ABSTRACT
Insider trading represents a pervasive challenge to the integrity, transparency, and fairness of capital markets. Despite its universal condemnation, jurisdictions have adopted markedly divergent regulatory strategies to address this complex phenomenon. This research undertakes a comparative legal analysis of the insider trading regimes enforced by Securities and Exchange Board of India (SEBI), United States (US)’s Securities and Exchange Commission (SEC), & United Kingdom (UK)’s Financial Conduct Authority (FCA). It explores conceptual underpinnings, statutory frameworks, enforcement mechanisms, and judicial interpretations that define the contours of insider trading regulation in each jurisdiction. While SEC has evolved nuanced doctrine encompassing both classical and misappropriation theories, & FCA employs a dual-track regulatory framework that balances civil and criminal liability under the Market Abuse Regulation, SEBI’s approach remains largely administrative, reactive, and doctrinally underdeveloped. Through a critical evaluation of definitions, scope of liability, evidentiary burdens, and compliance architecture, the research identifies the strengths and systemic limitations of each framework. It highlights the disproportionate reliance on procedural compliance in India and the absence of robust whistleblower incentives or fiduciary duty-based theories of liability. Drawing from comparative best practices, the research proposes reformative insights aimed at recalibrating India’s insider trading regime. These include legislative refinement, institutional strengthening, and alignment with international enforcement benchmarks. In doing so, the research argues for a paradigm shift from a merely preventive model to one that is substantively deterrent, technologically enabled, and jurisprudentially coherent.
Keywords: Insider Trading, Market Abuse, Unpublished Price Sensitive Information, Fiduciary Duty, Misappropriation Theory, Securities Regulation, Whistleblower Policy, Corporate Governance
INTRODUCTION
Insider trading, in its most juridically critical essence, constitutes a pernicious infraction wherein individuals engage in purchase or sale of securities on basis of access to material, non-public information, colloquially and legally denoted as unpublished price sensitive information (UPSI), thereby subverting the foundational principles of parity and transparency that are indispensable to the operation of capital markets. The operative misconduct arises not merely from the act of trading per se, but from the exploitation of an informational asymmetry that is inaccessible to the broader investing public, thereby enabling a select cohort, comprising, inter alia, directors, officers, auditors, legal advisors, consultants, and ancillary third-party recipients of such information, to reap pecuniary advantages or avert pecuniary losses through means that are fundamentally unavailable to others operating within the same market construct. The net effect of such conduct is a direct affront to the presumption of fairness that undergirds market architecture, and its ramifications extend beyond transactional injustice to systemic erosion of investor confidence and broader economic inefficiencies.[1]
From a jurisprudential standpoint, the legal proscription of insider trading assumes variegated contours across regulatory regimes, yet is uniformly anchored in the doctrinal repudiation of informational inequity. Under the classical fiduciary model, particularly dominant in the US, insider trading is conceptualized as breach of fiduciary obligations owed by insiders to corporation & its shareholders, a breach that transforms what might otherwise be permissible trading into a form of fraudulent deception. Augmenting this is misappropriation theory, which broadens scope of liability to encompass individuals who illicitly acquire information from a legitimate source and subsequently deploy it for securities trading, thus, transgressing duty of loyalty to the source of information rather than issuer of securities. In contrast, statutory regimes such as India’s SEBI (Prohibition of Insider Trading) Regulations, 2015, embody a codified & definition-centric approach, delineating the contours of what constitutes an ‘insider’ and what qualifies as UPSI with a view toward enhancing administrative enforceability and legal certainty. The UK, under the Market Abuse Regulation (MAR), adopts a market-integrity paradigm, shifting the locus of regulatory concern from interpersonal fiduciary breaches to systemic disruptions in informational equilibrium, thereby addressing a broader swathe of potentially abusive conduct under the umbrella of market abuse.[2]
Irrespective of the doctrinal foundation, insider trading epitomizes both a contravention of positive law and an ethical defalcation. It disrupts the trust-based frameworks inherent in corporate governance and capital market interactions, compromising not only the fairness of individual transactions but also the structural integrity of the marketplace. The clandestine modality of such conduct further exacerbates the enforcement challenge, as the evidentiary burden of establishing both the possession of UPSI and its causal nexus to the impugned trade often necessitates recourse to advanced forensic, surveillance, and analytical mechanisms, thereby elevating the threshold of regulatory competence required to ensure effective prosecution.[3]
Within this context, regulation of insider trading assumes sine qua non role in safeguarding the sanctity of market operations. Financial markets are predicated on the axiom of informational parity and transactional fairness; absent a credible and effective regulatory apparatus, market participants lose faith in the authenticity of pricing mechanisms and the equitability of access, leading to disintermediation, reduced liquidity, and capital flight. Robust regulation acts as an ex-ante deterrent and an ex-post corrective, buttressing the expectations of fair play among investors and deterring opportunistic behavior by those in positions of informational privilege. This regulatory imperative is not merely moralistic in orientation but economic in consequence; theoretical constructs such as the Efficient Market Hypothesis (EMH) are premised upon the availability of full and fair information to all market actors, and the undermining of this assumption compromises allocative efficiency and heightens the risk of asset mispricing.
The absence or inadequacy of insider trading regulation precipitates a corrosive dynamic within capital markets, wherein the asymmetrical exploitation of information becomes normalized and institutionalized, thereby disincentivizing participation by retail and institutional investors alike. Empirical economic literature has demonstrated a consistent correlation between weak regulatory enforcement and indicators of market dysfunction, including heightened cost of capital, diminished foreign investment, and suboptimal corporate governance practices. Accordingly, legal frameworks aimed at curbing insider trading must extend beyond mere criminalization to incorporate a holistic suite of statutory instruments, including but not limited to proactive monitoring, data analytics-based surveillance, protective mechanisms for whistleblowers, and proportionate, dissuasive sanctions calibrated to reflect the severity of the breach.
Critically, the regulatory response to insider trading must transcend its punitive dimensions and be viewed as a constitutive mechanism for embedding ethical norms and compliance culture within corporate and financial institutions. Jurisdictions with exemplary enforcement records, such as the US through SEC & UK via FCA, underscore the importance of procedural rigor, institutional capacity, and the strategic deployment of whistleblower incentive programs and technological surveillance in achieving deterrence and fostering market discipline. The efficacy of such framework’s rests not solely on the promulgation of laws but on the credibility and consistency of their enforcement, a principle of universal relevance in both mature and emerging economies.[4]
In an era characterized by the rapid globalization of capital flows and the dematerialization of information, the exigency for regulatory harmonization and interoperability becomes paramount. Insider trading is no longer a parochial concern circumscribed within national jurisdictions; it operates across borders, necessitating international cooperation, reciprocal enforcement mechanisms, and convergence around best practices. India, while having made commendable regulatory advancements through its 2015’s overhaul, must now orient its legal framework toward dynamic adaptability and normative alignment with international standards, not merely as a symbolic gesture of regulatory modernity but as a substantive commitment to fostering equitable, efficient, and resilient capital markets. In this pursuit, the integrity of India’s securities market, and by extension, its economic credibility, depends fundamentally on the sustained and rigorous enforcement of insider trading laws as instruments of both justice and market stewardship.
[1] Stephen M. Bainbridge, Insider Trading Law and Policy (Foundation Press 2014).
[2] Jesse M. Fried, Reducing the Profitability of Corporate Insider Trading through Pretrading Disclosure in Research Handbook on Insider Trading (Stephen M. Bainbridge ed., Edward Elgar 2013).
[3] Id.
[4] Henry G. Manne, Insider Trading and the Stock Market (Free Press 1966).