What are the penalties for insider trading?

Insider trading refers to the illegal practice of trading securities based on material non-public information. The penalties for insider trading are severe because it undermines the integrity and fairness of financial markets. In this blog, we will outline the penalties for insider trading, which vary depending on the jurisdiction and severity of the offense.

1. Civil Penalties

Civil penalties are financial penalties imposed by regulatory authorities such as the Securities and Exchange Commission (SEC) in the U.S. or the Securities and Exchange Board of India (SEBI) in India. These penalties aim to deter illegal trading activities.

In the U.S., the SEC can impose a fine of up to **three times the profit made or loss avoided** through insider trading. In India, SEBI can impose a penalty of up to **₹25 crore or three times the amount of profit made or loss avoided**, whichever is higher. This serves as a strong deterrent against insider trading.

2. Disgorgement of Profits

The person found guilty of insider trading must return any profits made or losses avoided through the illegal trading activities. This is known as **disgorgement of profits**. This ensures that the wrongdoer does not benefit from their unlawful actions.

The disgorgement amount can be substantial, as it is designed to strip the individual or entity of any financial advantage gained through insider trading.

3. Criminal Penalties

In addition to civil penalties, insider trading can also result in criminal charges. The penalties for criminal insider trading are typically harsher and can include:

• Imprisonment: In the U.S., an individual convicted of insider trading can face up to **20 years in prison**. In India, the maximum imprisonment for insider trading can be up to **10 years**.
• Fines: Criminal fines can be extremely high. In the U.S., individuals can face fines of up to **$5 million**, while corporations can be fined up to **$25 million**. In India, the maximum fine can go up to **₹25 crore**.

4. Administrative Sanctions

Regulatory bodies like the SEC and SEBI can impose administrative sanctions on individuals or entities involved in insider trading. These sanctions may include:

• Suspension of Trading Rights: Individuals or firms found guilty of insider trading may be banned from trading securities for a specified period.
• Ban on Employment in Securities Industry: Individuals found guilty may be prohibited from working in the securities or financial industry.

5. Impact on Market Integrity

Insider trading can have a significant negative impact on the integrity of the financial markets. It creates an uneven playing field, where those with access to non-public information can gain unfair advantages over other investors. This can reduce public trust in the markets and deter potential investors from participating in the stock market.

The penalties for insider trading are meant to uphold the fairness and integrity of the financial markets, ensuring that all investors are treated equally.

Conclusion

Insider trading is a serious offense with severe penalties, both civil and criminal. These penalties are designed to maintain the integrity of financial markets and ensure a level playing field for all investors. It is crucial for investors and market participants to be aware of the consequences of insider trading to avoid legal trouble and contribute to a fair trading environment.

Understanding the risks and penalties associated with insider trading is vital for anyone involved in the financial markets.