This article has been written by Rohit Chakraborty pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from LawSikho and edited by Shashwat Kaushik.

This article has been published by Shashwat Kaushik.

An overview of insider trading

“Discipline is the long and arduous process of convincing the mind to abide by one’s conscience.”

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Insider trading is trading in securities of publicly listed companies, stocks or otherwise based on any material information unavailable to the public at large. It is as old as trading securities on a stock exchange.  

Section 11(2) of the Companies Act of 1956 prohibits insider trading. This was done to:

  • Ensure equal opportunities are present for every participant in the market.
  • Ensuring fairness and transparency in all transactions,
  • Offering a free flow of information,
  • Prevention of information symmetry.

Unpublished Price Sensitive Information (“UPSI”) has been defined by the Securities and Exchange Board of India (SEBI) in the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations of 2015 in Regulation 2(1)(n) as:

  • Information relating to the company or its securities.
  • Such information is not generally available to the public.
  • If such information directly or indirectly becomes available, then it can materially affect the price of the securities, i.e., significantly affect the price of the share of the company.

Information may relate to:

  • financial results;
  • dividends;
  • any change in the capital structure of the company;
  • changes in key managerial personnel (“KMP”);
  • mergers, de-mergers, acquisitions, delistings, disposals, expansions and any such transactions; and
  • the list is not exhaustive.

Not every insider trade is illegal. If a person, after taking retirement from the company, wants the stocks of the company he owned to be sold for a specific period to earn returns, this is insider trading, but it is legal in this scenario. Therefore, even if later he comes into possession of UPSI, there is no charge of indulging in insider trading, as he had not offloaded the stocks based on such undisclosed information.

Insider trading is based on the principles of corporate governance – transparency, openness, and disclosure. Good corporate governance enhances faith in the company, managers, and other stakeholders. It also helps in gaining the trust of the investors. The Board of Directors makes the decisions for the day-to-day activities of the company; hence, such information from board meetings fits the definition of confidential information. Confidential information can only be shared for the benefit of the company.

Insiders include partners, directors, officers, employees, related companies, anyone having an official relationship with the company, any professional, any business, such as auditors, consultants, bankers, brokers, stockholders, government employees and officials, stock exchange employees, etc.

Insider trading is based on the principle of conflict of interest, wherein the person views his own self-interest over the company’s interest, which he is supposed to protect. Insider trading lowers the reputation of the financial market of the country, the company and the integrity of the market.

Insider trading is a financial crime. The aim of any securities market regulator is not to punish the real wrongdoers but rather to enforce disciplined trading and fair opportunity.

The jurisprudence on insider trading

Classical/Disclose/Abstain theory

According to this view, the insider should disclose the unpublished price sensitive information (UPSI) to the public before making a trade. Alternatively, the person can refrain from making a trade. This theory is applicable to directors, employees, officials, or other associated or connected persons.

Misappropriation theory

According to this view, insider trading regulations are designed to protect the integrity of the securities market against abuses by outsiders who have access to UPSI. There is otherwise no fiduciary or any other kind of duty owed to the shareholders of the company.

Evolution of the policy of insider trading in India

The first step towards restricting insider trading in India was taken in 1948 itself. A committee was formed for the same and recommended restrictions to impose short-swing profits. Section 195 of the Companies Act, 2013 has been enacted to prohibit insider trading.

Following the footsteps of the Thomas Committee of the US in 1948, Section 307 and Section 308 were added to the Companies Act of 1956 to declare insider trading an “undesirable practice.”

The Bhabha Committee in 1952 recommended maintaining a separate register by the company to keep track of the obligatory disclosure of the sale or purchase of shares. Section 307 of the Companies Act, 1956, provided for a register to maintain the shareholding of the directors in the company. Section 308 of the same statute says that directors or those deemed to be directors are to disclose their shareholdings in the company; a subsequent amendment in 1960 to this section added managers to the list.  

