Insider Trading Laws In India And The United States - A Comparative Legal Analysis

Author: LawSphereX

Category: General Law

Published: 2026-08-23T20:21:06.248353+00:00

Updated: 2026-08-26T17:11:05.735+00:00

INSIDER TRADING LAWS IN INDIA AND THE UNITED

STATES: A COMPARATIVE LEGAL ANALYSIS1

Archana Kumari, Research Scholar, Faculty of Law, UMU Ranchi Dr. Swati Sawar, HOD, Faculty of Law, UMU Ranchi Insider trading restrictions in the US and India have witnessed considerable change in three dimensions- capital market ideology, regulatory capability and securities market equity. After the Great Depression, the US has evolved its insider trading jurisprudence through case law and administrative action while India’s has developed over time albeit not dichotomously. It was also more national-state oriented, with governing interests favoring growth following deregulation. This part outlines the evolution of insider trading laws in the U. S and India, highlighting the disparate origins and principles animating each system. 2 Early Development of Insider Trading Laws in the United States U. S.

insider trading law developed in the wake of the Great Depression and new realities about money management. Before the 1930s, markets for U. S. securities had no demand for posttrade information except that based on fundamental principles such as good faith and fair dealing. Common practice Insider trading was a common characteristic of speculative markets and was not necessarily illegal. The 1929 crash and crisis altered popular and political beliefs about market conduct, exposing abuses by corporate insiders, investment banks, brokers and others who manipulated hidden information. 3 Federal regulation of securities rests on the premise that, absent regulation, markets will not assure that all information about a security is available to all investors at one time. The 1933 and the 1934 Securities Acts established the basis for much of US securities law.

The 1934 Act increased oversight of securities markets and shifted enforcement to the Securities and Exchange Commission. Section 10(b) of the 1934 Act authorized the SEC to prohibit “any manipulative or deceptive device” in connection with purchase or sale of 1 Archana Kumari, Research Scholar, Faculty of law, Usha Martin University, Ranchi & Dr. Swati Sawar, Ass. Professor & HOD, Faculty of law, UMU, Ranchi

2 William K.S. Wang and Marc I. Steinberg, Insider Trading (Oxford University Press, 3rd edn, 2010)

3 Joel Seligman, The Transformation of Wall Street: A History of the Securities and Exchange Commission and Modern Corporate Finance (Aspen Publishers, 3rd edn, 2003) 21–28

securities. Under this authority, the SEC promulgated Rule 10b-5, which would become the linchpin used to enforce insider trading. But because the law didn’t have a written definition of insider trading, its boundaries were left to be fleshed out almost entirely by the courts. Courts were faced with the task of deciding where trading on inside information was fraud, deceit or a breach of trust pursuant to Selling shareholders and Rule 10b-5. 4 Insider trading law first developed as a matter of judicial common law and was strongly influenced by fiduciary principles drawn from corporate law. The courts reasoned that corporate insiders, such as directors and officers (and a controlling shareholder), owed duties of loyalty and trust to the corporation and its shareholders. U. S.

courts have expanded the definition of insider trading liability to include individuals other than business insiders. The classical theory and later misappropriation theory were judicial attempts to align insider trading doctrine with evolving market realities. The misappropriation hypothesis holds individuals liable if they broke both a fiduciary obligation (not due to the source of crucial knowledge) and a duty of trust and confidence when trade. Insider trading legislation now includes attorneys, consultants, journalists, and other market participants who benefit from knowledge. 5 As capital markets grew and trading technology advanced, insider trading was seen as a systemic danger to market integrity, rather than an individual breach of fiduciary responsibility.

