Historical Evolution of the Securities Market and Insider Trading Regulations: A Comparative Study of India and the USA

Abstract

Insider trading, the illegal trading of securities based on material, non-public information, remains a significant challenge for regulators around the world. This paper provides a detailed comparative analysis of insider trading regulations in India and the USA, focusing on the historical evolution, key regulatory frameworks, enforcement mechanisms and landmark cases in both jurisdictions. The securities markets of India and the USA, while sharing common goals of promoting transparency and fairness, differ in their regulatory approaches, legal interpretations and enforcement challenges. The primary objective of this paper is to explore how each country has addressed the complexities of insider trading and the efficacy of their regulatory responses.

In the USA, insider trading is governed by the Securities Exchange Act of 1934, with the Securities and Exchange Commission (SEC) playing a central role in regulating and enforcing insider trading laws. Over the years, several landmark cases such as those of Ivan Boesky and Martha Stewart have shaped the legal landscape and demonstrated the SEC's commitment to combating insider trading. The SEC's use of advanced surveillance techniques and its collaboration with other federal agencies have helped it detect suspicious trading patterns and pursue civil and criminal charges. Despite these efforts, legal ambiguities, such as the question of tippee liability – where individuals who indirectly receive non-public information are involved – have created grey areas in enforcement, making it difficult for the SEC to build airtight cases in some cases. India, on the other hand, has seen its insider trading regulations evolve significantly over the past few decades. The establishment of the Securities and Exchange Board of India (SEBI) in 1992 marked a turning point in the regulation of securities markets, with SEBI taking an active role in enforcing insider trading laws. The introduction of the SEBI (Prohibition of Insider Trading) Regulations, 2015 brought significant reforms, including by expanding the definition of “insiders” to include not just corporate officers but also intermediaries, analysts, and persons indirectly connected with companies. While SEBI has made great strides in curbing insider trading through strict regulations and increased monitoring, it continues to face challenges in proving cases, especially where Mens rea (intent) is not clearly defined as a requirement for prosecution. Cases such as Rakesh Agrawal vs SEBI and the WhatsApp leaks case have highlighted these loopholes, revealing difficulties in establishing evidence of intent and the source of information.

Both the US and India face common challenges in detecting and prosecuting insider trading, especially in an increasingly globalised market where cross-border transactions and multinational corporations complicate enforcement efforts. International cooperation through agreements such as the IOSCO Multilateral Memorandum of Understanding has been crucial in addressing these challenges, although gaps in jurisdiction enforcement and technical capabilities remain.

The paper also explores the broader effects of insider trading on investor confidence and market integrity. If insider trading is left unchecked, it erodes public trust in financial markets, discourages retail investors from participating and leads to higher volatility. The role of effective regulation is critical in maintaining fair and transparent markets, ensuring that all participants have equal access to information.