Chapter 7: SEBI (Prohibition of Insider Trading) Regulations, 2015

The SEBI (Prohibition of Insider Trading) Regulations, 2015 (PIT Regulations) establish an intensive regime to ensure market fairness and protect symmetric information discovery. Trading based on privileged, non-public information undermines market integrity and destroys investor trust.

Key Statutory Definitions (Regulation 2(1))

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|                        THE INSIDER TRADING TRIAD                                  |
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| 1. CONNECTED PERSON: Relationship giving direct or indirect access to UPSI        |
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| 2. UNPUBLISHED PRICE SENSITIVE INFORMATION (UPSI): Material non-public facts      |
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| 3. INSIDER: Anyone who is a Connected Person OR in possession of/access to UPSI   |
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1. Connected Person (Regulation 2(1)(d))

Any person who is or has during the six (6) months prior to the concerned act been associated with a company, directly or indirectly, in any capacity (including contractual, fiduciary, or employment):

• Frequent communication with officers, or being a director, officer, or employee.
• Holding any position including a professional or business relationship that allows access to UPSI.
• Deemed Connected Persons: Immediate relatives of connected persons, holding/subsidiary/associate companies, merchant bankers, legal advisors, auditors, credit rating agencies, institutional lenders, and members of stock exchange clearing corporations.

2. Unpublished Price Sensitive Information - UPSI (Regulation 2(1)(n))

Any information, relating to a company or its securities, directly or indirectly, that is not generally available, which upon becoming generally available is likely to materially affect the price of securities. UPSI typically includes:

• Financial results (quarterly, half-yearly, and annual);
• Dividends (both interim and final);
• Change in capital structure (rights issue, bonus issue, buyback, stock split);
• Mergers, de-mergers, acquisitions, delistings, disposals, and expansion of business;
• Changes in Key Managerial Personnel (KMP).

3. Generally Available Information (Regulation 2(1)(e))

Information that is accessible to the public on a non-discriminatory basis, primarily via official dissemination feeds of recognized stock exchanges (NSE/BSE corporate filings). Information leaked on private social media or closed chat groups remains UPSI.

Regulations 3 and 4 form the substantive core of the prohibition against insider trading.

Regulation 3: Prohibition on Communication of UPSI

• Strict Prohibition: No insider shall communicate, provide, or allow access to any UPSI relating to a company or securities listed or proposed to be listed, to any person including other insiders.
• Prohibition on Procurement: No person shall solicit, procure, or induce access to UPSI from an insider.
• Permitted Exceptions (Legitimate Purposes): Communication of UPSI is permissible strictly in furtherance of legitimate purposes, performance of duties, or discharge of legal obligations.
  • Every listed company and market intermediary must formulate a Board-approved Policy for Determination of Legitimate Purposes.
  • Any person receiving UPSI pursuant to a legitimate purpose is deemed an "insider" and must be issued a notice of confidentiality.
  • Chinese Wall Policy: Physical and operational separation between departments that routinely handle sensitive non-public deals (mergers, investment banking) and departments executing market trading or research.

Regulation 4: Prohibition on Trading while in Possession of UPSI

• Presumption of Guilt: When a person who has traded in securities has been in possession of UPSI, their trades are presumed to have been motivated by the knowledge and awareness of such information.
• Statutory Defences Available to Insiders:
  1. Off-Market Inter-Se Transfer: Transparent transactions between promoters who were in possession of the same UPSI and made a conscious, informed decision.
  2. Block Deal Window: Transaction executed through the block deal window between parties possessing the same UPSI.
  3. Statutory Obligations: Trades executed pursuant to statutory or regulatory mandates (court orders, recovery auctions).
  4. Stock Options Exercise: Exercise of stock options under ESOP schemes at predetermined exercise prices.
  5. Non-Individual Chinese Wall Defence: Corporate entities can defend trades if they prove that the individual making the investment decision was insulated behind functional Chinese walls from individuals possessing UPSI.
  6. Trading Plans (Regulation 5): Trades executed strictly under a pre-approved, irrevocable trading plan.

The PIT Regulations mandate procedural safeguards that Compliance Officers must enforce to monitor and restrict trading by Designated Persons (DPs) and their immediate relatives.

Trading Window Closure

• The Compliance Officer must close the trading window when designated persons can reasonably be expected to possess UPSI.
• Mandatory Closure for Financial Results: The trading window is mandatorily closed from the end of every quarter until 48 hours after the declaration of financial results.
• DPs and their immediate relatives are barred from trading when the window is closed.