Early attempts in the 1930s and 1940s established a unique American insider trading framework based on antifraud principles, judicial law, and fair dealing concepts. The circumstantial development has shaped the strengths and flaws of US insider trading legislation to this day. 6 Evolution of Insider Trading Laws in India Capital Markets in India Indian capital markets have operated for most of the postindependence period under a weak regulatory regime and with low disclosure norms, limited retail participation, and little enforcement ability. Insider trading was an open secret, but the idea wasn't lashed out and enunciated, nor was the practice officially decried. Regulation was focused on crop orate governance and capital raising rather than the quality of asset sales in 4 Donald C. Langevoort, Insider Trading: Regulation, Enforcement and Prevention (West Academic, 2nd edn,

2018) 19–24

5 Dirks v. SEC, 463 U.S. 646, 654–59 (1983);

6 Securities Exchange Act of 1934 sec- 10(b), 15 U.S.C.

secondary markets.7 The Companies Act and related principles of corporate law used to control the corporate behaviour in the pre-reform period. They were under fiduciary duties which involved acting in good faith and being faithful to the company. But these responsibilities were formulated in abstract ethical language, and not connected to behaviour in securities trading. Sec-13 and Sec-

14 contained no provision proscribing directors/ promoters/ KMPs from dealing in the shares

of a company armed with price-sensitive information. Nor did the law establish criteria to define where such behaviour amounted to abuse of position or breach of trust. As a result, insiders often were able to take advantage of informational benefits available to them without offending any provision of the Act. Therefore, insider trading became ‘governance’ but not integrity related. 8 The changes in economic policy that began in 1991 were a period of regulatory transformation. The restrictions outlawed trading based on "insider" or "unpublished price sensitive information" doctrines. The regulatory approach relied on fiduciary logic and targeted individuals linked with a corporation who may have access to sensitive information. More importantly, the rules mandated SEBI to be able to prove both possession and misuse of UPSI, burdening the regulator with onerous evidentiary load.

Without the type of high-tech surveillance and digital audit trails, it became next to impossible to prove misuse beyond reasonable doubt. Therefore early enforcement results were mixed and the judicial review was rigorous. 9 SEBI bye-laws under now repealed SCRA were replaced by the SEBI (Prohibition of Insider Trading) Regulations, 2002, signifying a watershed in terms of regulatory makeover. The key reform was the broadening of who is considered to be an insider by the introduction of “connected persons” and “deemed connected persons. This method recognised that insider information was available to more than just the form corporate officials and covered family members, trusts and associate companies, agents and professional advisors. 10 The 2002 Regulations also manifested a new approach to evidence.

SEBI has attempted to shift the balance from reliance on direct evidence of flow of information to a normative process by which PSI would be linked to share prices. 11 This shifting of the burden is designed to alleviate

7 R. Rajagopal v. SEBI, (2004) 49 SCL 351 (SAT); Securities and Exchange Board of India Act, 1992,

8 S. Varadarajan v. SEBI, (2003) 47 SCL 15 (SAT); SEBI (Insider Trading) Regulations, 1992

9 Hindustan Lever Ltd. v. SEBI, (1998) 18 SCL 311 (SAT).

10 Rakesh Agrawal v. SEBI, (2004) 49 SCL 351 (SAT).

11 Ibid.

some of the structural problems associated with proving insider trading by means of complex organizations. In the past, India’s insider trading regime had been lower in the priority and enforcement list compared to counterpart in the US. US law was emerged from the judicial interpretation of anti-fraud laws whereas India's legislative changes culminated in scraping off SEBI. But that late coming-in, helped India develops an offensive layout without suffering from judicial craftiness or doctrinal fuzziness. The insider trading laws in India and the US are gradually drawing closer to each other. Both efforts are aimed at the protection of investors, the cleansing of markets and evasion from information-based exploitation. However, major inequalities exist.

The Indian rules are transparent and run on misreading of regulations instead of the extent dependency on court interpretation and exercising discretion by prosecution that happens in America. Such growth patterns affect the present strengths and weaknesses, as well as future control attempts in both orders. Key Legislative Provisions in the United States The Securities Exchange Commission and other U. S. federal authorities are typically what enforces insider trading laws in the United States. The U. S. has no blanket statutory bar on insider trading, although many folks might assume such since rules are made to be broken and sense disobedience or treachery in private matters after all. This approach has produced a "flexible and responsible" system; however, it is faulted for its ideological vagueness and dependence on corporate good citizenship. 12 The rules for U. S.

