Insider Trading
Insider Trading is the trading of a public company's securities by individuals with access to Unpublished Price Sensitive Information (UPSI).
Key Definitions
1. Who is an Insider?
- Connected Persons: Directors, Promoters, Key Managers, Auditors, Bankers.
- Deemed Insiders: Anyone who gets the info (e.g., the CEO's driver who overhears a call).
2. What is UPSI (Unpublished Price Sensitive Information)?
Information that is not public yet but will move the stock price when released.
- Financial Results (Profits/Losses).
- Dividends / Bonus issues.
- Mergers & Acquisitions.
- Major regulatory changes.
Why is it Illegal?
It violates Fairness.
- The market works on the premise that everyone has access to the same data (Level Playing Field).
- If Insiders trade on secret info, they are stealing from the public. Public investors will lose faith and leave the market.
SEBI Regulations (Prohibition of Insider Trading) 2015
- Trading Window: Insiders cannot trade when the "Window is Closed" (usually from end of quarter until 48 hours after results declared).
- Disclosures: Insiders must disclose their holdings.
- Penalties: Huge fines (up to 25 Crores or 3x profits) and jail time.
Note
Rajat Gupta Case: The famous CEO of McKinsey was jailed for calling Raj Rajaratnam (Galleon Group) immediately after a Goldman Sachs board meeting to tell him Warren Buffett was investing. That 16-second phone call cost him his career and freedom.
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