 The Sachar Committee was set up in 1978 to review the Monopolies and Restrictive Trade Practices (MRTP) Act of 1969. The intention was to curb insider trading. It said that there should be stringent laws to keep the details to identify the unfair gains with the details of such traders. The committee further recommended a prohibition on insider trading. If insider trading takes place before or after 2 months of the closing of the accounting year, it has to be notified, and the same was applied for rights issues. All such information was to be maintained in a separate register. They recommended provisions for compensation and civil remedies.

The G.S. Patel Committee was set up in 1984 to review stock exchange dealings. In 1986, the committee recommended amendments to the Securities Contract (Regulations) Act of 1956 (SCRA) to implement stringent policies on prohibiting insider trading for information. The committee further recommended separate legislation to curb the menace of insider trading and identified the absence of the same as a primary cause of insider trading.  

In 1989, the Abid Hussain Committee said that insider trading can be both a civil and criminal offence simultaneously, with stricter regulations by SEBI to restrain amoral practices. Consequently, SEBI came up with the SEBI (PIT) Regulations of 1992, later amended in 2002. The SEBI (PIT) Regulations, 1992, defined insider trading as:

  • Breach of fiduciary responsibility towards shareholders.
  • To ensure a fairer trade in securities and transfer in the market.
  • Such information is ‘price sensitive’, given that it has the capability to influence company’s securities’ price in the market.

The PIT Regulations of 1992 had a few loopholes. The same were inserted after Hindustan Lever Ltd. and Ors. vs. Securities Exchange Borad of India and Ors. (2019) and Rakesh Agarwal vs. Securities Exchange Board of India (2003), particularly widening the definition of the term “deemed person.” In Samir C. Arora vs. Securities Exchange Board of India (2004), it was held that to attract the provisions of insider trading in the case of private, unpublished information, the information has to be true.

Role of SEBI in curbing the menace

The definition of unpublished price sensitive information (“UPSI”) provides for a test to identify the price sensitive information, aligning it with the Listing Agreement and providing a platform for disclosure. Previously, the responsibility of adhering to the insider trading norms was restricted to the listed securities only; however, now securities “proposed to be listed” have also been included.

According to the SEBI (PIT) Regulations, 2015, any individual or collective can be considered involved in insider trading. These include:

  • Immediate relatives of such insiders or connected individuals.
  • Any holding or associate company directly linked with other corporations.
  • High-level executives belonging to the holding firm of the parent company.
  • Officials working at a stock exchange or at a clearing house.
  • Trustees of mutual fund management companies and board members of asset management companies.
  • Chairperson or any board member of a public financial organisation.

Regulation 5(1) of the PIT Regulations deals with ‘Trading Plans’. An insider is allowed to formulate his trading plan. He shall have to present the trading plan to the compliance officer for approval of the same. The insider shall also have to make a public disclosure of the trades he wishes to carry out according to the plan. This is to enable the insider to take trades since he is perpetually in possession of UPSI; since he has already declared his trading plans, all his trades are legitimate and cannot be charged with violating the PIT regulations.

The term “insider” has been defined in Regulation 2(1) (g) of the PIT Regulations. It defines an insider as:

  • a connected person, or
  • in possession of UPSI, or
  • have access to UPSI.

The idea is, as SEBI defines in the note pertaining to this regulation, that the process by which the information reached the person is irrelevant, and such a person can be an insider for the purpose of insider trading. The one alleging has to prove that the other person against whom such allegations are being hurled fulfils the criteria of being an insider. The one against whom such allegations were present after the trade has to show that he/she:

  • was not in possession of such information, or
  • he has not traded based on that information, or
  • he could not access such information, or
  • that the circumstances so present do not provide enough material on him/her, hence exonerates him.

The compliance officer of the company determines the “trading window,” the period where such trades can be taken. The time period during which trading in a company’s securities is limited is called the “closing of the trading window.” During this period, the designated persons and their family members are restricted from dealing with the company’s stocks, except:

  • legitimate goals,
  • execution of obligations,
  • compliance with any legal obligations.

Such a designated person engaged in trading shall not engage for 6 months in a contrary transaction. This restriction is present irrespective of the number of shares that have been traded. When the trading window is open for trading, both the value and quantity of shares specified have to be complied with.  