insider trading laws have evolved from the Securities Exchange Act of 1934, which was enacted during Great Depression. The SEC’s mission has always been to supervise and safeguard investors from fraudulent schemes. Section 10 (b) of the 1934 Act represents the principal statutory basis for insider trading enforcement. (Section 10 of the Exchange Act permits the SEC to bar “any manipulative or deceptive device or contrivance” in connection with a purchase or sale of securities that is otherwise inconsistent with rules issued by the Commission. ) The intentionally indeterminate character of Section 10(b) permitted the SEC and judiciary to take aim at a variety of market violations, but contained precious little statutory direction about what shape liability for insider 12 Chiarella v. United States, 445 U. S. 222, 228–30 (1980); Dirks v. SEC, 463 U. S. 646, 653–54 (1983)

trading should take. 13 Key Legislative Provisions in India Unlike the United States which has developed its insider trading doctrine as a matter of common law interpretation of broadly drawn statutory antifraud provisions, India has formally codified this area in rules and regulations that create a rule-based, delegated-legislation regime. This is a function of not only the past inadequacy of Indian capital markets but also regulatory inclination towards certainty, clarity and proactive compliance. The basic law governing insider trading in India is the SEBI Act, 1992. Passed after the big bang liberalisation of the securities market, it replaced the Capital Issues Control Act of 1947. The main aims of the Act are to safeguard investor interests, encourage securities market growth and regulate the intermediaries in the market.

Although the SEBI Act does not give an exhaustive definition of insider trading, it confers on SEBI a statutory duty and enforcement authority for issuing detailed regulations relating to market abuse. 14 Section 11 of the SEBI Act vests SEBI with wide regulatory powers to make such directions as it thinks fit for the protection of investors and orderly development of the markets in securities. Section 12 grants power to SEBI to regulate intermediaries and persons associated with securities market, Section 15G gives in clear terms the pecuniary penalty for insider trading. Taken together, these provisions form the statutory foundation for insider trading policing, however they are primarily enabling statutes rather than complete proscriptions. Thus the actual content of law relating to insider trading is found in rules made by SEBI under its power to frame rules.

15 The 1992 Regulations defined important expressions like ‘insider’ and ‘unpublished price sensitive information’ and prohibited trading by the connected persons. Yet the structure was based on a pre-nascent knowledge of market abuse and narrow in its conceptual reach and enforcement capabilities. 16 The definition took into consideration mainly individuals who are directly linked to the company, such as involving with its management and operation, and did not consider complex channels through which confidential information differently flows in 13 Securities Exchange Act of 1934 sec 10(b), 15 U. S. C. § 78j(b); Chiarella v. United States, 445 U. S. 222, 226–

28 (1980)

14 SEBI v. Rakhi Trading (P) Ltd., (2018) 13 SCC 753

15 Securities and Exchange Board of India Act, 1992 §§ 11, 12, 15G

16 SEBI (Insider Trading) Regulations, 1992, rr. 2(c), 2(k), 3

contemporary capital markets. Enforcement under the 1992 Regulations also required SEBI to prove the perpetrator’s possession and use of unpublished price sensitive information, resulting in an impossible burden of proof for the regulator. In practice, compliance with these criteria has been challenging to achieve - especially without recognition or even the benefit of technological tools for monitoring and disciplining as well as an organized system for compliance. Towards this end, SEBI promulgated the SEBI (Prohibition of Insider Trading) Regulations

2002. These rules were a significant extension and recasting of the insider trading regime. The

most radical change was the expansion of the meaning of “insiders” by the insertion of “connected persons” and “deemed connected persons”. This approach understood that access to sensitive information can be obtained beyond a traditional corporate role, at first of all an individual’s close relatives as well as holding and subsidiary companies, intermediaries and professional advisors. 17 In 2015, the SEBI (Prohibition of Insider Trading) Regulations underwent significant changes. The 2015 Regulations, based on worldwide best practices and expert committee recommendations, provide a thorough information-based legislative framework for greater clarity. The focus has shifted from breaching trust and conflict of interest to obtaining, communicating, and abusing unpublished price sensitive knowledge, regardless of organizational structure.

