Insider trading, which involves persons using non-public information to obtain an edge in securities trading, poses serious threats to market integrity and investor confidence. India has created legal frameworks to combat such abuses, with the Securities and Exchange Board of India (SEBI) playing an important role. Insider trading can have a profound impact on financial markets. When insiders trade on non-public information, they can manipulate the price of securities, creating an unfair advantage over other investors.

This can erode investor confidence, leading to a decline in market liquidity and overall economic activity. Additionally, insider trading can damage the reputation of companies and industries, deterring investment and hindering economic growth. Furthermore, insider trading can contribute to a culture of unethical behaviour in the financial sector. When insiders are perceived to be benefiting from unfair practices, it can undermine the public's trust in the integrity of financial markets. This can have far-reaching consequences, including a loss of faith in the capitalist system and increased calls for stricter regulation. To mitigate the negative effects of insider trading, it is essential to have robust regulatory frameworks and effective enforcement mechanisms in place.

By deterring insider trading and promoting fair and transparent markets, regulators can help to maintain investor confidence and ensure the long-term health of the economy. Recommendations are offered to improve insider trading legislation in India. This study highlights the necessity for ongoing monitoring and adaption of regulatory frameworks to handle changing difficulties in the securities industry. Addressing inadequacies in existing legislation will strengthen India's market environment and promote fairness, integrity, and investor protection.

Introduction:
The stock exchanges of a country are an important part of its capital market. A healthy capital market can be formed if stock exchanges are properly controlled. The global economic situation has led to a greater emphasis on enforcing criminal laws and regulations to combat insider trading and market abuse. Insider trading prosecutions must use aggressive methods such as wiretaps to disclose evidence of insider trading activity. US Court juries have repeatedly sentenced those who elected to go to trial and imposed heavy fines on the guilty defendants.

Insider trading means trading by any individual in the securities of a company by having price- sensitive information of the company before it is available to the general public with an intention of making abnormal profits or avoiding losses. According to the Securities and Exchange Board of India's SEBI (Prohibition of Insider Trading) Regulations (1992), an insider is defined as someone who has access to undisclosed price sensitive information about a company's securities. Section 195 of The Companies Act (2013) defines insider trading as the purchase, sale, or subscription of a company's securities by key management personnel or directors who have access to Unpublished Price Sensitive Information (UPSI) about the company and its securities.1

Insider trading is a term that encompasses both legal and prohibited activities. It involves the purchase and sale of securities by an individual with an Unlisted Person (UPP) of a company before it is accessible to the public, with the aim of creating abnormal earnings and evading losses. Corporate insiders are allowed to trade in their own company's stock but are required to disclose these transactions to avoid misuse of non-public price-sensitive information.

SEBI has framed numerous disclosure regulations for insiders to build investor confidence and increase transparency in securities trading. The Companies Act (2013) also devised a code of conduct for the administration of these regulations. In India, listed companies are guided by Clause 36 of the Listing Agreement of the stock exchanges, which states that the issuer will inform the stock exchanges immediately of events such as closure due to power cuts, lockouts, strikes, and events that have a posture on the operations/performance of the firm and price- sensitive information.

The liberalization of India's economy in 1991 led to significant development of capital market and regulatory reforms. The stock market crash in 1992, and stock manipulation by Harshad Mehta, highlighted the issues of transparency and motivated the enforcement of insider trading laws in India to be regulated and superseded by SEBI. This paper focuses on the SEBI's efforts to fulfill the regulatory objectives established by the merger, based on the SEBI (Prohibition of Insider Trading) Regulations (1992) and amendments made between 1992-2015.2

Insider Trading:
Insider Trading, also known as Insider Dealing, is the illegal activity of using confidential information to gain an edge when trading on the stock exchange. Insider trading refers to the purchase or sale of a security by someone with access to confidential information about it. Insider trading may be legal or illegal, depending on the timing of the transaction. It is illegal if the material information is still not public. Illegal insider trading involves tipping others if you know any type of confidential information. Legal insider trading occurs when corporate directors buy or sell shares while legally disclosing their transactions. Insider trading is the activity of trading a company's securities by individuals who have a vested interest.