In the PIT regulations of 2015, the companies were supposed to set up countermeasures to prevent leakage of sensitive information. An amendment in 2018, which came into effect in 2019, stated that public companies are required to have a plan in place to deal with such leakage of information and lapses in security.

Provisions of Insider Trading under the Companies Act: Insider trading is also prohibited by the Companies Act, 2013. Under the SEBI Act, it is an offence for 10 years of imprisonment or a fine of Rs. 25 crores, whichever is higher. Under Section 24 of the SEBI Act, the adjudicating officer, on contravention or attempting to contravene or abets contravention of the provisions of the Act or of any rules or regulations made the same.

Section 24(2) says that if any person fails to pay the penalty imposed by the adjudicating officer or SEBI or fails to comply with any such directions or orders, he or she is punishable with an imprisonment term of at least a month, extendable up to ten years, or with twenty-five crores.

SEBI has been given the power to investigate matters related to insider trading and matters related to it since:

  • SEBI can investigate  all sorts of complaints received from investors, intermediaries, etc. who are alleged to carry on insider allegations.
  • SEBI can carry out such investigations based on their own awareness, knowledge, or information in possession to fulfil SEBI’s motto of protecting investors.

 SEBI has its own “insider trading surveillance” mechanism to monitor trading activities and identify suspicious activities. Based on these parameters, further investigation is taken up. SEBI has a whistle-blower mechanism for reporting anonymously, whereby SEBI investigates and takes appropriate action. SEBI conducts regular inspections and audits to ensure compliance with regulations.

On being appointed as a KMP or a director, or as a promoter or a member of the promoter group, they will have to disclose their holdings in the company within 7 days of being appointed as the same.

Off-market trades executed by insiders have to be reported within 2 days to the stock exchange upon receipt. If any promoter, member of any promoter group, or designated person executes a trade exceeding Rs 10 lakh over a quarter, it has to be reported within 2 days of receipt of the information or when he becomes aware of the trade.

Allegations against insider trading have been treated by SEBI as a measure to ensure confidence in the market rather than a retributive action. There are many cases where no penalty has been levied and cases have been dismissed, most of which included cases related to trading while possessing UPSI. SEBI PIT Regulations are focused  more on ensuring a pro-active approach.    

Every provision in the regulations has specific notes stating the legislative intent for the provision. This is an example of moving from the ‘form approach’ to the ‘substance approach’. The notes are keys to the mind of the regulator.

Structured Digital Database: Structured Digital Database (“SDD”) is one of the most potent tools in SEBI’s arsenal to curb malpractices in the securities market. SDD was added by an amendment to the regulations in 2018, which came into effect on April 1, 2019. SDD has been mentioned in Regulation 3(5) of the SEBI (PIT) Regulations.

The entities handling such UPSI have to maintain a digital database under the SEBI (PIT) Regulations. SDD mandatorily:

  • must contain details of persons or groups,
  • one who is sharing the information,
  • the person to whom such information is being shared, and
  • the nature of the UPSI shared.

The database should include the names of listed companies and intermediaries, such as merchant bankers, stockbrokers, asset management companies, etc. The database is to be maintained by auditors, advisors to transactions, and other consultants. SDD is envisaged as a tool to trace back the information trail legitimately shared, as stated in the Report of the Committee on Fair Market Conduct (“Report”).

The report said that UPSI, once shared, loses control over such information, irrespective of its legitimacy. It is very difficult to prove the connection between the persons who shared UPSI and the ones who legitimately should not have been parties to the information in cases of insider trading. SDD is therefore a tool to aid SEBI and stock exchanges in investigating insider trading matters.

SDD has to be maintained internally; outsourcing is forbidden. The present legal position is that external servers can be used to store data. However, the responsibility for security logs lies with the board of directors and the compliance officer.  

Entries are to be made in SDD with a time-stamp containing the details of the particular person who has first received access to UPSI. There are controls with audit trails to prevent tampering with databases, hence the chain of information sharing. Any change or modification can only be made in a separate entry. The software being used by the companies can be an external one or developed in-house. Compliance with the same is part of the annual compliance report for listed companies and is provided by a practicing company secretary. The report is submitted to stock exchanges.

