Insider Trading In India Loopholes In The SEBI

Introduction

One of the most dangerous risks to market integrity in India’s quickly changing securities environment is insider trading. Insider trading, which is defined as the act of trading securities while in possession of unpublished price-sensitive information (UPSI), compromises the core idea of market fairness by giving some people an unfair advantage over regular investors. With a thorough regulatory framework, the Securities and Exchange Board of India (SEBI) has been leading the charge to combat this threat; however, substantial gaps still undermine the efficacy of enforcement.

With a daily trading volume of over ₹150,000 crores, the Indian securities market has seen a number of high-profile insider trading scandals that have damaged investor confidence. Despite three decades of regulatory evolution, insider trading still plagues India’s financial markets, as evidenced by the Harshad Mehta scam of the early 1990s and recent cases involving large corporations like Infosys and NSE. In addition to causing innocent investors to suffer immediate financial losses, the practice undermines the fundamental trust that underpins capital markets.

The secrecy of insider trading and the difficulty in identifying complex schemes are what make it so pernicious. Traditional surveillance techniques are insufficient for modern insider trading because it frequently involves intricate networks of intermediaries, offshore accounts, and digital communication channels. Because trading can take place across jurisdictions with different regulatory standards and cooperation mechanisms, the globalization of financial markets has made enforcement even more difficult.

The SEBI (Prohibition of Insider Trading) Regulations, 1992, marked the beginning of SEBI’s fight against insider trading. More extensive regulations took their place in 2015. However, difficulties with enforcement continue even after the legal framework has been strengthened and regularly amended. According to RTI data, there were no convictions for insider trading cases between 2014 and 2019, which is still a dismally low conviction rate. This harsh reality draws attention to the discrepancy between the goals of regulations and the actual capacity of enforcement.

The dynamic character of financial markets, fueled by advances in technology and the growing sophistication of market players, necessitates ongoing regulatory framework adaptation. Artificial intelligence, algorithmic trading, and high-frequency trading present new difficulties for conventional surveillance techniques. Furthermore, as demonstrated by recent SEBI investigations involving large corporations, the emergence of digital communication platforms such as WhatsApp has opened up new channels for information leakage.

Legal Framework in India

India’s legal framework for addressing insider trading has evolved significantly since the establishment of SEBI in 1992. The regulatory architecture is built upon multiple layers of legislation, with the SEBI Act, 1992 serving as the foundational statute, complemented by the Companies Act, 2013, and specialized regulations under the SEBI (Prohibition of Insider Trading) Regulations, 2015.

The SEBI Act, 1992 provides the primary legal foundation for insider trading prohibition under Section 12-A, which empowers SEBI to investigate and penalize insider trading violations. Section 15G specifically addresses insider trading, making it an offense punishable by imprisonment of up to 10 years or a fine of up to ₹25 crores, whichever is higher. The Act also grants SEBI extensive investigative powers, including search and seizure capabilities, though these are rarely utilized in practice.

The SEBI (Prohibition of Insider Trading) Regulations, 2015 replaced the earlier 1992 regulations and introduced several key improvements. These regulations provide comprehensive definitions of key terms such as “insider,” “connected person,” and “unpublished price-sensitive information.” The 2015 regulations expanded the scope of persons considered as insiders to include not just corporate executives but also their immediate relatives, consultants, advisors, and anyone with access to UPSI.

Recent amendments in 2024 have further refined the framework by reducing the waiting period for trading plans from six months to 120 calendar days, introducing price range specifications for trading, and providing exit clauses for extraordinary circumstances. However, these changes have also been criticized for potentially creating new loopholes that sophisticated traders could exploit.

The Companies Act, 2013 complements the SEBI framework through Section 195, which prohibits directors and key managerial personnel from engaging in insider trading. The Act also mandates various disclosure requirements that help in tracking potential insider trading activities. However, the coordination between different legal frameworks sometimes creates enforcement challenges due to overlapping jurisdictions and varying penalties.

The regulatory framework also incorporates international best practices through provisions for extraterritorial jurisdiction, though the practical implementation of cross-border enforcement remains limited compared to jurisdictions like the United States. The lack of comprehensive mutual legal assistance treaties (MLATs) with key financial centers further hampers the effectiveness of cross-border insider trading investigations.

Objectives of SEBI Regulations

The SEBI regulations on insider trading are designed with multiple interconnected objectives that collectively aim to maintain market integrity and protect investor interests. The primary objective is to prevent unfair trading practices by prohibiting individuals with access to material non-public information from exploiting such information for personal gain. This fundamental goal recognizes that information asymmetry undermines the efficient functioning of capital markets and erodes investor confidence.

A crucial objective of the regulations is to establish clear disclosure requirements that promote transparency in the securities market. The regulations mandate that designated persons, including directors, employees, and their immediate relatives, disclose their trading activities within specified timeframes. These disclosure requirements serve a dual purpose: they create audit trails that facilitate detection of potential violations and they provide the market with information about insider trading activities that might influence security prices.