Henry G. Mane a stalwart and founder of law and economics discipline defines Insider trading as the "the practice of corporate agents buying or selling their corporation securities without disclosing to the public significant information, which is known to them, but which has not affected the price of the security"3 In layman's terms, "Unpublished Price Sensitive Information" (UPSI) refers to dealing in a company's securities based on confidential information that can significantly impact the value of the securities and is not publicly available to shareholders or the general public. The "insider" violates the fiduciary obligations of corporate staff and connected persons towards shareholders under the Securities Exchange Board of India by gaining unfair advantage or avoiding loss.

Regulations 1992"4. The primary intent of insider trading laws and regulations is to curtail "Insiders" from capitalizing on UPSI and curb the information asymmetry arising due to the unavailability of the same to other market participants, with the overarching intent of leveling the playing field for all stakeholders in the market.

Types of Insider Trading:
Insider trading is classified into two types: legal insider trading, in which corporate insiders legally buy and sell their own company's stock and report it to regulatory authorities, and illegal insider trading, in which trades are made based on non-public, material information for personal gain, violating transparency and fairness principles.

Legal Insider Trading:

Corporate officers, directors, and employees can legally purchase and sell stock in their own company. However, these transactions must be promptly notified to regulatory authorities such as the SEC. This transparency prevents the exploitation of non-public information and maintains market integrity.

Illegal Insider Trading:

This happens when people trade using confidential, material knowledge that is not available to the public. Such activities give insiders an unfair edge and undermine confidence. Illegal insider trading jeopardizes market fairness and carries serious legal consequences, including fines and jail.

Tipper and Tippee Trading:

Involves a 'tipper' (an insider with confidential information) and a 'tippee' (who receives the tip). If the tippee trades on this inside information, both parties can be held liable. This type emphasizes the responsibility of insiders to safeguard sensitive information.

Misappropriation Theory:

This kind happens when someone utilizes inside information for trade purposes, violating a duty of trust and confidence due to another party, such as an employer. This idea broadens the definition of what constitutes illicit trading by including numerous deceptive activities.

Temporary Insiders:

Individuals can temporarily become insiders, such as lawyers or accountants who work for a firm. If they trade on sensitive knowledge obtained during their service, it is considered insider trading, demonstrating the broad definition of a 'insider'.

Characteristics of Insider Trading:

1. Secret Knowledge, Unfair Gain: Insider trading is based on using non-public, material information to make transactions. Insiders, such as firm executives or workers, use proprietary information not available to the broader public, giving them an unfair advantage in the market.
2. Legal Lines Crossed: Insider trading is banned and considered a major financial crime. It violates trust and fiduciary responsibilities. To discourage such actions, regulatory bodies such as the SEC and SEBI apply severe punishments, including large fines and jail.
3. The Ripple Effect on Companies: Insider trading scandals can damage a company's brand, affecting stock prices and investor relations. It also results in increased regulatory scrutiny, which may have an influence on their future operations and financial health.
4. A Blow to Investor Trust: When insider trading news breaks, it can dramatically undermine investor confidence in the market. This loss of confidence can have far-reaching consequences, such as lower investment and a general cynicism of the equity markets.
5. Market Integrity at Stake: Insider trading threatens the integrity of financial markets. It creates an unequal playing field in which insiders with privileged information can profit in ways that ordinary investors cannot, causing a loss of trust in the market's fairness.

Insider trading regulations around the world:
There is a considerable cross-country variation in the quality and quantity of corporate reporting, information intermediation and information dissemination structures (Bushman et al., 2004). The USA has strict insider trading regulations in the world today. The USA Securities Exchange Act of 1934 was the first to enact the insider trading law to place restrictions on insider trading. The Securities Exchange Commission (SEC) of USA7 has zero tolerance for insider trading activities. The verdicts for the culprits of insider trading will be imprisonment and huge penalties.

Thereafter, most developed economies as well as several emerging markets have followed and prohibited insider trading. Eradicating insider trading has become one of the most important goals of market regulators. Bhattacharya and Daouk (2002)8 collected information on the existence of insider trading laws from 103 countries.

The existence and enforcement of insider trading laws were first established in the USA in 1934, and it is the first nation to prosecute the insider trading case in 1961; however, it took 27 long years to report its first insider trading case for prosecution. Malaysia has taken 23 years to report their first insider trading prosecution among all the other nations. Canada and France have framed insider trading regulations in the 1970s, and the prosecution was reported during 1970s only.

