Insider Trading: What's Legal and What's Not

Most people read "insider trading" and picture the dramatic version — a phone call, a tip, a fortune made before the announcement. That happens. But it is the small minority of insider activity in any given month. The majority is boring, disclosed, and on the NSE website by 5 PM the next day.

Most trades by insiders are legal — and that's by design

Open the corporate announcements page on NSE on any given Monday. Filter by "Insider Trading - SAST/PIT." You'll see hundreds of disclosures: a promoter buying 50,000 shares of his own company, a director selling 12,000 shares to fund his daughter's wedding, a CFO acquiring shares as part of an ESOP (Employee Stock Option Plan) exercise.

All of these trades are by insiders. None of them, on the face of it, are illegal.

SEBI's framework, the Prohibition of Insider Trading Regulations, 2015, does not prohibit insiders from trading in their own company's shares. That would be absurd. Promoters built these companies; directors and KMPs (Key Managerial Personnel — CFOs, company secretaries, and other senior officers) often have a significant share of their net worth tied up in equity grants. Stopping them from ever transacting would freeze the market.

What SEBI actually prohibits is two narrow things: trading while in possession of UPSI, and communicating UPSI to anyone who doesn't need it for legitimate purposes. Everything else is just regulated transparency: disclose the trade, time it correctly, and you are within the law.

The reason this matters for retail investors is simple: the disclosed trades are a public dataset. The undisclosed ones are not. If you train your eye to read the legal flow, you can extract a real signal, without ever needing the kind of access that gets people prosecuted.

The three pieces of the insider trading test

To know whether a trade is legal or illegal, SEBI applies three tests in sequence: who is trading, what they know, and when they're doing it. Get all three on the right side of the line and the trade is fine. Fail any one and you're in 15G territory.

Test 1 — Who counts as an "insider"?

Under PIT Regulation 2(1)(g), an insider is anyone who is either a "connected person" or who has access to UPSI. The definition is intentionally wide.

• Tier 1 · Obvious

  Promoters, directors, KMPs, employees

  Anyone formally on the company's payroll or board. They are presumed to have access to UPSI by virtue of their role.

• Tier 2 · Connected

  Auditors, lawyers, merchant bankers, consultants

  Professional advisors who routinely see internal numbers before they're released. The CA who signs your audit, the law firm working on a merger, the banker prepping a QIP — all insiders for the duration of the engagement.

• Tier 3 · Relatives

  Immediate relatives of any of the above

  Spouse, parents, siblings, children — and anyone "financially dependent" on the insider. SEBI's 2024 amendments are pushing this to align with the broader Income Tax Act definition of "relative", which captures a much wider family circle.

• Tier 4 · Tippees

  Anyone who receives UPSI from any of the above

  The friend at the party who heard the merger talk. The cousin who was told about the unannounced results. SEBI's "parity of information" approach means it doesn't matter whether you're connected to the company — once you have UPSI, trading on it is illegal.

Test 2 — What is UPSI?

Unpublished Price Sensitive Information is the heart of the regulation. Two things have to be true at once: the information is not generally available, and once it becomes available it is likely to materially affect the share price.

Regulation 2(1)(n) gives an indicative list. Memorise it — this is the one paragraph in the entire regulation that retail investors should actually know:

Two things are not UPSI, even if they feel like they should be. A genuine business forecast based on public data is not UPSI; that's research. And a rumour, even one that turns out to be true, is not UPSI in the moment it's told to you. The information has to actually exist as a confirmed internal fact.

Test 3 — When can the trade happen?

Even an insider with no current UPSI cannot trade whenever they want. SEBI mandates a "trading window closure period," a recurring blackout, during which designated persons are simply not allowed to transact.

The window closes from the end of every quarter until 48 hours after the company declares its financial results. For a March-end quarter, that means trading is blocked roughly from April 1 until two days after the May earnings release. Any director who buys shares during this period, even with the best of intentions, has committed an offence.

Trading window, disclosures, and the PAN freeze

Until 2023, the trading window was an honour system. The company maintained a list of designated persons, the compliance officer sent emails before each quarter, and SEBI relied on after-the-fact audits to catch violations.

That changed when SEBI instructed exchanges to freeze the PAN of designated persons at the security level during the closure window. The system itself now blocks the trade — your broker's terminal will reject the order with a regulatory error message, regardless of whether you remembered the rule.

In April 2025, SEBI extended the same automated PAN-freeze mechanism to the immediate relatives of designated persons. The extension rolled out in phases: the top 500 listed companies from 1 July 2025, all remaining listed companies from 1 October 2025. The compliance gap that used to depend on the designated person remembering to brief their spouse and parents has now been closed at the system level.

