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Capital Market and Securities Laws · Prohibition of Insider Trading

Insider Trading: Meaning and Legal Framework in India

Updated 11 October 2026 · Fact-checked

Insider trading is dealing in listed securities while in possession of unpublished price sensitive information, or passing that information on. In India it is prohibited by section 12A of the SEBI Act, 1992 and the SEBI (Prohibition of Insider Trading) Regulations, 2015, and penalised under section 15G. Answer by stating the provision, applying the facts, then concluding.

Understand Insider Trading: Meaning and Legal Framework

Insider trading means using or passing on important price-affecting information that the public does not have, to gain from trading in securities. Think of a director who learns that the company will announce a big loss next week. If she sells her shares before the news, she avoids a loss that ordinary investors will suffer. That is unfair.

The law prohibits it for three reasons. It destroys investor confidence, because outsiders feel the game is rigged. It breaks the principle that all investors should have equal access to material information. It also damages market integrity and fair price discovery.

The legal framework has three layers. First, section 12A of the SEBI Act, 1992 is the parent prohibition. It says no person shall directly or indirectly engage in insider trading, or deal in securities while in possession of material or non-public information, or communicate such information to another person, in contravention of the Act, rules or regulations. It covers securities listed or proposed to be listed on a recognised stock exchange. Second, the SEBI (Prohibition of Insider Trading) Regulations, 2015 (PIT Regulations), made under the SEBI Act, give the detailed rules: definitions, trading restrictions, disclosures and codes. Third, section 15G of the SEBI Act provides the penalty.

The Companies Act, 2013 once had its own insider trading provisions. Section 195 (prohibition on insider trading of securities) and section 194 (forward dealings by directors or key managerial personnel) have both been omitted with effect from 9 February 2018. So today the prohibition sits in securities law, administered by SEBI, not in the Companies Act. Do not cite section 195 as a live provision.

Section 15G applies to an insider who deals in securities of a listed body corporate on the basis of unpublished price sensitive information (UPSI), communicates UPSI to any person (except as required in the ordinary course of business or under any law), or counsels or procures another to deal on the basis of UPSI.

Key rules to remember

Parent prohibition
SEBI Act, 1992, section 12A(d) and (e)
No person shall engage in insider trading, or deal in securities while in possession of material or non-public information, or communicate such information, in contravention of the Act, rules or regulations.
Scope of section 12A
Securities listed or proposed to be listed on a recognised stock exchange
Sub-clauses (a) to (c) on manipulative and deceptive devices and fraud use this wording; always mention listing in your answer.
Penalty for insider trading (section 15G)
Penalty ≥ ₹10 lakh, may extend to the higher of ₹25 crore or 3 × profits made
Applies to an insider who deals on the basis of UPSI, communicates UPSI, or counsels or procures dealing.
Three acts caught by section 15G
Deal + Communicate + Counsel/Procure
Communication is excepted if required in the ordinary course of business or under any law.
Companies Act position
Sections 194 and 195: omitted w.e.f. 9-2-2018
Insider trading is now governed by the SEBI Act and the PIT Regulations, 2015.

How to solve Insider Trading: Meaning and Legal Framework questions

Use this method for any question on the meaning, purpose or legal framework of insider trading.

  1. 1Define insider trading in one or two lines: dealing in, or communicating, unpublished price sensitive information.
  2. 2State why it is prohibited: investor confidence, equal access to information, market integrity.
  3. 3Name the source of the prohibition: section 12A of the SEBI Act, 1992, with the relevant clauses.
  4. 4Add the PIT Regulations, 2015 as the detailed code made under the SEBI Act.
  5. 5State the penalty under section 15G if the question involves consequences.
  6. 6Mention that Companies Act sections 194 and 195 are omitted from 9 February 2018, if the question refers to the Companies Act.
  7. 7For case facts, identify the person, the information, the act (dealing, communicating, counselling) and then conclude clearly.

Quickest way: Provision, Facts, Conclusion in five lines

When to use it: Use when time is short and you need a compact answer worth full marks.

  1. Line 1: Define insider trading with the word UPSI.
  2. Line 2: Cite section 12A of the SEBI Act and the PIT Regulations, 2015.
  3. Line 3: Give the purpose in one phrase: fair market and investor confidence.
  4. Line 4: Cite section 15G penalty: minimum ₹10 lakh, up to ₹25 crore or 3 times profit, whichever is higher.
  5. Line 5: Conclude and, where relevant, note that Companies Act section 195 is omitted.