The UK and Germany have prosecuted insider trading cases within one year of their insider trading regulations, whereas Sweden and Canada have taken 19 years and 10 years, respectively, in the first prosecution of insider trading case. Whereas, India has framed its insider trading regulations in 1992, and in 1998, it has reported the prosecution of insider trading, that is in six years of framing such regulations. By 2000, 87 countries had passed insider trading laws and 38 had prosecuted at least one insider trading case (Bhattacharya and Daouk 2002).

The following are the three sections which infer the insider trading regulations in the various nations. These imply the strength of the stock markets of a nation:

1. Level playing field: The market should be fair to all the participants. The regulatory bodies in all countries aim primarily at a level playing field by promoting fair and full disclosure of all material information by the listed companies, so that insiders will not have any unfair advantage.
    
2. Investor confidence: Restricting insider trading will increase the investor confidence in financial markets. Permitting insider trading does not seriously threaten the investor's confidence. Further, investor participation depends not only on the laws in place but also on the confidence that they will be enforced fairly (Eleswarapu, 2006)9.
    
3. Market efficiency: Fama (1970) used the concept of strong-form efficiency in his Efficient Market Hypothesis (EMH) to characterize a market where private information is fully reflected in stock prices. EMH states that most of the developed countries' stock markets fall under the semi-strong category. The securities markets are informational efficient, and the securities prices reflect all the publicly available information but not the private information. The insiders' private information will affect the securities prices positively/negatively on the markets.
    

Evolution of Insider Trading Regulation in India:
Evolution of insider trading regulation dates back to 1978 when The Sachar Committee stated that company personnel such as board members, accountants and company secretaries might have certain price-sensitive information. Such information may be used to influence stock prices, which could affect the market sentiments of the capitalizing public. The Committee suggested that the Companies Act, 1956 must be amended to prevent such practices.

In 1986, The Patel Committee recommended amendments to Securities Contracts (Regulation) Act, 1956 to enroute for restraining insider trading through the supervisory machinery. In 1989, the Abid Hussein Committee suggested that insider trading actions could be fined by civil and criminal actions. Besides, it put forward that SEBI has to formulate the guidelines and regulations to avoid insider trading (Misra, 2011)10. In light of the recommendations of various Committees by means of the endorsements, SEBI formulated the SEBI (Prohibition of Insider Trading) Regulations (1992) and outlawed this misconduct. All the listed companies and market intermediaries have to act in accordance with the directions of these regulations.

Insider Trading Regulations in India:
The fast expansion of India's economy and financial markets has led to a surge in financial crimes, particularly insider trading in the capital markets. To become a reliable investor haven and compete with other big global economies, India must prioritize preventing such crimes. According to an RTI reply dated November 23, 2019, there were no convictions for insider trading between 2014 and 201911.

In a country like India, where the "average daily traded equity value is in the tune of 70,000 crore Indian rupees," it is practically impossible for a five- year period to pass without any insider trading convictions. Insider trading remains within the ambit of the Securities Exchange Board of India (SEBI), which was set up in 1988 under the supervision of the Ministry of Finance with the objective of regulating the securities market as well as protecting the interests of the investor, but the conviction rates evidence the fact that this regulatory authority has failed to effectively carry out the purpose for which the Prohibition of Insider Trading Regulations (hereinafter "PIT"),1992 was laid down.

With the Indian market capitalisation crossing 1.6 trillion U.S dollars6 there emerged a clear need to relook and revamp the laws on insider trading and the 18 membered Sodhi committee was tasked with this matter closing the gaps on the existing laws. This committee report was submitted to SEBI and upon approval lead to the introduction of the (Prohibition of Insider Trading) Regulations, 2015.

Regulatory Framework and Key Provisions of SEBI (Prohibition of Insider Trading) Regulation, 2015:
India's Securities and Exchange Board of India (SEBI) regulates insider trading and oversees the securities market. SEBI's mandate includes developing and enforcing regulations to safeguard market integrity, protect investor interests, and promote fair and transparent market activity. SEBI is responsible for preventing and deterring insider trading by enforcing strict regulations. The SEBI (Prohibition of Insider Trading) Regulation, 201512 is a key component of SEBI's regulatory framework, governing insider trading operations in India. The legislation includes provisions to combat insider trading, promote transparency, and strengthen market integrity.