Interlinking of provisions other than the PIT Regulations: Section 12A of the SEBI Act deals with insider trading. The section states that no person, directly or otherwise:

  • Should not, in reference to listed securities or securities proposed to be listed on a recognised stock exchange.
    • employ or use any manipulative or deceptive device.
    • plan any activity that is not permissible under the SEBI Act or the rules and regulations made under the SEBI Act.
  • Employ any device, scheme, etc. for defrauding of issue of dealings in securities of listed or to be listed companies.
  • Engage in insider trading.
  • Deal in securities with possession of any UPSI, communicate any information or material to others, which is illegal under the Act, and follow the rules and regulations under the SEBI Act.
  • To not acquire control of company or securities for more than the amount prescribed under the Act and its regulations.
  • In the course of business, engage in acts, practices, etc. that can be considered fraud or deceit regarding the issue of securities.

 There are discretionary powers given to the Board of Directors and Compliance Officers to decide on matters related to insider trading. Regulation 3(3) says that communication or procurement of UPSI is not a violation if the information is to make an open offer under the SEBI (Substantial Acquisition and Takeover) Regulations, 2011 (SEBI (SAST) Regulations), provided that the Board of Directors of the company are convinced that the decision is taken in the best interest of the company. Under Regulation 8(1), listed entities have to bring about and publish on their official website a “code of practices and procedures for fair disclosure of unpublished price sensitive information” to adhere to the principles of the regulations. A few of such principles are provided in the note to the regulation:

  • equity of access to information
  • publication of policies, for example, dividend
  • inorganic growth pursuits
  • calls and meetings with analysts, and transcripts of the same, etc.

All such principles have been detailed in Schedule A of the SEBI (PIT) Regulations. Amendments to the code are to be promptly made to the stock exchange where the securities are listed, as provided under Regulation 8(2). This is following the principle of transparency in disclosure.

Regulation 5(2) says that no one is permitted to procure or communicate any UPSI related to:

  • company or securities listed or proposed to be listed,
  • except for legitimate purposes,
  • performing duties,
  • discharging legal obligations, or
  • any other reason is considered not legitimate.

These checks are present such that there is no discrimination when it comes to trading on the stock exchange and that any additional UPSI does not affect the trading plan of the insider disproportionately.

In October 2022, a consultation paper was brought about by SEBI to include mutual funds under the SEBI (PIT) Regulations. The paper was published based on the reactions of fund management entities winding up their operations during the pandemic, affecting people invested in them. Around a reasonable time before the announcement of winding was made public, the major investors withdrew from them. This indicates that  there was probably insider information.

The note to Regulation 2(1)(g) on who can be considered an insider is  enough, covering all possible instances. This is to avoid any market asymmetry.  Regulation 4 is based on the principle of parity of information; therefore, intention becomes irrelevant and compliance is put on a higher pedestal. Also, it does not matter whether the benefit of the transaction is for the company or its shareholders. In the PIT regulations, ‘immediate relatives’ are presumed to be a connected person, legal fiction, rebuttable presumption. Rebutting the same depends on the facts and circumstances of the case.

Regulation 9(4)(iii) of the PIT Regulations says that promoters of all listed companies are designated persons. The shareholding pattern of the promoters has to be pursuant to the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (SEBI (LODR) Regulations). The promoters must also adhere to the code of conduct, as mentioned in the SEBI (PIT) Regulations.

Regulation 6(4) says that disclosures received by any company have to be maintained for a minimum period of 5 years. In case a fire breaks out, the company shall immediately inform the recognised stock exchanges where the company is listed. This is present under  Regulation 30 of the SEBI (LODR) Regulations. The company will also have to provide proof, such as a copy of the FIR, insurance, survey report, etc., to prove the damages caused.

Regulation 7 is titled  ‘Disclosures by Certain Persons’, further classified as initial disclosures, continual disclosures and disclosures by other connected persons. Regulation 7(2)(a) requires promoters to disclose the number of securities acquired or disposed of where the traded value exceeds Rs 10 lakh presently. In an informal guidance note in another matter, SEBI said that in cases where the persons acquiring the securities have no role in the transaction or relevant disclosures for such transactions are already in the public domain, such as bonus issuance or shares received in pursuance of a scheme, separate internal disclosures to the company may not be necessary.   