Common mistakes in Insider Trading: Meaning and Legal Framework

  • Citing Companies Act section 195 as the current law on insider trading.

    Older books and notes still show it.

    Fix: Write that sections 194 and 195 were omitted from 9 February 2018 and that the SEBI Act and PIT Regulations govern.

  • Saying section 12A applies to all companies.

    Students ignore the listing condition.

    Fix: State that it covers securities listed or proposed to be listed on a recognised stock exchange.

  • Stating the section 15G penalty as a fixed amount.

    Students remember only one figure.

    Fix: Write: not less than ₹10 lakh, may extend to ₹25 crore or three times the profits, whichever is higher.

  • Treating only dealing as insider trading.

    The popular image is buying or selling shares.

    Fix: Include communicating UPSI and counselling or procuring others to deal.

  • Ignoring the ordinary-course exception for communication.

    Students assume any sharing of UPSI is an offence.

    Fix: Note that section 15G excepts communication required in the ordinary course of business or under any law.

Worked examples

Example 1

Explain the legal framework governing insider trading in India and state why it is prohibited.

Show the solution
  1. Meaning: insider trading is dealing in securities of a listed company on the basis of unpublished price sensitive information, or communicating or procuring such dealing.
  2. Reason: it undermines investor confidence, gives unfair advantage over ordinary investors and harms market integrity.
  3. Source 1: section 12A of the SEBI Act, 1992 prohibits any person from engaging in insider trading and from dealing in securities while in possession of material or non-public information, or communicating it, in contravention of the Act, rules or regulations.
  4. Source 2: the SEBI (Prohibition of Insider Trading) Regulations, 2015 give the detailed rules.
  5. Penalty: section 15G of the SEBI Act.
  6. Companies Act: sections 194 and 195 are omitted from 9 February 2018.

Answer: Insider trading is prohibited to protect fair markets and investor confidence. The framework is section 12A of the SEBI Act, 1992, the PIT Regulations, 2015 and the penalty under section 15G. The Companies Act provisions are omitted.

Example 2

A director of a listed company knows its board will soon approve a major loss that is not public. She sells her shares at a profit-protecting price and tells her brother to sell too. Her brother sells. Advise on the legal position and the maximum penalty if profit avoided is ₹2 crore.

Show the solution
  1. Provision: section 12A(d) and (e) of the SEBI Act bars insider trading and dealing or communicating while in possession of material non-public information.
  2. Facts: the loss is unpublished price sensitive information; the director dealt on that basis and communicated it, which also counsels or procures dealing.
  3. Section 15G: penalty not less than ₹10 lakh, up to the higher of ₹25 crore or three times the profit.
  4. Compute: 3 × ₹2 crore = ₹6 crore, which is lower than ₹25 crore.
  5. Higher of the two = ₹25 crore.

Answer: The director has violated section 12A and is liable under section 15G. The penalty is at least ₹10 lakh and may extend to ₹25 crore, since ₹25 crore is higher than three times the ₹2 crore profit (₹6 crore). The brother's position depends on whether he is an insider or merely a recipient, to be assessed under the PIT Regulations.

Exam tips

  • Always open with the definition and cite section 12A of the SEBI Act; examiners look for the section number.
  • Learn the section 15G figures exactly: ₹10 lakh minimum, ₹25 crore or three times profit, whichever is higher.
  • State clearly that Companies Act sections 194 and 195 are omitted from 9 February 2018.
  • In case-based questions, write provision, facts, then a clear conclusion.
  • Use the words unpublished price sensitive information, not just inside information.

Practice questions from Prohibition of Insider Trading

Insider Trading: Meaning and Legal Framework: frequently asked questions

What is insider trading under SEBI law?

It is dealing in listed securities on the basis of unpublished price sensitive information, or communicating such information or counselling others to deal. Section 12A of the SEBI Act and the PIT Regulations, 2015 prohibit it.

Is section 195 of the Companies Act still in force?

No. Section 195, on insider trading, and section 194, on forward dealings, were omitted with effect from 9 February 2018. Insider trading is now dealt with under the SEBI Act and the PIT Regulations.

Why is insider trading prohibited in India?

It gives insiders an unfair advantage over ordinary investors. This reduces trust in the market and harms fair price discovery, so the law prohibits it.

What is the penalty under section 15G of the SEBI Act?

The penalty is not less than ₹10 lakh and may extend to ₹25 crore or three times the profits made from insider trading, whichever is higher.