As the name suggest “Insider Trading” is the trading done by an insider (insiders may be executives, directors, or sometimes rank-and-file employees of the company). There is no harm and crime involved in insider trading and it is completely legal unless and until the trader is not cashing upon some confidential information which is not available to the general public. If an insider uses some confidential information for his own profit or leaks the information to his relative, friends or other firms so as to get profited indirectly, it becomes illegal.

A recent scam related to the illegal insider trading, involved one of the biggest hedge fund scam in the US. Dubbed as the $20 million Galleon hedge fund scam by billionaire financier Raj Rajaratnam who has been accused of carrying on a conspiracy for over three years since January 2006 along with two people at the Intel Capital treasury department. The two others that were convicted are RajatGupta(Ex Director- “Goldman Sachs” and “Proctor & Gamble”) and Anil Kumar who are of Indian origin.

The main disadvantage of these activities is the loss of public trust in the investment industry.

Someone may argue that there is nothing wrong in using the information that you know for your profit. But at the same time they also forget that, if someone is making profit then someone else is losing money. The ones who lose money are mainly the small/retail investors. Moreover, insider trading undermines investor confidence in the fairness and integrity of the securities markets. That is why every regulatory body treats the detection and prosecution of insider trading violations as prime enforcement.

SEBI (Security and Exchange board of India) has taken several preventive measures to avoid this insider trading. Various amendments have been done in the laws regarding this.

According to the latest amendment by SEBI, the insider trading regulations are applicable to all the entities with more than 5% stake.

Catching an insider involved in illegal trading is difficult. Earlier, the SEBI relied on tips and human data analysis to catch insider trading. An executive is required to file a report on all company stock trades, but what if that executive fails to follow that requirement? With thousands of publicly traded companies in India and a ratio of less than one employee per company in the entire SEBI, the Commission has historically had trouble catching insider trading violations. When you take into account all of the investment banks, accounting firms and the circles of friends, families, executives and employees at each company, it becomes clear that regulating trade is a very big task for the SEBI. The threat of a random audit of executives’ trades and a standing offer of rewards for whistle blowers are pretty much the only tools the SEBI has had to keep traders honest.

In India, the system of capturing the Insider Trader is mainly limited only to the big firms. Thus if any case related to insider trading found in larger companies, those are handled properly but the cases which take place in small companies go unnoticed.


Our solutions must provide simpler ways to detect Inside Trading.

  • One solution is the use of technology to tap into the networks. This would throw up all cases with ease and minimal cost implications. Here, we can create a graph which will link the directors, executives, major stake holders of a firm to their relatives, friends who are involved in trading. We can monitor all the transaction and can classify some of them as “potential inside trading transaction (PITT)” if the transaction amount is very high. Upon receiving PITT, we can find the connection (if any) of the entity (which made the transaction) with the insider of the company involved in transaction. This can be achieved using graph algorithms. By doing this, we can reduce the number of suspects from thousands to a few who can be further investigated manually.
  • Other solution can be the surveillance within the company. To restrict speculative trading, it is crucial for companies to monitor the trading activities of their employees. A system must be developed which is fully automated and robust. Manual intervention must be avoided as this includes mainly the higher authorities of the company.

According to Frontline’s Lynch

“The higher up the individual [who is suspected of insider trading], the harder it is to monitor,” she says. The board is afraid to ask questions of its top management. That becomes a political issue within the firm. If something is flagged but it regards the CEO, they don’t follow through. It’s political; people are worried about their jobs.

Some famous Illegal Insider Trading Violations in India:

RIL Insider Scam Case
Ranbaxy Insider Scam
HDFC Mutual Funds Scam
Infosys ED fined Rs 5 lakh




Check the top Insider scams here


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