October 16, 2025
What Is Insider Trading?
Think of a three-way conversation:
- Person A works at a company and knows something major is about to happen — say, a big loss, a merger, or bad regulatory news. But this info is not public yet.
- Person B hears from A, and buys or sells shares (or tells others to) before the news comes out.
- Once the news hits public, the company’s stock price moves sharply. Person B makes (or avoids) big gains or prevents losses because they acted when everyone else was in the dark.
That’s insider trading: using “Unpublished Price Sensitive Information” (UPSI) to trade, or tipping someone who trades off that information. It’s illegal because it violates fairness — regular investors don’t have access to that info.
Who’s Involved & What’s Each Person’s Role
| Role | Who This Might Be | What They Can Do (Good or Bad) |
|---|---|---|
| Company insiders | Directors, CEOs, CFOs, senior executives, sometimes auditors | They often have access to UPSI. If they trade (or allow someone else to trade) using it → violation. They also have the responsibility to maintain internal walls, disclosure rules, etc. |
| Tippee / Insider-recipient | Employees, relatives, friends, traders who get info from insiders | They violate laws if they trade on info they know was non-public and material. |
| Regulators | SEBI (India) | Detect violations, investigate, penalize (fines, banning from trading, disgorgement of gains) to maintain trust in markets. |
Example to Make It Clear
Imagine TechCo, a tech company. Their board learns that a big contract they were bidding for is rejected by a client. That’s bad news and not public. The CFO (insider) knows this. Before the announcement, CFO sells a large block of TechCo shares. After public release, the stock drops 30%. CFO avoided heavy losses because they acted on non-public info. That’s insider trading.
Or tipping: CFO tells a friend “Looks like bad news at TechCo. Sell or don’t buy.” Friend sells before info public → friend profits/avoids loss unfairly.
Big Recent Cases in India (Last ~4-5 Years)
These cases help show how insider trading works in reality and what kind of impact and consequences follow.
| Case | What Happened / Who Was Involved | Stock / Market Impact |
|---|---|---|
| IndusInd Bank – May 2025 | Former CEO Sumanth Kathpalia and others sold shares while knowing about upcoming derivative losses (material non-public info). | Once the info got disclosed (March 10, 2025), the stock dropped ~27%, from about ₹900.60 to ₹655.95. That’s a huge loss for public shareholders who didn’t know. |
| IEX / CERC Officials – Oct 2025 | Some officials at India’s power regulator (CERC) allegedly knew of a policy change (“market coupling”) before public announcement. They and associated people traded (shares & derivatives) of Indian Energy Exchange (IEX). | After announcement on July 23, 2025 that policy would be implemented, IEX share price dropped by ~29.6% next day. Those who had traded derivatives or sold short (or put options) benefited. |
| Adani Green Energy (AGEL) Case – 2022 | A person (Ajay Bhatia) allegedly received UPSI before AGEL preferential share issue was announced, passed it to another, traded multiple scrips (AGEL, Adani Enterprises etc.). | On the day of preferential issue announcement, AGEL shares surged ~7.20%. Those who traded ahead gained; public investors suffered or didn’t benefit. |
| Infosys Case (Salil Parekh) – settled 2024 | The CEO of Infosys allegedly didn’t put in place strong enough internal controls to prevent insider trading around a corporate deal (with Vanguard). | Less dramatic stock-price crash or spike in public reporting, more reputational risk. Market reacts to governance concerns. Often risk premium for stock, maybe short-term volatility. |
| Rupa & Company – Aug 2023 | Independent director at Rupa, and a firm (NCIL), traded during financial result UPSI period (before financial results were published). | Likely some small movement around earnings announcement; since it was financial results, public reaction matters. But scale here much smaller than IndusInd or IEX. |
What’s the Impact of Insider Trading (for Stock & Public Trust)
- Stock price volatility: When bad news leaks, insiders may sell early → steep drop once public; or positive UPSI leaks → sharp rise. Public – after announcement – often “catch-up” losses or gains.
- Investor confidence suffers: Retail investors feel the market is rigged, trust drops.
- Legal / regulatory risk for company management: Costs, penalties, sometimes legal suits, damage to reputation.
- Mispricing: Market prices don’t reflect real risk because insiders moved early.
Who’s At Fault & What SEBI / Law Does
- Fault generally lies with insider(s) who have access to non-public, price-sensitive info, plus anyone who receives such info and trades (tippee).
- Also if company management fails to have robust internal controls (disclosure systems, pre-clearance of trades, preventing leaks).
- SEBI’s role is to investigate, freeze accounts, bar individuals from markets, impose fines/disgorgement of profits, require internal governance improvements.
Insights & Lessons for Students / Investors
- Just because you don’t hear about insider trading in small firms doesn’t mean it’s not happening — detecting it is hard.
- Always check governance, disclosures, “insiders trading / management selling / buying before major announcements” — those patterns sometimes show risks.
- Regulatory frameworks matter. SEBI’s PIT (Prohibition of Insider Trading) regulations, rules around UPSI, and enforcement have improved over years; but there are challenges proving tippee liability, proving when info was “material”, etc.
FAQ / Quick Bits
Q: Will insider trading always lead to big profit for insiders?
A: Not always. Timing matters, how much was known, whether they actually trade. Also risk of being caught.
Q: What happens to stock after a big insider-trading scandal is exposed?
A: Usually sharp drop if bad news was hidden (like in IndusInd); if positive info leaked, sometimes initial spike then correction. Also long-term reputational damage can suppress investor sentiment.
Q: Can companies be punished too, or only individuals?
A: Yes, companies can be penalised (if internal controls are weak), forced to improve governance, sometimes institutional fines. But individuals are the main ones punished.
Read Also
Leave a Reply