Relevance of “mens rea” – A study based on the case laws

A significant component in determining insider trading is dependent on establishing “mens rea.” In V.K. Kaul vs. Securities Exchange Board of India (2012), the Court used circumstantial evidence to determine the violations of the regulation:

  • Since it is difficult to get direct evidence due to the multiplicity of transactions,
  • The steps in the procedure may be unrecorded or unofficial.

   The relationship between the parties, the sources of receiving information, the involvement of corporate entities with each other (holding companies, subsidiaries, etc.), the control and management of the company, the Articles of Association (AOA), and the frequency of communication (for example, call data records) are all important sources of evidence. Therefore, determining whether insider trading has taken place depends on a preponderance of probabilities.  

 In Samir C. Arora vs. Securities Exchange Board of India (2004), it was held that to hold anyone liable for insider trading:

  • the UPSI has to be true,
  • only then can such information come under the PIT regulations, and
  • one of the criteria is that such information should affect the price of the securities.

In Cyrus Investments Pvt. Ltd. and Anr. vs. Tata Sons Ltd. and Ors. (2019), the National Companies Law Tribunal (NCLT) refused to take into account allegations of insider trading due to a lack of direct evidence on the same. In the case of Rakesh Agarwal vs. Securities Exchange Board of India (2003), the Court said that motive is an important element to determining guilt in insider trading cases. This becomes very problematic. Reg 4 allows off-market trading of securities between ones in possession of the same UPSI; this affects market situations too, along with other investors who may have a high influence in the market or belong to different corporate entities when they are about to merge or demerge. Under the garb of “best interest of the company,” any person can get away without any motive for profit maximisation.

In Rakesh Agarwal vs. SEBI, the MD of ABS Company Pvt. Ltd., Mr. Rakesh Agarwal, was accused of insider trading. He was accused of insider trading even on previous occasions, but it was later held that the decisions were taken “in the best interest of the company.” The verdict shows the importance of mens rea in insider trading cases.

A section of experts insists on the  strict interpretation of the law; others say that KMPs and other persons who hold significant positions in the company must disclose certain insider information for the best interest of the company. This interpretation of how insider information should be perceived puts in the spotlight the importance of mens rea as an element in deciding the necessary components of the best interest of the company.

In the Sahara case, more than 3 crore people invested due to the allurement of returns in multiples of the amount invested. The money was embezzled in different businesses, such as airlines, resorts, hotels, engaging in foreign investments, investing in foreign exchange markets, etc. These dubious activities stayed under cover until two different companies in the Sahara got listed as public companies. This is an example of a private individual or a private company with celebrity status influencing the market. The present set of regulations does not cover such entities and individuals.

Section 24 of the SEBI Act, 1992, empowers SEBI to proceed against the accused in  criminal courts if the facts prima facie indicate criminal activity. Further, in the case of The Chairman, SEBI vs. Shriram Mutual Funds and Anr. (2006), it was held that unless the language of the statute indicates the presence of mens rea in the statute, it is not necessary for the court to determine whether the violation was an intentional one or not. This ambiguity was further clarified in the 2018 amendment to Regulation 4 of the SEBI (PIT) Regulations, 2015, in the explanation.

In the case of Balram Garg vs. Securities Exchange Board of India (2022) the SC discussed the importance of proving intent in proving insider trading. In this case, SEBI held the accused guilty based on circumstantial evidence, while SC set aside the decision. In Securities Exchange Board of India vs. Abhijit Rajan (2020), the Supreme Court said that since there was no intention to make profits with the UPSI in possession, the accused is not guilty. SC further observed that the motive to make a gain is essential, while the actual gain or loss in a transaction is immaterial. This observation shows the importance of the provision of a detailed trading plan as mentioned in Regulation 5 and the necessity to monitor the actions of such connected persons.