Key provisions of the SEBI (Prohibition of Insider Trading) Regulation, 2015, include:

• Definition of Insider Trading: The regulation prohibits insider trading and the sharing of unpublished price-sensitive information by insiders.
• Prohibition on Insider Trading: The legislation prevents insiders from trading securities based on unpublished price-sensitive knowledge, providing fairness for all market participants.
• Disclosure Requirements: Insiders must disclose their trading activities and shareholding positions to approved authorities within prescribed periods for transparency and accountability.
• Trading Window and Blackout Periods: The regulation allows insiders to trade securities during designated windows, with specified limits. Insiders are not allowed to trade outside of designated trading windows to prevent illicit transactions based on confidential knowledge.

Insider Trading Code of Conduct:
The law establishes an insider trading code of conduct for listed firms and market intermediaries. It outlines ethical standards and best practices to combat insider trading and assure regulatory compliance13. These provisions promote a fair, transparent, and efficient securities market in India. The regulation aims to strengthen market integrity and investor trust by prohibiting insider trading and requiring stringent transparency. Trading windows and blackout periods strive to prevent market manipulation and provide a fair playing field for all participants. The insider trading code of conduct encourages ethical behaviour and accountability among insiders, creating a culture of compliance and integrity in the securities market. The SEBI (Prohibition of Insider Trading) Regulation, 2015 is a comprehensive regulatory framework that prevents insider trading and maintains market integrity in India. This chapter offers an overview of the regulatory framework for insider trading in the country, highlighting major rules and their significance.14

Case Law:
The case of Shruti Vora v Securities and Exchange Board of India presents a significant analysis of India's insider trading regime, particularly regarding the interpretation of the knowledge requirement in determining liability under the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015. The decision rendered by the Securities Appellate Tribunal (SAT) in this case has far-reaching implications for the enforcement and interpretation of insider trading regulations in India. In the Shruti Vora case, the SAT deliberated on whether the circulation of a "forwarded as received" message on a WhatsApp group, containing financial results of a company before they were disclosed publicly, constituted unpublished price-sensitive information (UPSI) under the PIT Regulations.

The central legal question revolved around the element of knowledge and whether the accused possessed the requisite knowledge that the information in question was UPSI. The case comment begins by providing context on India's insider trading regime and the historical development of laws governing insider trading. It highlights the evolution of insider trading regulations in India, emphasizing the strict stance adopted by the Securities and Exchange Board of India (SEBI) in combating insider trading practices. The analysis of the Shruti Vora case delves into the implications of the SAT's judgment on the interpretation of the knowledge requirement under the PIT Regulations. It critiques the SAT's approach,

highlighting several flaws and inconsistencies in its reasoning. Notably, the SAT's failure to reference precedents and the ambiguous connection made between general information and the requirement of knowledge are scrutinized. Furthermore, the case study examines the broader implications of the SAT's decision on India's insider trading laws and regulatory framework. It argues for a reconsideration of the legislative intent of the PIT Regulations, particularly regarding the inclusion of a knowledge requirement and the establishment of an innocent tippee defense.

The analysis underscores the need for reform to align India's insider trading regime with international best practices and address gaps in the existing regulatory framework. The Shruti Vora case serves as a critical examination of India's insider trading regime, shedding light on the complexities and challenges in enforcing insider trading regulations. By analyzing the implications of the SAT's decision, this case study contributes to the ongoing discourse on insider trading regulation in India and advocates for reforms to strengthen market integrity and investor protection.15

Challenges in Enforcement:
To develop into one of the world's advanced economies and create a welcoming environment for domestic and foreign investors, India's capital markets and statutory bodies must be trusted by investors. SEBI can address regulatory issues related to insider trading by implementing measures such as:

1. Expanding Technological Prowess and Scope of Investigative powers: SEBI needs to improve its prosecutorial machinery to effectively investigate and punish insider trading cases. To effectively oversee capital markets, it must use modern technologies and investigative techniques, moving beyond traditional methods. SEBI requires expanded investigation tools, including access to phone records, wiretapping, and electronic communication, to strengthen prosecution cases and conduct more effective probes. In India, investigating organizations like the CBI have been granted powers, but they only share intelligence with SEBI.
2. Expansion of territorial jurisdiction: Insider trading rules should have extraterritorial applicability, as modern offenders often cross countries. The SEC's regulatory framework, which includes extraterritorial jurisdiction (proviso 27(b) of the SEC Act, 1934), could be applied to Indian law. SEBI aims to prevent foreign parties from engaging in illegal insider trading across borders. To facilitate cross-border investigations, MoUs and bilateral agreements are still the most effective tools. Moving forward, SEBI must increase its efforts to include new territories.
3. Issuance of a line of clarity as to the nature of offence Insider trading falls under: In the case of Rakesh Agarwal v. SEBI, the SAT proceeded to adjudicate the matter on the basis that the offence of insider trading was of a criminal nature, a position in contravention to the Bombay High Court's finding in Cabot International v. SEBI, stating that "For breaches of provisions of SEBI Act and Regulations, which are civil in nature, mens rea is not essential." The Supreme Court upheld the same position in the case of SEBI v. Shriram Mutual Fund and Another. Clarity in terms of the nature of the offence and the elements required to establish insider trading charges will enable SEBI to prosecute cases effectively. Proviso 32(a) of the SEC in the US legal regime clearly lays out that indulgence in insider trading qualifies as a criminal offence, and India may draw from such laws to solidify its position.
4. Increasing awareness and spreading information: Educating stakeholders on insider trading and financial crimes is crucial for promoting fairness and reducing misconduct in capital markets. SEBI may provide guidelines for disseminating such information through NGOs and stock exchanges. Effective application of insider trading regulations requires management to self-regulate and adhere to sound corporate governance norms. Companies can implement self-adopted codes and monitor compliance officers to ensure that personal trading of securities aligns with company policies.
5. Enabling Pre-emptive action: The approach towards insider trading must shift from punitive action after the crime to a mechanism where it can be stopped at inception. Developing a strong surveillance system that identifies potential insider trading based on evidentiary circumstances, rather than detecting it after it has occurred, will ensure greater investor safety.
6. Provide for Private right of action: As discussed previously (with respect to Rules 10b5 and Rule 14e-3 of Securities Exchange Rules, 1942 and Section 16-b and Section 20- a of the Securities Exchange Act) the US legal regime has empowered individual investors to file maintainable civil suits to seek adequate redressal for the losses they have suffered due to instances of insider trading. Such an approach must also be adopted by the Indian legal framework, over the current system wherein enforcement rests only with SEBI. Under the current Indian legal regime insider trading remains a lucrative means as the annual reports of SEBI are indicative of the fact that most accused persons are acquitted and even those which are convicted pay measly settlement amounts with respect to the profits, they booked by indulging in such illegitimate activity.21

In recent years, there have been several notable developments in the field of insider trading:
Regulators are increasingly leveraging artificial intelligence and data analytics to detect suspicious patterns of trading activity. Social media monitoring has also become a valuable tool for identifying potential insider trading schemes. Additionally, regulatory agencies have expanded their enforcement powers and implemented stricter disclosure requirements for insiders.

International cooperation has intensified to combat cross-border insider trading, and public awareness campaigns have been launched to educate investors about the risks and consequences of this illicit activity. Landmark cases have further shaped the legal landscape and established precedents for penalties. These developments collectively demonstrate the ongoing commitment to maintaining the integrity of financial markets and deterring insider trading.

Conclusion:
Insider trading supposedly seems like an "unwinnable "war which the government and the SEBI in its regularity role continue to fight. Despite the revision and redevising of various regulatory frameworks to deter Insider trading, such regulations have not been able to achieve the true extent of the goal for which it was laid down. The mechanisms adopted by westerns regulators particularly the SEC in the U.S also provide a great reference point for assimilating effective enforcement mechanisms as well as positions of law necessary to effectively address the issue of Insider trading in India and achieve the heights that the Indian economy is capable of attaining. Insider trading poses a significant threat to the integrity of financial markets.

India has implemented robust regulatory frameworks to combat this illicit activity, but challenges remain in effective detection, investigation, and prosecution. To further strengthen India's efforts, it is essential to enhance technological capabilities, expand investigative powers, strengthen international cooperation, raise public awareness, and consider private right of action. By addressing these recommendations, India can promote a fair, transparent, and efficient securities market.