The regulations also aim to create a robust compliance framework within listed companies and market intermediaries. By requiring companies to establish internal policies, maintain structured digital databases of insiders, and implement trading window restrictions, SEBI seeks to prevent insider trading at the source. The emphasis on preventive measures reflects a shift from purely punitive approaches to more comprehensive compliance-based regulation.

Another significant objective is to establish proportionate penalties that serve as effective deterrents while not stifling legitimate business activities. The regulations provide for both civil and criminal penalties, with civil penalties potentially reaching ₹25 crores or three times the profit made from insider trading, whichever is higher. This graduated penalty structure aims to ensure that the cost of non-compliance exceeds any potential benefits from insider trading.

The regulations also seek to facilitate efficient enforcement through provisions for settlement mechanisms. The settlement framework allows alleged violators to resolve matters without prolonged litigation while ensuring that SEBI collects appropriate penalties and prevents future violations. This approach recognizes the practical challenges of proving insider trading cases while ensuring that violations do not go unpunished.

Finally, the regulations aim to balance market efficiency with fairness by providing legitimate exceptions for trading based on generally available information and permitting trading plans that allow insiders to trade in a pre-determined manner. These provisions recognize that complete prohibition of insider trading could impair legitimate business activities while ensuring that any permitted trading occurs in a transparent and regulated manner.

Loopholes and Challenges in the SEBI Framework

Despite the comprehensive nature of the SEBI regulatory framework, several significant loopholes and enforcement challenges continue to undermine its effectiveness. The most fundamental challenge lies in the evidentiary burden imposed on SEBI, particularly after the Supreme Court’s decision in Balram Garg v. SEBI, which significantly raised the standard of proof required for establishing insider trading violations.

The Balram Garg judgment established that SEBI cannot rely merely on circumstantial evidence such as trading patterns and timing to prove insider trading. The Court mandated that SEBI must produce direct evidence such as emails, letters, or witness testimony to establish communication of UPSI between insiders and traders. This requirement creates practical difficulties since insider trading often occurs through informal communications between closely related individuals who rarely leave paper trails.

Technological challenges present another major loophole in the current framework. The rise of digital communication platforms, particularly encrypted messaging services like WhatsApp, has created new channels for information leakage that are difficult to monitor and investigate. The recent WhatsApp leak case involving multiple listed companies exposed SEBI’s limited technical capabilities in digital surveillance and evidence collection. Traditional surveillance methods are inadequate for detecting sophisticated trading schemes that utilize advanced technology and complex financial instruments.

The definition and scope of “connected persons” remains problematic despite recent amendments. The 2024 amendments expanded the definition to include persons sharing a residence with connected persons, but this broad definition has raised constitutional concerns about the presumption of innocence and reverse burden of proof. The amendments appear to be a direct response to the Balram Garg judgment but may face constitutional challenges on grounds of violating Article 21 rights.

Cross-border enforcement presents significant challenges as Indian law lacks extraterritorial application mechanisms comparable to those in the United States. Many insider trading schemes involve offshore entities and foreign intermediaries, making it difficult for SEBI to investigate and prosecute violations effectively. The absence of comprehensive mutual legal assistance treaties (MLATs) with major financial centers further complicates international cooperation in insider trading cases.

The settlement mechanism, while providing efficiency benefits, also creates potential loopholes by allowing violators to resolve matters without admitting guilt. This approach may reduce the deterrent effect of insider trading regulations and could be perceived as allowing wealthy individuals to buy their way out of serious violations. The significant increase in settlement applications – from 434 in FY24 to 703 in FY25 – raises questions about whether the settlement process is being misused.

Major Cases of Insider Trading in India

The landscape of insider trading in India is marked by several landmark cases that have shaped regulatory understanding and enforcement approaches. The Hindustan Lever Ltd. v. SEBI case of 1998 stands as one of the earliest and most significant insider trading decisions. In this case, SEBI held Hindustan Lever Limited guilty of insider trading when it purchased shares of Brooke Bond Lipton India Ltd. just before announcing a merger. The case established SEBI’s authority to take action against insider trading and highlighted the importance of timing in securities transactions.

The Rakesh Agarwal v. SEBI case (2003) marked a crucial development in the jurisprudence surrounding intent in insider trading cases. Agarwal, then Managing Director of ABS Industries, was accused of insider trading, but the Securities Appellate Tribunal held that the trades were conducted in the company’s interest without mala fide intent. This case demonstrated the difficulty in proving insider trading beyond reasonable doubt and established the importance of examining the intent behind trading decisions.

More recently, the Balram Garg v. SEBI case (2022) has fundamentally altered the evidentiary landscape for insider trading prosecutions. The Supreme Court’s decision in this case involving PC Jeweller Limited established that SEBI cannot rely on circumstantial evidence alone to prove insider trading. The Court ruled that direct evidence such as written communications or witness testimony must be produced to establish the communication of UPSI between insiders and traders. This judgment has significantly enhanced the burden of proof on SEBI and has implications for future enforcement actions.