18 To prevent the abuse of insider trading, the 2015 Regulations laid down a number of compliances and governance measures. Publicly listed companies should adhere to a code of conduct, have an orderly digital record-keeping system with trading access limits and timely disclosures. New forms of regulation emphasize the prevention of market risk-taking and internal compliance over ex-post enforcement. India’s insider trading laws are one of the strictest and most consistent in the world. Banning creates specific obligations and oversight to let market participants know what is acceptable (and unacceptable) behaviour. This will create legal precedents and reduces ambiguities, especially in countries such as the US that have a legal definition of duty of care and decency. 19

17 Ibid.

18 Ibid.

19 SEBI, Report of the High Level Committee to Review the SEBI (Prohibition of Insider Trading) Regulations,

1992 (N.K. Sodhi Committee Report, 2013)

Definition of Insider: United States vs. India The element of differentiated treatment between insiders in the US and India is due to separate regulatory philosophies and institutional beliefs. In India insider trading is defined in terms of an access and a pre-existing relationship, while the law in the United States has developed through judicially created case law derived from treaty relations and conduct rules. These divergences have far-reaching implications for the reach, impact and burden of proof imposed by insider trading legislation in each jurisdiction. 20 Rather, insider status has developed under case law interpreting the antifraud laws. American insider trading regulation does not operate on the basis that informational advantage in itself is wrongful.

Instead, liability is contingent on a violation of a fiduciary obligation or its equivalent that makes the nature of trading deceptive. This duty-centric model embodies the premise that insider trading is a subset of fraud, rather than a blanket prohibition on information asymmetry. Case law broadened the achievement of insider trading liability based on tipper–tippee theory. In such cases insider status is derivative and contingent upon the insider’s misconduct and not upon the tippee’s knowledge at the time of such misconduct. 21 A tippee is not an insider simply because he receives information; liability under sec 14(e) arises only if the information has been tainted by a breach of duty.

Though this doctrine expands the regulation of insider trading to individuals outside even traditional corporate lines, it remains largely normatively couched in terms of deception and personal benefit, helping to maintain coherence within the doctrine but raising empirically significant hurdles for enforcement authorities. India, on the other hand, opted for a very different approach. The SEBI Regulations defines insiders using both this knowledge-based and relationship-based criteria. An insider is someone who knows exclusive unpublished price sensitive information or is closely related to someone who does. Put simply, unlike U. S. law, this law does not require a dishonest or misleading duty to treat information or use regulation as verification. access to information alone is enough to justify regulatory intervention.

22 The Indian regime also widens its definition of insiders to include connected persons and deemed connected persons. Insider means persons who are/were connected persons or employees of a company person, in other words, related to the company in any manner which

20 SEBI v. Kanaiyalal Baldevbhai Patel, (2017) 15 SCC 1

21 Salman v. United States, 580 U.S. 39, 48–52 (2016)

22 SEBI (Prohibition of Insider Trading) Regulations, 2015, r. 2(g)

is or may reasonably be expected to be perceived by the public as likely to materially affect the price of its securities. It encompasses officers, employees, representatives, professional advisors or consultants of the company organised as described in the previous paragraph. Connected persons are presumed to have knowledge or information unless the fact that they do not have them has been shown. Such relations include, among others, a) heirs-apparent, holding and subsidiary companies and other such relations: (b) Immediate family members of a public official: including any alternative persons or entities with whom they have "substantial affiliation". Use of Presumptions this aspect is very different from US practice. 23 In India, the onus may move to the accused to prove non-access to UPSI.

This regulatory response, demonstrates recognition of the operational challenges enforcement officials faces when it comes to following any flow of information through complex corporate and familial structures. Unpublished Price Sensitive Information (UPSI) vs. Material Non-Public Information

(MNPI)

The definition as an insider is important, but so is the nature of the information that gives rise to regulation. In the US and India, the liability for insider trading is based on misappropriation of information that is non-publicly known; and which can affect investment decisions. But the way such information’s are conceptualised, framed and utilised have great variance in both jurisdictions. While the U. S. regime is built upon the judge-made principle of Material Non- Public Information, Indian law is premised on statutorily codified norm of Unpublished Price Sensitive Information. These duelling approaches reflect different regulatory philosophies when it comes to certainty, flexibility and evidence. 24 Material Non-Public Information is not a term defined in full statutory text under U. S. law.