To mitigate the negative effects of insider trading, it is essential to have robust regulatory frameworks and effective enforcement mechanisms in place. By deterring insider trading and promoting fair and transparent markets, regulators can help to maintain investor confidence and ensure the long-term health of the economy.

References:
Books

• Harry S. Davis, Insider Trading and Compliance book 2016, published in 2015
• Armaan Pathak, Insider Trading- Law & Practice, 1st Edition, 2019
• Wolters Kluwer, Fraud Manipulation and Insider Trading in the Indian Securities Market, 3Ed, published in 2020

Articles

• Bhandari, A. (2022). Shruti Vora securities and exchange board of India: analysing the India's insider trading regime. Jus Corpus Law Journal, 2(4), 522-528
• Misra, M. (2011), "Insider trading: Indian perspective on prosecution of insiders", Journal of Financial Crime, Vol. 18 No. 2, pp. 162-168.
• Bhattacharya, U. and Daouk, H. (2002), "The world price of insider trading", The Journal of Finance, Vol. 62 No. 4, pp. 75-108.
• Eleswarapu, V.R. (2006), "The impact of legal and political institutions on equity trading costs: a cross-country analysis", Review of Financial Studies, Vol. 19 No. 3, pp. 1081-1111.

Websites

• https://www.sebi.gov.in/acts/InsiderTrading
• https://www.usa.gov/agencies/securities-and-exchange-commission
• https://www.sebi.gov.in/legal/regulations/jul-2022/securities-and-exchange-board-of-india-listing-obligations-and-disclosure-requirements-regulations-2015-last-amended-on-july-25-2022-_61405
• https://dipam.gov.in/securities-exchange-board-india

End Notes:

1. https://www.sebi.gov.in/acts/InsiderTrading
2. https://idr.nitk.ac.in/jspui/bitstream/123456789/8319/1/6.Insider%20trading%20in%20India.pdf
3. Henry G. Manne, "Definition of Insider Trading" in Fred S. McChesney (ed.) The Collected Works of Henry G. Manne 364 (2009)
4. Securities Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992.
5. https://aliceblueonline.com/what-is-insider-trading-in-india/
6. https://onlinemba.wsu.edu/blog/insider-trading-examples
7. https://www.usa.gov/agencies/securities-and-exchange-commission
8. Bhattacharya, U. and Daouk, H. (2002), "The world price of insider trading", The Journal of Finance, Vol. 62 No. 4, pp. 75-108.
9. Eleswarapu, V.R. (2006), "The impact of legal and political institutions on equity trading costs: a cross-country analysis", Review of Financial Studies, Vol. 19 No. 3, pp. 1081-1111.
10. Misra, M. (2011), "Insider trading: Indian perspective on prosecution of insiders", Journal of Financial Crime, Vol. 18 No. 2, pp. 162-168.
11. Pratyush Mohanti, Insider Trading in India – Deficiency from Prosecution to Conviction, (16 June 2021), Insider Trading in India – Deficiency from Prosecution to Conviction.
12. https://www.sebi.gov.in/legal/regulations/jul-2022/securities-and-exchange-board-of-india-listing-obligations-and-disclosure-requirements-regulations-2015-last-amended-on-july-25-2022_61405
13. (2016). The effect of enforcement intensity on illegal insider trading volume: the case of Taiwan. Investment Management and Financial Innovations, 13(2), 141-148. https://doi.org/10.21511/imfi.13(2-1).2016.02
14. (2017). Insider trading in India – regulatory enforcement. Journal of Financial Crime, 24(1), 48-55. https://doi.org/10.1108/jfc-12-2015-0075
15. Bhandari, A. (2022). Shruti Vora Securities and Exchange Board of India: Analysing the India's Insider Trading Regime. Jus Corpus Law Journal, 2(4), 522-528.
16. Rakesh Agarwal v. SEBI, 2004 49 SCL 351 SAT
17. Cabot International v. SEBI, 2004 51 SCL 307
18. Cabot International v. SEBI, 2004 51 SCL 307, para.30
19. SEBI v. Shriram Mutual Fund and others, Appeal (civil) 9523-9524 of 2003
20. S.32(a), Securities Exchange Act, 1934
21. https://dipam.gov.in/securities-exchange-board-india-sebi