Nestlé India Under SEBI’s Lens: Insider Trading Sparks Alarm

By - Ananya Sinha

Nestlé India's recent SEBI notice for insider trading rule breaches reinforces the extreme importance of corporate compliance. This incident emphasizes the necessity for companies to make their compliance programs tighter and adhere to ethical practices.

What is the Nestlé India story?

Nestlé India, the Indian arm of the global food company, was warned by the Securities and Exchange Board of India (SEBI) for insider trading violations. SEBI sent a warning letter to Nestlé India on March 7, 2025,followingan employee violating insider trading regulations SEBI informed the company's compliance officer about a violation of the SEBI (Prohibition of Insider Trading) Regulations, 2015. According to these regulations, an insider cannot sell or buy shares within six months after a previous transaction in the same security to gain short-term profits. Nestlé India consented to the warning but indicated that the event will not have a material effect on its financial or operational capabilities. The company indicated that the employee's action did not have any material impact on its business. The concerned employee has not been identified.

Why Corporate Compliance Matters?

Corporate compliance is to make sure a company follows all applicable laws, rules, standards, and ethical business practices. It involves creating and implementing policies, training, and overseeing procedures to prevent a violation, safeguard the company from such risks as fines and lawsuits, and foster an atmosphere of integrity. A sound compliance program is needed to ensure investors', employees', and the public's confidence in a company. It also prevents financial loss, damage to reputation, and legal problems. Rutgers School of Law says companies that actively prevent and detect violations will be treated more favorably than companies that do not take the trouble of complying.Most Critical Components of a Successful Compliance Program, to develop an effective corporate compliance program, companies must focus on the following:

·       Committed Leadership: The program needs to be run. Appoint one person to run the program daily. The person appointed should be capable of enforcing rules and disciplining staff. Leaders ought to lead by example.

·       Continuing Risk Assessments: Compliance is risk management. Identify where your business is most likely to be at risk of compliance issues. The Association of Corporate Counsel (ACC) recommends annual risk assessments.

·       Clear Code of Conduct: There must be a clear code of conduct. The code must specify who is responsible for the program,

How one reports employee misconduct and the penalties for breaking the code.

·       Policies and Procedures: There should be established policies and procedures with clear rules and expectations in all the key areas of compliance. There should be established procedures for day-to-day operations to be put into practice, and policies and standards should be enforced.

·       Training and Education: It is required so that the employees will comply. Ensure company officers, employees, and third-party vendors read and comprehend all compliance policies and procedures.

·       Regular Monitoring and Auditing: It is required to maintain compliance. Implement monitoring programs to measure compliance in real time, detect problems early, and correct violations.

SEBI's Role in Preventing Insider Trading

The Securities and Exchange Board of India (SEBI) regulates the Indian security market and keeps a check on insider trading. SEBI attempts to safeguard investors and provide an honest, regulated securities market. To this end, SEBI may impose rules, investigate, and penalize those who violate securities laws.

SEBI regulations, specifically the SEBI (Prohibition of Insider Trading) Regulations, 2015, bar insiders from trading on unpublished price-sensitive information (UPSI) to their benefit. The regulations prohibit insiders from trading on UPSI and from sharing the information with others to trade. SEBI deems an "insider" as a person connected to the company or possessing UPSI access. This involves relatives, partners, employees, and anyone having access to UPSI through his or her professional or business contact.

Penalties in India for Insider Trading

Breaking the insider trading laws in India has serious legal and reputational consequences. The penalty can be INR 1 million to INR 250 million, or three times the profit, whichever is higher, as per Section 15G of the Securities and Exchange Board of India Act, 1992. The person can also be jailed and barred from becoming a future director, which can end his/her career. Apart from legal consequences, insider trading can also cause substantial harm to a person's and a company's reputation. The company's share price can fall, and it can lose investors and partners. It can shatter employee confidence and cause low morale and productivity.

Recent Trends in Insider Trading in India

Offenders of insider trading continue to be a problem in India despite the efforts of SEBI. SEBI has been working to improve its enforcement as well as raise the penalties. However, the cases continue to increase, indicating the need for stricter preventive action. Insider trading has been the most common problem for investigation according to SEBI data. During FY 2022-2023, 59% out of 144 investigations SEBI initiated concerned insider trading, indicating the need for companies to increase their internal controls as well as compliance procedures.

Examples of Insider Trading Cases

Some Indian companies have recently been accused of insider trading, indicating just how rampant the issue is.

·     Infosys: Infosys CEO Salil Parekh paid ₹25 Lakh fine in order to resolve charges of insider trading for failing to prevent insider trading. SEBI banned Infosys officials in 2021 for tipping UPSI.

·       PNB Housing Finance: Three individuals remitted Rs 1.56 crore in 2024 to resolve with SEBI for suspected insider trading regulation violations in PNB Housing Finance Ltd.

·    HDFC Bank: In 2024, two persons, one of whom is a former Deloitte India employee, have settled with SEBI for Rs 74 lakh on insider trading rule violations in HDFC Bank Ltd.

How to Improve Corporate Compliance?

To prevent insider trading and encourage ethical behaviour, companies can implement the following measures to strengthen their compliance programs:

·       Internal Controls: Strengthen internal controls to prevent the misuse of confidential information. This includes limiting access to confidential information, monitoring the communication of the employees, and regular audits.

·       Offer Enhanced Training: Offer in-depth training to employees on insider trading regulations, corporate policy, and ethical behaviour. Job-related training and periodic refreshers need to be offered.

·       Promote a Culture of Compliance: Embed ethics and integrity in the firm. This includes creating a strong tone at the top, encouraging open communications, and allowing employees to bring forward their issues without fear of retaliation.

·       Implement Whistleblower Policies: Create a policy that encourages workers to report insider trading or improper conduct. The policy should protect whistleblowers against retaliatory action and provide assurances that their concerns will be adequately considered.

·       Track Trading Activity: Use systems to monitor employee trading and alert for suspicious activity. This includes monitoring employee trades, monitoring communication, trades, and investigating unusual activity.

·       Enforce Penalties: Take swift action against any individual who violates insider trading laws. This includes disciplinary action like termination and reporting offenses to regulators. 

Conclusion

Nestlé India's warning is a reminder to the companies to prioritize corporate ethics and compliance. By strengthening the internal controls, training, and compliance culture, companies can protect themselves from the consequences of insider trading. In the background of increased regulatory scrutiny and widening the scope of insider trading, the companies must maintain their vigilance to keep the financial markets healthy.