Pre-Clearance of Trades & Contra-Trade Restrictions

• Pre-Clearance Threshold: When the trading window is open, DPs must obtain pre-clearance from the Compliance Officer if the trade value exceeds thresholds specified in the entity's Code of Conduct (typically ₹10 Lakhs).
• Execution Window: Pre-cleared trades must be executed within seven (7) trading days of approval, failing which a fresh pre-clearance must be obtained.
• Contra-Trade Restriction (6-Month Ban): A Designated Person who buys or sells securities cannot execute an opposite transaction (contra-trade) for a minimum period of six (6) months following the prior trade.
  • If a contra-trade is executed inadvertently or in violation of restrictions, profits earned must be disgorged and remitted to SEBI's Investor Protection and Education Fund (IPEF).

Trading Plans (Regulation 5)

An insider may formulate and present a Trading Plan to the Compliance Officer for public disclosure on stock exchanges:

To streamline regulatory oversight and eliminate evidentiary ambiguities, SEBI mandates a tamper-proof digital database alongside a whistle-blower reward mechanism.

Structured Digital Database - SDD (Regulation 3(5))

The Board of Directors of every listed company and market intermediary must maintain a Structured Digital Database (SDD):

• Mandatory Fields: Contains the nature of UPSI, names of persons who shared the information, names of persons/entities with whom UPSI was shared, along with their Permanent Account Number (PAN) or other legal identifier.
• Technical Specifications: The SDD must be maintained internally with internal controls; outsourcing to external third-party software cloud vendors without strict access locks is prohibited.
• Audit Trails & Tamper-Proofing: The database must incorporate time-stamped logs, non-resettable internal sequence controls, and non-overwritable audit trails.
• Retention Period: SDD logs must be preserved for a minimum of eight (8) years (longer if regulatory investigations are pending).

Codes of Conduct (Schedules B & C)

• Schedule B: Minimum standards for listed companies to regulate, monitor, and report trading by designated persons.
• Schedule C: Minimum standards for market intermediaries and fiduciaries (merchant bankers, legal firms, audit firms, consultants) handling UPSI.

The Informant Mechanism (Chapter IIIA)

Notified in 2019 to incentivize insiders to report insider trading violations:

• Voluntary Information Disclosure Form (VIDF): An informant submits original, credible information to SEBI's specialized Office of Informant Protection (OIP).
• Informant Reward: Upon successful recovery of disgorged amounts, the informant is eligible for a reward of up to 10% of the recovered monies, capped at ₹10 Crores.
• Protection Against Retaliation: Intermediaries and employers are prohibited from taking discriminatory, disciplinary, or retributive measures against employees who file a VIDF or cooperate with SEBI.

The PIT Regulations mandate that every listed company, market intermediary, and fiduciary institute an institutional framework to eliminate structural leaks of UPSI.

Role of Chief Investor Relations Officer (CIRO) & Code of Fair Disclosure (Schedule A)

• Every listed company must formulate a Code of Practices and Procedures for Fair Disclosure of UPSI.
• A designated senior executive—the Chief Investor Relations Officer (CIRO)—is appointed to deal with dissemination of information and disclosure of UPSI.
• Fair Disclosure Principles: Prompt public disclosure of UPSI that would impact price discovery; uniform and universal dissemination avoiding selective disclosure; prompt dissemination of information that gets disclosed selectively, inadvertently or otherwise; and appropriate response to queries on news reports and requests for verification of market rumors by regulatory authorities.

Internal Controls System (Regulation 9A)

The Chief Executive Officer, Managing Director, or such other analogous person of a listed company or intermediary shall put in place an adequate and effective system of internal controls to ensure compliance with the regulations:

1. All employees who have access to UPSI are identified as Designated Persons.
2. All UPSI is identified and its confidentiality maintained as per the regulations.
3. Adequate restrictions placed on communication or procurement of UPSI.
4. Lists of all employees and other persons with whom UPSI is shared are maintained and confidentiality agreements signed or notice served.
5. Periodic process review to evaluate effectiveness of such internal controls.
6. The Audit Committee of the listed company or other analogous body for an intermediary shall review compliance with the provisions of these regulations at least once in a financial year and verify that the systems for internal control are adequate and operating effectively.