- Securities Law
- Article
- Loopholes in Insider Trading: A Persistent Challenge for Regulators
- CS Deepali Jaiswal
July 29, 2025
Loopholes in Insider Trading: A Persistent Challenge for Regulators
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Insider trading, the act of trading securities based on unpublished price sensitive information (UPSI), poses a serious threat to market fairness and investor confidence. Despite strict regulations under SEBI’s Prohibition of Insider Trading (PIT) Regulations, several loopholes continue to be exploited by insiders to circumvent the law.
One of the most common methods is trading through family members, friends, or associates—proxies who are not officially classified as insiders but act on passed-on UPSI. These "benami" transactions are difficult to detect and prove. Similarly, some insiders delay the disclosure of material information, citing pending approvals, thereby creating opportunities to trade before public announcement.
The misuse of pre-declared trading plans under Regulation 5 also poses a risk. Although intended to provide legitimate trading opportunities, insiders may structure plans in anticipation of future events. Derivative instruments, block deals, and off-market trades are also used to mask insider trades, making detection challenging.
Furthermore, cross-border trading through foreign accounts or shell entities complicates regulatory enforcement due to jurisdictional limitations. Intermediaries like auditors or consultants, who have access to UPSI, may also become channels for leaks, especially if internal controls are weak.
Companies sometimes manipulate trading windows or fail to monitor non-employees such as ex-staff or vendors, who continue to access sensitive data.
While SEBI has increased surveillance and imposed severe penalties in recent years, insider trading enforcement remains an ongoing challenge. Addressing these loopholes requires robust internal compliance, data analytics, and international cooperation.
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hi
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