“An open market is a just market, but an informed market is an unfair market.” This quote sums up the real challenge in insider trading. The financial markets are built on the principle of fairness, ensuring all investors have equal access to relevant information. Whenever somebody profits by using material non-public information [“MNPI”], that act compromises the integrity of the market.
Insider trading is widely condemned as an unfair practice, which justifies strict regulations from country to country. However, not all allegations of insider trading are so simple. Many individuals and entities charged with insider trading use different kinds of legal arguments to prove their innocence, claiming either a lack of intent, planned transactions, or mere coincidence regarding trading patterns.
Understanding Insider Trading: The Legal Landscape
Insider trading is illegal in almost every jurisdictions, including the United States under the Securities Exchange Act, 1934, and even in India under the SEBI (Prohibition of Insider Trading) Regulations, 2015.
Under the SEBI regulations, an “insider” is defined as:
• A “connected person” (e.g., directors, employees, auditors, consultants) who has access to UPSI.
• Any person who is in possession of Unpublished Price-Sensitive Information [“UPSI”], regardless of how they obtained it.
Legal Defences Against Insider Trading Allegations
I. Lack of Knowledge or Possession of UPSI
It is essential to prove that the alleged person having inside information should have that knowledge at the time of dealing in the securities, whereas the defences to an insider trade usually centre upon the accused showing that he or she did not have access to material non-public information. In India, Rajiv B. Gandhi v. SEBI (2008) reinforced this stance. Holding thus, the SAT established by itself that mere proximity to business affairs does not give basis to insider trading unless proven that the accused had access to and acted on UPSI.
II. Pre-Planned Trading Strategies
It is perhaps the best defence available to an accused that his trading was pre-planned and not contingent on any untoward insider information. The SEBI regulation essentially allows insiders to trade through pre-scheduled Trading Plans, thus ensuring transparency. In case of SEBI v. Rakesh Agarwal (2003), the defendant contended that his trades were pre-planned. Yet, SEBI found his disclosures were not consistent, which resulted in a penalty. This case underscores adherence to the framework of the trading plan.
III. Transactions in the Ordinary Course of Business
The decision rendered in SEC v. Dirks (1983) by the United States Supreme Court asserted that there can be no insider trading only with professional connections with the company, except in the event of breach of fiduciary duty. In the context of India, the SEBI, too, clarifies that routine transactions undertaken by mutual funds and other financial institutions do not fall within the definition of insider trading unless UPSI is misused.
Preventive measures company’s can take to avoid Insider Trading
I. Implementation of Chinese Walls and Information Barriers
Corporations often uploads Chinese walls — policies that restrict the sensitive information being accessible between departments—to guard themselves from allegations of insider trading. In Hindustan Lever Ltd. v. SEBI (1998), HUL was accused of insider trading cause of Brooke Bond shares purchase. later, the HUL’s liability was mitigated as they argued about their strict internal compliance measure.
II. Strong Insider Training Policy
A well designed and understood policy framework makes it possible for the company to prevent insider trading from causing them loss of sensitive data. A strong insider trading policy is one which covers who shall be considered an ‘Insider’; it puts on reasonable restrictions on trading; in addition to that provides for a process of reporting and malafide act by anyone.
III. Controlling The Flow Of Information
Another preventive measure available with companies to prevent insider trading is to restrict and regulate the flow of sensitive information among the employees. For better implementation of this strategy the information has to be regulated based on the requirement of the task which is supposed to be executed by the employee.
Conclusion
Insider trading continues to be a contentious matter for financial regulation, and the strictest laws have been established against it in the name of market integrity. That said, not everything is an accusation. Companies and traders are best protected by prevention. While a thorough compliance program, internal mechanisms, and transparency of disclosures will not be able to mitigate the risk entirely, they can greatly decrease it. As Warren Buffett once quoted that, “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.” . In this evolving financial environment, regulatory frameworks and defence strategies must move forward in tandem so that a delicate balance is attained between enforcement with an iron fist, with non-prohibited trading activities.
