Insider Trading Prevention Training

The SEBI (Prohibition of Insider Trading) Regulations, 2015 ("PIT Regulations", as amended) define an "insider" in Regulation 2(1)(g) as a connected person or anyone in possession of, or with access to, unpublished price sensitive information (UPSI). A connected person includes anyone associated with the company in the six months before the act, as an employee, director, adviser or through a contractual or professional relationship that gives access to UPSI.

UPSI under Regulation 2(1)(n) is information about a company or its securities that is not generally available and is likely to materially affect the price once it is. The regulation lists examples including financial results, dividends, changes in capital structure, mergers and acquisitions, changes in key managerial personnel, fund raising, rating changes, and fraud or defaults by the company or its management.

Regulation 3(1) prohibits an insider from communicating, providing or allowing access to UPSI except for legitimate purposes, performance of duties or discharge of legal obligations. Regulation 3(2) makes it an offence to procure UPSI from an insider on the same terms. Under Regulation 3(2A) the board must adopt a policy defining "legitimate purposes", and a person who receives UPSI for a legitimate purpose becomes an insider (Regulation 3(2B)).

Regulation 3(5) requires a structured digital database recording what UPSI was shared, by whom and with whom (with PAN or another identifier). It must be maintained internally with time stamping and audit trails, and Regulation 3(6) requires it to be preserved for at least eight years after the transaction.

Regulation 4(1) prohibits an insider from trading in listed (or proposed to be listed) securities while in possession of UPSI. Trades made while in possession of UPSI are presumed to be motivated by it. The insider can prove innocence only through the circumstances set out in the proviso, such as a pre-approved trading plan. For connected persons, Regulation 4(2) places the burden of proving they did not hold UPSI on them.

Insiders who are regularly in possession of UPSI may trade under a trading plan approved by the compliance officer and disclosed to the stock exchanges. As amended in 2024, trading under the plan cannot begin earlier than 120 calendar days from public disclosure, plans cannot overlap, and the compliance officer must approve or reject the plan within two trading days.

Under Regulation 7(1)(b), a person appointed as a director or key managerial personnel, or becoming a promoter or member of the promoter group, must disclose their holding to the company within seven days. Under Regulation 7(2)(a), promoters, members of the promoter group, designated persons and directors must disclose trades within two trading days if the value traded in a calendar quarter exceeds ten lakh rupees. The company must inform the stock exchange within two trading days of receiving the disclosure (Regulation 7(2)(b)).

Regulation 9(1) requires every listed company to adopt a code of conduct to regulate, monitor and report trading by designated persons and their immediate relatives, meeting the minimum standards in Schedule B. Regulation 9(4) says designated persons must include the CEO and employees up to two levels below the CEO of the company and its material subsidiaries, all promoters, employees with access to UPSI, and support staff such as IT or secretarial staff who have access to UPSI.

Schedule B sets the operating rules. The trading window closes when designated persons can reasonably be expected to hold UPSI, and in any case from the end of every quarter until 48 hours after financial results are declared (clause 4). Trades above board-set thresholds need pre-clearance (clause 6), pre-cleared trades must be executed within seven trading days (clause 9), and a contra trade within at least six months is barred, with profits from a breach disgorged to SEBI's Investor Protection and Education Fund (clause 10). Designated persons must disclose immediate relatives and persons with whom they share a material financial relationship annually (clause 14). Clause 15 requires people brought "inside" on sensitive transactions to be made aware of their duties and of the liability for misuse of the information.

Regulation 9A(1) and (2) require the CEO or managing director to put in place adequate and effective internal controls, including identifying all employees with access to UPSI as designated persons, keeping lists of everyone UPSI is shared with, and periodic review of those controls. The audit committee must review compliance at least once a financial year (Regulation 9A(4)).

Regulation 9A(5) requires a board-approved written policy for inquiring into leaks or suspected leaks of UPSI, with prompt reporting to SEBI. Regulation 9A(6) requires a whistle-blower policy and that the company "make employees aware" of it, so they can report UPSI leaks.

Regulation 10 of the PIT Regulations says contraventions are dealt with under the Securities and Exchange Board of India Act, 1992. Section 15G provides a penalty for an insider who deals on the basis of UPSI, communicates UPSI other than in the ordinary course of business or under law, or counsels or procures another person to deal on it. Section 24 makes contravention of the Act or regulations a criminal offence.