The disclosure rules in plain English

Every legal insider trade carries a disclosure obligation. The thresholds and forms can feel technical, but the core idea is simple: if an insider's trades cross a small rupee threshold, the company has 48 hours to put it on the exchange website.

• Form A

  Initial holding disclosure

  Filed once, when a person first becomes an insider — joins as a director, becomes a KMP, or is added to the promoter group. Tells SEBI the starting balance.

• Form B

  On-appointment holding disclosure

  Same as Form A but specifically for the moment of appointment. The compliance officer ensures it's filed within seven days.

• Form C

  Trade disclosure — the one retail should track

  Filed within two trading days every time a designated person's trades exceed ₹10 lakh in value during a calendar quarter. This is what shows up on NSE and BSE as a public PIT disclosure.

• Form D

  Trading plan disclosure

  An insider who genuinely needs to trade regularly, for liquidity, ESOP exercises, or planned diversification, can pre-file a six-month-cooling-off trading plan. Once approved, trades under the plan are exempt from the standard prohibition because the decision was made before any UPSI existed.

The Form C filing is where the legal flow becomes a public dataset. It is also why "tracking insider trades" is something retail investors can do without ever seeing a confidential email.

How to read a Form C disclosure

Form C is filed by the company on the exchange website, usually within 24 hours of receiving the disclosure from the insider. It runs to a single page and follows a fixed structure. Here is what each line tells you, in the order you'll see it:

You can read every Form C filing for a given stock at nseindia.com → Corporates → Disclosures → Insider Trading - SAST/PIT, or the equivalent path on BSE. They are free, public, and updated within 24 hours of every transaction.

When the line gets crossed: three real Indian cases

Theory only sticks when you see what crossing the line actually looks like. Here are three SEBI orders from the last decade: one mid-sized, one massive, one quiet but instructive.

Case 1 — Infosys and the Vanguard partnership (2020)

On 14 July 2020, Infosys announced a strategic partnership with Vanguard, the world's largest asset manager in defined contribution. The stock jumped on the news.

SEBI's surveillance flagged unusual trading in the stock and in Infosys options in the days before the announcement. The probe found that a former Infosys employee had passed the partnership information to an outside trader, who built a position before the announcement and made roughly ₹2.6 crore.

SEBI's order in February 2025 impounded the entire ₹2.6 crore (with 12% interest from July 2020), barred both individuals from the markets for a year, and imposed a ₹30 lakh penalty on each. Separately, Infosys CEO Salil Parekh paid ₹25 lakh to settle the related charge — that the company had failed to classify the partnership as UPSI in its own internal system.

The lesson here isn't the size of the fine. It's that SEBI's surveillance is now sophisticated enough to flag the trade pattern before any whistleblower comes forward. The trail of who-spoke-to-whom on phone records did the rest.

Case 2 — Reliance Industries and RPL futures (2007, settled 2017–2021)

This one has a different shape. In March 2007, Reliance Industries decided to sell 5% of its stake in Reliance Petroleum Limited (RPL), then a separately listed entity. RIL knew the cash-segment sale would push the stock down.

According to the SEBI order, RIL routed short positions in November RPL futures through 12 front entities, accumulating between 62% and 93% of the marketwide position limit on different days, and then dumped the cash shares. The futures positions paid off when the stock fell, on top of the cash from the share sale.

SEBI's eventual order, upheld by the Securities Appellate Tribunal in November 2020, required RIL to disgorge ₹447.27 crore plus 12% annual interest from November 2007. With the interest accumulated over more than a decade, RIL's total liability crossed ₹1,000 crore by the time it was paid.

The personal-liability piece had a different ending. In a separate 2021 order, SEBI imposed an additional ₹70 crore in penalties — including ₹15 crore on Mukesh Ambani personally, and ₹30 crore on the two SEZ entities. The Securities Appellate Tribunal (SAT — where SEBI orders get appealed) set those penalties aside in December 2023, holding that personal liability could not be fastened on the managing director merely by his role, without evidence of direct involvement or knowledge. The Supreme Court dismissed SEBI's appeal in November 2024.

Note the legal framing. SEBI did not eventually classify this as insider trading in the narrow PIT sense; it was charged under the Prevention of Fraudulent and Unfair Trade Practices regulations. The reason it shows up in any insider-trading article is that the underlying offence is the same shape: using non-public information about your own intended action to extract trades that the rest of the market couldn't make.