Instead, the definition of "in connection with" has developed through case law under the Securities Exchange Act, 1934 and Rule 10b-5. Materiality is a cornerstone of U. S. securities law, and extends beyond insider trading to disclosure obligations and anti-fraud regulation more generally. On the other hand, information is “material” if there is a substantial likelihood that the average prudent investor would consider it important in deciding whether to purchase or not sell securities or if its disclosure would have been significantly altering to the “total mix

23 SEBI v. Kishore R. Ajmera, (2016) 6 SCC 368

24 Basic Inc. v. Levinson, 485 U.S. 224, 231–32 (1988)

“of relevant information. In India, the system is more organized and rigid under this adopted concept of Unpublished Price Sensitive Information. UPSI means price sensitive information that is not generally available and upon becoming generally available, is likely to materially affect the price of securities as per SEBI (Prohibition of Insider Trading) Regulations 2015. Unlike U. S. law, Indian regulation builds the price sensitivity directly into the definition of ‘price sensitive information’ by focusing on its effect in terms of the likely impact it might have on the market price, rather than with reference to a reasonable person investor’s subjective assessment of importance. Role of the Securities and Exchange Commission (SEC) In the United States, insider trading is controlled by the United States Securities and Exchange Commission (SEC).

Under federal securities law, the SEC regulates insider trading involving states, political subdivisions, and their agencies. The SEC was created during the Great Depression of the 1930s as a quasi-judicial body to enforce federal securities laws following the stock market crash of 1929. In enforcing against insider trading, it wears two hats: there is conducting an investigation and finding a suspect, and there is the involvement in coordination with law enforcement. 25 The SEC has broad investigational authority, and can call witnesses and require the production of records, take testimony, require us to provide information, inspect members and other persons who are regulated entities. The power of the Commission enables it to review trading activities, review information dissemination, and detect issues if any.

In the case of exams, the SEC uses computer scans by market surveillance staff and information coming from whistleblowers, exchanges and other avenues Role of the Securities and Exchange Board of India (SEBI) Under a unique governance structure, India has enacted insider trading restrictions that are administered by a securities market regulator. SEBI is the regulator for the securities market in India and carries out both regulatory and enforcement functions of other various laws. SEBI derive its powers to enforce from the Securities Board of India Act, 1992 and its guidelines. It has wide investigative authority, including the power to collect information, inspect documents, summon individuals and also investigate around publicly traded companies and

25 SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 848–49 (2d Cir. 1968)

intermediaries. SEBI's enforcement is generally administrative, unlike in the US, where criminal and civil enforcement are carried out. The adjudicatory jurisdiction of SEBI is invoked through two complementary bodies, namely: the Securities Appellate Tribunal (SAT). The members' of the SAT Board including the chairman are appointed by Govt. on recommendations of a selection committee. It can levy offensives like trading restrictions, disgorgement orders and market bans. The Securities Appellate Tribunal adjudicates appeals against SEBI orders. But the Administrative Procedure Act (APA) permits more rapid enforcement than civil court proceedings do. SEBI’s inconsistent enforcement is worrying for its institutional integrity.

This chapter contrasts these elements of insider trading law and enforcement in India with those of the American regime, thus focusing on differences in historical evolution, statute drafting, enforcement strategy, judicial philosophy as well as efficacy. The chapter draws attention to different legal traditions, institutional setups and patterns of regulatory dynamics in two countries with varied degrees of “regularization” and enforcement reputations. Prior to

2015 architecture was dominated by an information-oriented design versus codification. India

has a legal regime as opposed to the US’ judicial and flexible system. The chapter contrasted the statutory and regulatory regulation of insider trading. The US approach is shaped by judicial doctrine over a foundation of general anti-fraud to statutes, with the potential for enforcement flexibility and also legal indeterminacy. In contrast, in India, a system of so-called delegated legislation is adopted for framing the more specific regulatory rules, leading to greater certainty and predictability but less interpretative flexibility for assistance. But it also highlights two different ways for regulators, judicial improvisation in the U. S. and statutory fixity in India. In the US, they are described by reference to fiduciary conflicts and fraud; in India, their characterization depends on possession and is qualified by presumptions and defences. In the U. S.