The IndusInd Bank officials case represents a current high-profile investigation where SEBI has barred former CEO Sumant Kathpalia and four senior officials for allegedly selling shares based on UPSI. They allegedly avoided losses of approximately ₹20 crores by trading on material information before it became public. This case highlights continuing challenges in corporate governance and the misuse of employee stock option plans (ESOPs) by senior management.

The NSE data disclosure case of 2025 demonstrates how insider trading can occur through systemic failures rather than individual misconduct. The National Stock Exchange agreed to pay ₹40.35 crores to settle charges related to the indirect sharing of confidential information with third-party vendors. The case revealed that NSE’s system architecture enabled clients to receive unpublished price-sensitive corporate announcements before they were made public.

The recent Rakesh Jhunjhunwala family settlement in the Aptech insider trading case shows how high-profile investors navigate the regulatory framework. The late stock market veteran’s family and associates paid a total of ₹37.25 crores to settle insider trading charges without admitting guilt. This case illustrates the practical use of SEBI’s settlement mechanism by sophisticated market participants.

Comparative Perspective

When examined against international standards, India’s insider trading regulatory framework reveals both strengths and significant gaps compared to developed jurisdictions like the United States and United Kingdom. The United States has maintained the most comprehensive and effective insider trading regulation globally since 1934, with the Securities and Exchange Commission (SEC) demonstrating superior enforcement capabilities.

The US framework differs fundamentally in its approach to extraterritorial jurisdiction and cross-border enforcement. American Rule 10b-5 applies wherever fraud affects US securities markets, enabling the SEC to pursue insider trading cases with international dimensions. This extraterritorial reach, combined with extensive mutual legal assistance treaties, allows US authorities to effectively investigate and prosecute complex international insider trading schemes. In contrast, Indian law lacks similar extraterritorial application, limiting SEBI’s ability to address offshore trading based on Indian UPSI.

The evidentiary standards and enforcement success rates demonstrate stark differences between jurisdictions. While India recorded zero convictions for insider trading between 2014-2019, the US has achieved numerous high-profile convictions including the Raj Rajaratnam and Rajat Gupta cases. The US courts have developed sophisticated jurisprudence around concepts like the “tipper-tippee” theory and the “personal benefit” test, providing clearer guidance for prosecution and enforcement.

The United Kingdom’s approach under the Criminal Justice Act, 1993 provides for criminal penalties of up to 7 years imprisonment and unlimited fines for insider trading violations. However, the UK has faced criticism for low enforcement rates despite having strong regulations, similar to India’s experience. The UK’s Financial Conduct Authority has struggled with detection and prosecution challenges, though it benefits from better international cooperation mechanisms than SEBI.

Technological capabilities reveal another crucial difference between jurisdictions. The SEC and major US exchanges employ sophisticated automated surveillance systems that use artificial intelligence and machine learning to detect unusual trading patterns. These systems provide real-time monitoring capabilities that far exceed SEBI’s current technological infrastructure. The US also benefits from better data integration between regulatory agencies and market participants, facilitating more effective surveillance and investigation.

The settlement and cooperation mechanisms also differ significantly across jurisdictions. While SEBI’s recent increase in settlement applications suggests growing acceptance of alternative dispute resolution, the US SEC has long utilized deferred prosecution agreements and cooperation agreements that provide stronger incentives for disclosure and assistance in investigations. These mechanisms have proven effective in uncovering larger insider trading networks and facilitating successful prosecutions.

Suggestions for Reform

To address the identified loopholes and enhance the effectiveness of India’s insider trading framework, comprehensive reforms across multiple dimensions are necessary. The first priority should be strengthening SEBI’s technological capabilities through substantial investment in artificial intelligence and machine learning systems for market surveillance. SEBI should develop real-time monitoring systems similar to those employed by the SEC, capable of detecting sophisticated trading patterns and correlating them with corporate announcements and material events.

The evidentiary burden issue highlighted by the Balram Garg judgment requires legislative intervention to provide SEBI with enhanced investigative powers. Parliament should consider amending the SEBI Act to include provisions similar to those in the Companies Act regarding the Serious Fraud Investigation Office (SFIO), which would allow SEBI to investigate related offenses under other laws and consolidate proceedings in specialized courts. This would prevent the current fragmentation of enforcement efforts and reduce the risk of contradictory findings.

Digital evidence collection capabilities must be substantially enhanced to address modern insider trading schemes. SEBI should establish dedicated cyber-forensics units equipped with advanced tools for analyzing encrypted communications, blockchain transactions, and complex digital trails. The regulatory framework should be updated to provide clear guidelines for collecting and presenting digital evidence in insider trading cases, addressing current gaps in electronic evidence procedures.

Cross-border enforcement mechanisms require immediate attention through negotiation of comprehensive mutual legal assistance treaties (MLATs) with major financial centers. SEBI should also seek extraterritorial jurisdiction provisions similar to US Rule 10b-5, enabling pursuit of insider trading cases that affect Indian markets regardless of where the trading occurs. Enhanced cooperation agreements with international regulators would facilitate information sharing and coordinated enforcement actions.

The settlement mechanism needs refinement to maintain its efficiency benefits while strengthening deterrence. SEBI should consider implementing a tiered settlement system where repe