Case 3 — Future Retail (2017): when the public-domain line decides the case

The Future Retail (FRL) case is instructive precisely because SEBI's order did not hold. In 2017, FRL's board was discussing a demerger of one of its businesses. Before the formal announcement, related parties of certain insiders bought FRL shares aggressively. When the demerger was announced, the stock rose and the related parties booked the gains.

SEBI's February 2021 order barred Kishore Biyani and other promoters from the markets for one year and imposed penalties of ₹1 crore each on Biyani, Anil Biyani, and Future Corporate Resources. On paper, this looked like a textbook UPSI case.

In December 2023, the Securities Appellate Tribunal quashed SEBI's order entirely. SAT's reasoning is the most useful part of the case: by the time the appellants traded, the demerger plan was already in the public domain through interviews and news reports. Information that has been publicly reported is not "unpublished" anymore, and trading on it cannot be UPSI-based insider trading, even if the trader happens to be an insider.

The lesson here is subtle. The line between UPSI and "generally available information" is not always obvious. A board minute is UPSI; the same fact in a Mint interview the next day is not. Many of the cases that make it to SAT turn on exactly this question, and the regulator does not always win.

Is this insider trade legal?

Five scenarios. Pick what you think the law says, then see the rule that decides it. Each one is a real pattern from SEBI's enforcement record — or its non-enforcement record.

Each scenario is a teaching shortcut, not legal advice. Real cases turn on facts, evidence, and SAT readings of the public-domain line.

How retail investors can read the legal flow

If most trades by insiders are legal and disclosed, the obvious follow-up question is whether the disclosures are useful. The honest answer is yes, but with calibration. Insider buying is a much stronger signal than insider selling.

A promoter or director sells shares for many reasons that have nothing to do with the company's prospects. Estate planning, ESOP exercises that need to be liquidated for tax, a new house in Bandra, a child's education abroad. Selling tells you almost nothing on its own.

Buying is different. The most common reason a promoter spends post-tax money to buy more of his own company's shares is that he believes the stock is undervalued relative to what he knows about the business.

He may be wrong. He may have a worse sense of valuation than the market does. There are also less flattering reasons, such as boosting confidence ahead of a fundraise or signalling to lenders. But on average, the conviction implied by an open-market purchase has a real cost behind it, and the cost is what makes the signal worth reading.

What to look for in the disclosure feed

The patterns that have historically been most useful, in roughly increasing order of conviction:

• Pattern 1

  A single promoter buying within a quarter

  Useful background information. Worth noting; not worth acting on alone.

• Pattern 2

  Cluster buying — multiple insiders in the same window

  Two or three insiders buying within a few weeks of each other is harder to explain away as personal-finance coincidence. Worth looking deeper.

• Pattern 3

  Cluster buying after a price drawdown

  Insiders increasing their position after the stock has fallen 20–30% is the most-watched pattern. They are paying a price the market is rejecting, which means they think the market has it wrong.

• Pattern 4

  Open-market buying versus ESOP exercises

  An open-market purchase is a stronger signal than an ESOP exercise. ESOPs are part of compensation; open-market buys are conviction.

None of this is a guarantee. Promoters have been wrong about their own companies plenty of times. But as one of perhaps a dozen factors in a research process, insider activity costs nothing to add. Promoter buying with their own capital is harder to fake than commentary, because the capital is real, but it still needs context: which industry cycle, what the cash-flow picture looks like, whether the buying is small relative to their existing holding.

What illegal insider trading actually costs

The penalty structure under Section 15G of the SEBI Act is layered. The minimum penalty alone is ₹10 lakh, and that floor cannot go lower regardless of the size of the trade. The maximum is ₹25 crore or three times the profit made, whichever is higher. There is no cap if the profit is large.

Separately, Section 24 of the SEBI Act allows for criminal prosecution: imprisonment up to 10 years, and a fine up to ₹25 crore, or both. This is rarely used in practice, but it exists, and it has been invoked.

Beyond the money: SEBI can bar a person from the markets for a fixed period or indefinitely, impound the unlawful gains with 12% interest, and pursue a formal settlement that requires payment without admission of guilt. The settlement route is what most accused parties take — it ends the matter, but it appears on the public record forever.

Add up an illustrative case. A retail-scale violation, say ₹50 lakh of profit on UPSI, could plausibly result in disgorgement of the ₹50 lakh with interest, a penalty in the order of ₹1.5 crore (3× profit), a market ban of one to two years, and ₹15-20 lakh in legal fees fighting the matter. Outcomes vary case by case — settlements, partial liability findings, and SAT reversals all reshape the final number — but the math rarely works in the trader's favour, even before the reputational cost.