, MNPI has reasonable investor and materiality requirement, but not that it ignores potential value of information. In India, UPSI is based on illustrative examples and the rules and regulations. The Indian approach is the stronger, and the US method is more flexible but contains greater burden of proof. Landmark Insider Trading Cases in the United States The evolution of insider trading law in the United States has principally resulted from a line of leading decisions that have construed the antifraud provisions of the Securities Exchange

Act, 1934. One of the oldest and most influential is SEC v. Texas Gulf Sulphur Co. 26, which helped establish modern insider-trading jurisprudence. The issue was precipitated by company insiders trading while in possession of secret information about a significant mineral discovery. The court adopted broad insider trading liability by requiring anyone who had material nonpublic information to either disclose it or refrain from trading. The ruling was based on considerations of fair markets and level access to information, articulating a general proposition that the informational benefit that comes with occupying such corporate office should not be used to further private wealth. The Dirks decision27redirected insider trading laws back toward fiduciary duty and personal gain, not regulatory overreach or antifraud problems.

The Supreme Court must determine the personal gain for the tipster and whether revelation of non-public information is illegal. The ruling presented interpretational issues, including the need for courts to distinguish between private benefit and distant tepee knowledge. 28 The United States v. O'Hagan29opinion elaborated the doctrine of protecting fiduciaries, i. e. , imposing a responsibility to act solely in the interest of others. In O’Hagan, the Supreme Court adopted a misappropriation theory under which a misappropriate can be held liable for trading shares on the basis of undisclosed information that has been improperly acquired from another’s breach of duty, as opposed to his own. These are all examples of the flexibility and responsiveness of US law. Indian cases on Insider Trading The verdict in Hindustan Lever Ltd. v.

SEBI is among the earliest and most significant insider trading judgments in India and provides a constitutional base to Indian securities law jurisprudence. The ruling was made under the SEBI Regulations, 1992 on Insider Trading concerning the alleged insider trading in the context of a merger, it exemplifies the problems of imposing evidence of misuse of UP’s capacity in corporate events of substantial complexity. The case of Rakesh Agarwal v. SEBI30 is a welcome addition to the jurisprudence from India on insider trading, especially for its treatment of mens rea, good faith and the distinction

between innocent insiders vis-à-vis guilty ones. "It was an analysis discharging the onus and burden of proof having been rendered on to the challenging insider", it said. "The appellant has, at best, acted for money which is not less a mens rea". The decision underscored the push and pull between regulatory deterrence and fairness in enforcement. Balram Garg v. SEBI (2022) saw the Securities Appellate Tribunal (SAT) assess the contours of UPSI and at what point there is possession-based liability. The appellant had not accepted the findings of SEBI on the ground that the information was reiterated in nature and also that such information referred to, at best was “speculative” which could not be considered as UPSI.

The Tribunal reiterated that they are not all internal business development of company, UPSI is there unless these are specific and concrete in nature and capable of affecting the prices of such securities. The decision is important as it brings a certain amount of judicial restraint on regulation, reducing the risk that enforcement against insider trading becomes a tool to punish normal commercial awareness or indecisive internal discussions. The case, SEBI v. Prannoy Roy & Radhika Roy (2020), is one of the largest enforcement actions against promoters of media companies and has accusations of insider trading using complex financial transactions as well as making due disclosures in a slow fashion.

CONCLUSION

This paper contrasts these elements of insider trading law and enforcement in India with those of the American regime, thus focusing on differences in historical evolution, statute drafting, enforcement strategy, judicial philosophy as well as efficacy. The chapter draws attention to different legal traditions, institutional setups and patterns of regulatory dynamics in two countries with varied degrees of “regularization” and enforcement reputations. The US approach is shaped by judicial doctrine over a foundation of general anti-fraud to statutes, with the potential for enforcement flexibility and also legal indeterminacy. In contrast, in India, a system of so-called delegated legislation is adopted for framing the more specific regulatory rules, leading to greater certainty and predictability but less interpretative flexibility for assistance.

Despite the fact that we have a better Indian legislation, our country still lags behind America when it comes down to implementation outcomes. India has also failed to meet global norms and standards in terms of its insider trading prevention and regulations, despite recent amendments. The experience in the US of jurisdiction enforcement, whistle-blower incentives, and a more coordinated inter-agency approach to reducing court backlogs may be of benefit to an India perspective.