Insider information
Also written Inside information · Material non-public information · MNPI
Material non-public information which, if published, would immediately affect an investor's decision to buy or sell a security — information a research analyst must not collate.
In plain language
A research analyst spends the working day gathering information. Company filings, industry reports, plant visits, conversations with customers, suppliers and employees.
Some of what comes back will not be public. That by itself is not a problem.
It becomes a problem when the information is both secret and big enough to change a decision. Then it is insider information, and the analyst must not build research on it.
The workbook is direct about this. The research work of an analyst "should not involve collating insider information." The line is not always obvious, which is why chapter 4 spends a whole section on where it falls.
How it works
The chapter 4 definition. Section 4.2 first describes it by who holds it: "any price-sensitive information about a company that is not available to public at large, but with a handful of individuals who are closely connected to the company in some role or the other, or their relatives, who are privy to confidential information of the company."
Section 4.2.1 then defines it by effect: "Insider information is a material non-public information that when published would immediately affect an investor's decision to buy or sell the security."
The 3 tests the workbook applies. "Whether an information can be considered insider depends on:
- the source of the information — how reliable it is;
- its impact; and
- its certainty."
That is the examinable triad, and it is what makes the judgement a judgement rather than a rule.
The workbook's own pair of cases. "A CEO talking about an unpublished acquisition proposal would constitute an insider information." But "an employee talking about increasing workload in the purchase department (which may indicate higher level of business activity) need not fall under the definition of insider information."
Run the 3 tests across that pair and the difference is visible. The CEO is a reliable source, the acquisition is high impact, and it is close to certain. The employee's remark is second-hand as to its meaning, indirect in impact and highly uncertain — busier purchasing might mean higher sales, or restocking, or nothing.
Not the same as mosaic analysis. The workbook immediately contrasts it. Assembling many individually insignificant pieces into a critical insight is mosaic analysis, and it "is acceptable." Its warning is about the boundary: "Analysts need to be careful whether certain insight drawn came from their mosaic analysis or by being privy to a specific non-public price sensitive information."
On figures. Section 4.2.1 carries no number — no materiality percentage, no time limit, no list of covered persons. The statutory apparatus, with its categories and its blackout periods, lives in chapter 14 under unpublished price sensitive information.
A worked example
Illustrative, using the workbook's own 3 tests. An analyst visits a mid-sized pharmaceutical company with a market capitalisation of Rs 8,400 crore.
| What is heard | Source | Impact | Certainty | Insider information? |
|---|---|---|---|---|
| The managing director mentions an unannounced acquisition of a Rs 1,200 crore business | Highest | Large — 14% of market cap | Near certain | Yes |
| A line supervisor says the packing hall is running an extra shift | Low | Indirect | Very uncertain | Not necessarily |
| The CFO says a US regulatory clearance was received yesterday and will be filed with the exchange tomorrow | Highest | Large | Certain | Yes |
| A distributor says he is ordering more than last quarter | Low | Small, one distributor | Uncertain | Not necessarily |
Rows 1 and 3 stop the analyst. He may not publish on them and may not deal in the stock until the company has disclosed them.
Rows 2 and 4 do not, on their own. But here is the boundary the workbook warns about. Suppose the analyst puts row 2 and row 4 together with public export data and a competitor's commentary, and concludes that volumes are running about 12% ahead of the market's expectation. That conclusion is his own, built from pieces that were individually insignificant. It is mosaic analysis and it is acceptable.
Had he reached the same 12% figure because the CFO told him the quarterly number, the identical conclusion in the identical report would be built on insider information.
Why NISM asks about it
Section 4.2 (The role of research in investment activity) and 4.2.1 (Insider information vs Mosaic analysis) carry this, and chapter 14 supplies the statutory version through the SEBI (Prohibition of Insider Trading) Regulations, 2015.
The examinable content in chapter 4 is the 3-factor test — source, impact, certainty — and the CEO-versus-employee pair, which is almost always reproduced as a scenario. Expect to be given a piece of information and asked whether it is insider information, or to be asked what the analyst's obligation is on receiving it. Note that the same conduct is also a code of conduct matter: the Third Schedule requires that a research analyst "shall not engage in insider trading or front running."
Common exam traps
- Not everything non-public is insider information. The workbook says so in as many words. Materiality and immediacy of effect are part of the definition.
- The 3 tests are source, impact and certainty. Reliability of the source is the one candidates leave out.
- Mosaic analysis is acceptable; insider information is not. The difference is where the insight came from, not how valuable it turned out to be.
- The analyst's duty is not to collate it in the first place. Declining to receive it is safer than receiving it and then trying to isolate it.
- This is chapter 4's working definition; UPSI is chapter 14's statutory one. They cover the same ground from different directions: UPSI turns on "not generally available" plus "likely to materially affect the price," and comes with categories, an insider definition and disclosure duties. Cite the right one for the chapter the question is set from.