In the case of Pan Asia Advisory and Andr. vs. Securities Exchange Board of India (2013), the SC said that SEBI has the power to proceed against non-citizens of India if the allegations are connected in relation to the securities market of India. In Hindustan Lever Ltd. and Ors. vs. Securities Exchange Board of India and Ors. (2019), the Securities Appellate Tribunal (SAT) held that under Reg 3(1), there is no requirement of profit or loss for the charge of insider trading.

Therefore, judicial pronouncements show that the courts are interpreting the regulations as grammatically as possible, even if the conclusion is a harsh one. Therefore, the argument that Regulation 4 of the SEBI (PIT) Regulations, which deals with trading while in possession of UPSI, disproportionately targets individuals lacking any motive, holds no ground. The Indian courts have employed the ‘mischief’ rule of interpretation while assessing the scope of Regulation 4. This has effectively widened the scope beyond what the legislature had envisioned. It was possible because the PIT regulations of 1992 had no provision for an explicit presumption for trading with or without knowledge of UPSI.

SC has further observed that an independent quasi-judicial authority must abide by the established principles of law and not adopt a mechanical procedure.  

Comparison with other jurisdictions

The United States of America

 The USA was the first country to enact legislation to regulate insider trading. The Securities and Exchange Act, 1934, is an outcome of the same. The background for the enactment of the statute was the Great Depression of 1929.

The Securities Exchange Commission (SEC) Rule 10b-5 of the USA looks at the motive of insider trading in foreign jurisdictions, prohibiting insider trading in foreign jurisdictions. The rule is that any person:

  • if directly or indirectly using any means, mails, or any other instrument that facilitates interstate commerce, or
  • any other facility of national securities exchange,
  • employs any device or scheme,
  • omits any ‘material fact’ necessary to make statements that are not misleading based on the circumstances under which such statements were made, or
  • engaged in acts, practices, etc. that, in a normal course of business, could be fraud or deceit upon those engaged in the purchase or sale of any securities.

In the case of USA v. Newman (2014), the US Supreme Court said that in cases of securities fraud, it is important to prove that the act was knowingly or deliberately done. The scientist is determined by their mental state to manipulate, deceive, and defraud. The government must be able to prove its willingness to defraud.

The US Sanction Act deals with penalties for insider trading. The amount is three times the net profit gained or loss avoided by the materials considered UPSI. All the directors and beneficial owners with more than 10% of registered equity securities have to mandatorily file an initial statement with the SEC and the stock exchange where the stock may be listed. Enforcement, keeping pace with technology, has included IT professionals, hackers, etc., who misappropriate sensitive corporate data or are providers of political intelligence.

United Kingdom

The Financial Services and Markets Act, 2000 (FSMA) and the Criminal Justice Act, 1993 provide the statutory framework for the trading regime. Neither of the two regulations defines insider trading. The FSMA empowers the UK Financial Services Authority to sanction anyone emerging from market abuse. Market abuse in the statute is defined as an insider  dealing or attempting to deal in a qualifying or related investment based on any insider information related to the investment in question. The provisions apply to those who encourage others to engage in conduct amounting to market abuse. Market abuse is a civil offence.

The Criminal Justice Act deals with price-effected securities on the basis of insider information, or such encouragement, or knowing disclosure of insider information to one another. Section 53 of the Criminal Justice Act, 1993, deals with the defence of a person accused of insider trading. Clause 1 of the section states that if the individual is able to:

  • Show that at the time he did not expect that the information in question was price sensitive information which would result in profit, or
  • that he widely believed that the information has been disseminated enough such that the ones not possessing the information are not in any disadvantage by not having the information, or,
  • he would have carried out the same transaction irrespective of the information he alleged to have gained.

The punishment is limited to up to 7 years, with unlimited fines. Both the UK and India have similar definitions of “price sensitive information” and insider.


Section 220 of the Securities and Futures Act, 2001, sidesteps ‘mens rea’ as a component to determine insider trading. The section says that it is not necessary for the prosecution or claimant to prove that there was an intention on the part of the accused to use the information or the absence of facts or circumstances.

Extending the ambit of insider trading

Private companies are excluded from the purview of the regulations; therefore, only a minuscule portion of insider trading gets tracked. Influential individual decisions of private companies or foreign nationals can also be involved in market decisions that can have a price-sensitive effect. A good example of this is Sahara. Reg 2(1)(d)(ii), being not inclusive in nature, is a hindrance to deciding who is a connected person but remains outside the purview of the regulations.

