The Insider Who Never Said “Catch Me”: Can SEBI Prove Insider Trading When the Trader Is Not an Obvious Insider?

Insider-trading enforcement is relatively straightforward when the facts fit the conventional pattern: a person connected with the company obtains UPSI, trades shortly before the announcement and benefits when the information becomes public. However, the more difficult cases are those that fall outside this obvious pattern.

Consider the following situation:

(i) Sometime in January, Investor Z purchased the shares of Company A;

(ii) In February, Company A initiates discussions w.r.t. acquisition with Company B;

(iii) In March, the aforesaid transaction is put on hold;

(iv) From April to June, there was again no discussion on (ii);

(v) Then, suddenly, in July, there is a public announcement regarding the transaction.

Assumptions here:

1. Investor Z has no formal connection with either Company A or Company B;

2. Investor Z makes a substantial gain out the transaction referred to above.

As legal experts, the following issues arise for our consideration:

(a) Can a mere recipient of trading profit be regarded as insider?

(b) How does SEBI establish that the person was an insider?

(c) How far back can SEBI legitimately look at the person's trading?

(d) What is the effect of the corporate action being put on hold between the trade and the eventual announcement?

These questions become particularly relevant after the Supreme Court's decision in SEBI v. Rajeev Vasant Sheth.

The first problem: How do you identify an “insider” who isn't an obvious insider?

Regulation 2(1)(g) of the PIT Regulations defines an insider as a person who is either:

• a connected person; or
• in possession of or having access to UPSI.

In fact, SEBI's FAQ also states- "a person need not be a Designated Person to be an insider if that person has access to UPSI." 

However, the bigger problem is identification of a non- insider.

Considering the aforementioned illustration, if Investor Z:

• has no employment relationship with either Company A or Company B;
• is not a director or promoter in both Company A or Company B;
• is not a Designated Person of Company A or Company B;
• is not an obvious adviser to Company A or Company B;
• does not appear in the system driver disclosure for Company A or Company B.

Mere receipt of trading profits cannot establish a case of insider trading; SEBI would need to build a strong nexus as follows:

(i)              Investor Z;

(ii)            existence of UPSI (acquisition details);

(iii)          possession of (ii) by (i);

(iv)           trade by (i) to benefit with (iii).

The PIT regulations stipulate that, in case of connected persons, the onus of establishing that they were not in possession of UPSI lies on such connected person; and in other cases, the onus is on SEBI.

How does SEBI prove that the person had UPSI?

This is where the investigation becomes fact-intensive; SEBI may look at:

• communications with company personnel;
• telephone records;
• emails or messages;
• business relationships;
• family or personal relationships;
• dealings with promoters;
• interactions with investment bankers or advisers;
• fund movements;
• unusual trading patterns;
• timing and size of the trade;
• previous trading history;
• subsequent trading;
• links between the investor and persons having access to UPSI.

While all the above are good indicators, they also have their own limitations. Even if SEBI is able to establish a relationship or a communication, it does not automatically entail proof of possession of UPSI.

In this regard, it is essential to refer to the recent SEBI order dated 7th July, 2026, in the matter of Mr. Raj Kumar Agarwal in the matter of insider trading activities in the scrip of RHI Magnesita India Ltd. In the said case, the noticee challenged the absence of evidence establishing how the alleged UPSI had been transmitted, and the Adjudicating Authority has finally concluded in favour of the noticee in absence of sufficiently compelling evidence.

Does this mean the trader will ultimately be exonerated?

Of course not. However, there are several cases, where investigation did not produce adequate evidence against the accused, and therefore, no legal action could be taken. Another relevant case law available on the SEBI portal, is in the matter of Sabero Organics Gujarat Limited. 

The next question: How far back can SEBI look?

The PIT Regulations contain a six-month look-back concept in the definition of a connected person, and the six-month period also appears in the context of the contra-trade restriction. However, these provisions should not be converted into a general proposition that SEBI can only examine trades occurring within six months before the announcement.

Again, drawing reference to the aforementioned illustration, the January trade is almost six months old but if evidence establishes that Investor Z had knowledge of relevant acquisition transaction as on the date of trading, the age of the transaction should not, by itself, make it irrelevant.

The critical issue is not: “Was the trade six months ago?” It is: “Was there UPSI at the time of the trade, and was the investor in possession of it?”

The converse is also equally important; A six-month-old trade cannot automatically be treated as insider trading simply because the investor subsequently profited; This becomes particularly important where the corporate action itself evolved over time.

Consider that Investor Z argues that he bought the shares in January based on public financial information, industry analysis, valuation or an entirely independent investment thesis. Further, Company A and Company B contend that they only began serious negotiations in February, i.e. after the said purchase; then in such an instance, it would be difficult to argue that Investor Z possessed that later-generated UPSI in January merely because the transaction was ultimately announced in June. Therefore, the chronology matters.

The last question: What if the corporate action was put on hold? Will the SEBI be able to determine that there was any UPSI in January? 

This may be the most interesting factual complication, and this cannot be answered merely by looking at the June announcement alone; The regulator would have to reconstruct the information lifecycle of the transaction. Let us examine the below scenarios here:

Scene 1 — The transaction was substantially finalised: Company A and Company B had in principle agreed on the terms in January. 

Scene 2 — Negotiations were inconclusive: Company A and Company B were having preliminary discussions, and at this point, the transaction could have gone either way. 

Scene 3 — The transaction was abandoned: The original proposal had collapsed, and months later, a new transaction was negotiated and agreed to between Company A and Company B.

SEBI may be able to establish the factual linkage in Scene- 1; and Scene- 2/ Scene- 3 can serve as a defence for the trader. 

What if SEBI cannot establish the information link?

This is where the alleged trader may ultimately succeed. If SEBI successfully proves the following:

(a) that Investor Z bought shares in Company A,

(b) that investment amount involved was substantial,

(c) that purchase of shares preceded the acquisition announcement with Company B, and

(d) that Investor Z made a significant gain out of the aforementioned transaction,

but is unable to establish the following:

(i) How Investor Z obtained UPSI?

(ii) Investor Z was in possession of the relevant information,

(iii) Relevant information was in existence when the trade occurred, or

(iv) Corporate action of acquisition was materially the same transaction contemplated when the trade occurred,

then the case still falls flat.

The aforementioned illustration becomes the connotation of the real enforcement challenge since an expert trader is unlikely to leave an obvious trail saying: “I received UPSI today and purchased shares tomorrow.”

The PIT framework casts a wide net, and a person does not merely become insulated because he or she is not recognised as a Designated Person. However, the broader inclusion  should not be construed as an unrestricted presumption of guilt; For a person who is not a connected person, the central evidentiary question remains: Can SEBI establish possession of or access to UPSI at the time of the trade? That, ultimately, is the distinction between a suspicious trade and a provable insider-trading violation.