Why is insider trading considered illegal in India ?

What is Insider trading?

Insider trading means trading shares by insider news that is not published in the market. This type of information is called UPSI (unpublished price-sensitive information). It involves buying and selling of shares, bonds, or futures & options of any company which is listed in the share market. which impact the price of shares and bonds by unpublished news of the company in public yet.

The non-public information is crucial for traders which helps them to make a big profit but it is unfair to the public because the information will fluctuate the stock or even hole market and investors were reducing the trust from market.

In simple words, Insider trading means individuals buy or sell stock based on information that is not available in the market.

In terms of individuals, it can be a corporate office, board of directors, CEO, employees, or someone else who is directly connected to the company.

Examples of Insider trading

Let’s gives some of the examples of insider trading so that you can understand easily about the whole process works

 1. Let a person name Raju and he is Board of director of ABC company limited. Now he knows that his company will do a partnership deal with TCS(Tata consultancy services) and the company will get a large profit from this deal so Raju gives this information to their friends and all of them will buy a big amount of share from the company.

After some time when news comes out about the company deal, the share price will rise up to 40% from its actual price.

Now Raju and his friends were got a profit of 1000cr. And sell the stock at market price.

 In the above example, Raju and her friends were doing insider trading and getting a large amount of profit and this is unfair for other people who are trading in the stock market because Raju is volatile the stock and others were losing their money.

2. Let’s take second example

An automobile company planning to launch a new vehicle in the budget segment will lead in the budget segment vehicle. Rajesh is part of board of directors who knows about the plan of the company so he buys 1000 qty. share of the company at a price of 230.

After the launch vehicle the share price goes to 330 and Rajesh get RS 100000 profit from the trade.

This kind of trade is unfair trade for normal public in the stock market.

Why is Insider trading illegal?

In most of the country, insider trading is prohibited for certain reasons: -

1 Unfair for others trader and investor

The insider knowledge of the company for specific people is unfair for the other people how don’t have insider knowledge about the company.

Investor who has non-public information can make large profit and it is unfair for other trader and investors.

2 Morally wrong and un-ethical terms for others investor

It is morally wrong for the other investors who don’t know about insider knowledge. All investors should get equal knowledge.

3 It hampers the confidence of other people

Insider trading reduces the confidence of other traders. The people who are interested in the stock will lose their interest in the trade.

The other people who were interested in the stock were not confident because of ups and downs of the stock.

The people who know inside news of the company they were fluctuate the stock according to there direction. This is one of the causes which mainly hamper the investor.

Conclusion

If you or someone else are doing insider then please try to stop them because it affects other traders and investors.

SEBI will charge penalty against insider trader or SEBI can ban her trading account also.