With outsourcing and technological advancements gaining steam, the PIT regulations should further be amended to bring such professionals under the ambit of the PIT regulations. The term “best interest of the company” remains undefined, taking up a lot of time and energy to get clearance from the compliance officer. This will ensure that the decisions taken by the Board of Directors are not in violation of the regulations and provide for the necessary clearance. This will further ensure that Section 166(15) of the Companies Act, 2013 is upheld. The legislature should bring about an amendment on the applicability of mens rea and the admissibility of necessary evidence to determine cases of insider trading. A provision of strict liability might also be necessary.

There is confusion on the interpretation of “mutual funds” under the PIT regulations. There are issues related to the definition of designated persons since, in mutual funds, the investments are pooled. The investors rarely get to say anything in the decision-making processes, even after being in possession of any UPSI related to the fund. Besides, such information might not add anything to the NAV of the scheme. The definition of connected persons in the case of a mutual fund is much wider, which makes it uncertain. Therefore, it only increases compliance requirements and disclosure.

 The motive now essentially is to establish uniform compliance standards, linking material events under the SEBI (LODR) Regulations to the definition of UPSI as present under the SEBI (PIT) Regulations, 2015. Matters of divestment, or in the normal course of business operations of the company, having no effect on the price of securities, are to be disclosed to the stock exchanges under the SEBI (LODR) Regulations, but such information is not UPSI under the SEBI (PIT) Regulations.

SEBI’s consultation paper (as mentioned above) said that the non-categorization of material information by UPSI effectively means that the surveillance system mounted cannot be further examined. SEBI’s analysis shows that presently, companies categorise UPSI based on the enumerations listed in the PIT regulations. In thousands of instances of top 100 companies making announcements through various press releases, there was a price movement of 20% of such companies. The movement of the scrip exceeded 2% adjusted to the index, but companies categorised only 8% as UPSI.

All such analysis and observations by SEBI further led SEBI to conclude in the consultation paper that the definition of material events has to be in line with Regulation 30 of the SEBI (LODR) Regulations. Regulation 30 of the SEBI (LODR) Regulations presently defines material events as ones that are determined by the Board of Directors of a listed entity. This has a significant effect on the company. The companies formulated their own policy on material information based on revenue operations, etc.  

Further in the consultation paper, SEBI notes that insiders argue that since the company has not classified a certain piece of information as UPSI, the insider cannot determine the same. The amendments, therefore, if carried out, will shift the focus from price sensitivity to the materiality of the information. In another consultation paper, materiality was proposed to be defined  as 2% of turnover, or a net worth of 5% of a 3-year average profit/loss after tax, the basis being audited standalone financial statements. These amendments blur the line between UPSI and material non-public information (MNPI), a distinction made in the SEBI Act, 1992. Sec 12A(e) of the SEBI Act refers to MNPI, while Sec 15G refers to UPSI, with compliance measures like closing trading windows and obtaining pre-clearances under the SEBI (PIT) Regulations to make disclosures under Regulation 30 of the SEBI (LODR) Regulations. To sum it up, the intent is to curb the arbitrage present in the regulations.


Most of the allegations are based on circumstantial evidence; there is nothing concrete to prove the allegation. SEBI is said to lack the required technological expertise to perform investigations, coupled with an acute shortage of resources and manpower. Indian laws do not cover cases where such violations have been committed by foreign nationals. There are even no provisions for a penalty in this scenario.

Capping the maximum amount is more of a cost than a penalty, since people make much more through insider trading. Besides, the penalty mechanism of this nature is not uniform. There are standalone firms, business groups, and high market power firms in both emerging and developed markets. All these make it essential to incorporate provisions beyond simply monetary penalties.

Although the Indian market is said to lack depth, there has been a significant increase in the number of investors in  recent years. More and more companies are participating in our markets. Economic reforms are driving the development of the capital market. There has been an increase in volume, operations are more transparent, and investment holding methods are now by way of depositories.



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