), 3 (communication), 4 (trading), and 5 (trading plans). ↩ ↩² ↩³ ↩⁴ ↩⁵ ↩⁶ ↩⁷ ↩⁸ ↩⁹ ↩¹⁰ ↩¹¹