- Relatives of connected individuals are inside the workbook's description, not outside it.
Check yourself
1.According to the workbook, investment in the context of the securities market involves thorough analysis of the underlying security in terms of which three dimensions?
- a)Liquidity, taxation and convenience
- b)Safety/risk, income and growth potential
- c)Price, volume and time span
- d)Source, impact and certainty
Show the answer
Answer: (b) Safety/risk, income and growth potential
The workbook's definition is precise: investment involves an upfront commitment of money to earn returns over an investment horizon, and it involves thorough analysis of the underlying security in terms of safety/risk, income, and growth potential.
Option A lists factors used to judge an investment avenue in other syllabi, not this definition. Option C is the three essential elements of price behaviour in technical analysis — price history, volume and time span. Option D is the three-part test for whether information is insider information. All three wrong options are real lists from elsewhere, which is exactly how NISM builds distractors: learn each list attached to its own heading.
2.An analyst hears three things in a week: a factory employee mentions the purchase department is busier than usual; a dealer says stock is clearing faster; and the company has advertised openings for a second shift. She combines them into a view that volumes are running ahead of expectations. This is best described as:
- a)Insider trading, because none of the three facts was published by the company
- b)Mosaic analysis, which the workbook states is acceptable
- c)Insider information, because the employee is connected to the company
- d)Primary research, which is prohibited for research analysts
Show the answer
Answer: (b) Mosaic analysis, which the workbook states is acceptable
The workbook describes this exactly: often analysts collate information from different sources, which individually may not be significant but when put together with other public or non-public information may provide critical insight. These is called as mosaic analysis. Such mosaic analysis is acceptable.
Options A and C both rest on the same misconception, which the workbook rebuts directly: it is not necessary that all such information would fall under insider information. Insider information is material non-public information that, when published, would immediately affect a buy or sell decision, judged on source, impact and certainty. A remark about workload fails on impact and certainty — indeed the workbook uses that very example to say it need not be insider information.
Option D is wrong twice over: this is a mix of primary and secondary research, and primary research is not prohibited — the workbook says analysts often have to conduct primary research including visiting facilities and speaking to customers, suppliers and employees.
3.What distinguishes a hedger from a speculator?
- a)Hedgers use derivatives; speculators do not
- b)Hedgers are motivated to avoid losses rather than to make profits, and a hedged position is expected to result in no gain or no loss
- c)Hedgers always make a profit
- d)Speculators are prohibited from trading in India
Show the answer
Answer: (b) Hedgers are motivated to avoid losses rather than to make profits, and a hedged position is expected to result in no gain or no loss
Hedging is an act of buying an asset/contract to offset potential losses that may be incurred due to holding an existing investment/asset. A hedged position is expected to result into a no gain or no loss situation. This is because a gain on the existing asset/investment is expected to be offset or squared-off by a loss in the value of the hedge asset/contract.
And the motive line: unlike speculators, hedgers are not motivated by profits, rather they are motivated to avoid losses.
Option A is wrong because both may use the same instruments — hedging can be undertaken by using a variety of financial instruments, including forward/futures contracts, swaps, options. The instrument does not determine the category; the existing exposure does.
On speculation: speculating is an act of purchase or sale of an asset in the expectation of a gain from changes in the price of that asset over any period of time, though usually short term. Speculators seek to benefit from acting on private or insider information, or their own view about the fundamentals.
And on the trader, who sits close to the speculator: trading is based on price patterns extracted through technical analysis, and the assumption that historical patterns repeat themselves. The thin line differentiating them is the probability of gaining or losing. Traders have higher probability of gains, than the speculators.
Both carry the same amplification: both Traders and Speculators typically leverage their buying and selling activity with borrowed funds, which magnifies their gains as well as losses.
Where this is taught
Free preparation for NISM Series XVRelated terms
- Chinese WallAn enforced separation inside a firm between departments holding confidential price-sensitive information and those dealing with clients, sales or public research.
- Conflict of interestAny interest of the analyst's own — a shareholding, a fee, a relationship — that could bias the research, and which the regulations require to be disclosed rather than merely avoided.
- InsiderAnyone who is a connected person, or who simply possesses or has access to unpublished price sensitive information — possession alone is enough, with no relationship to the company required.
- Mosaic analysisAssembling many individually insignificant pieces of information, public and non-public, into a critical insight — a practice the workbook states is acceptable.
- Primary researchFirst-hand information an analyst gathers directly — plant visits, and conversations with customers, suppliers or employees — rather than sourced from published reports.
- Unpublished price sensitive informationInformation about a company or its securities that is not generally available and that would, on becoming available, be likely to materially affect the price of the security.