Courseware Insider Trading Regulation for Employees
- Nirav Shah
- Oct 15
- 44 min read
PART A: THE CONCEPT BEHIND PIT REGULATIONS
· Securities and Exchange Board of India (“SEBI”) has been established under the Securities and Exchange Board of India Act, 1992 (“SEBI Act”) with the principal objects of a) protecting the interests of investors in securities; and b) promoting the development of, and regulating, the securities market, and for matters connected therewith or incidental thereto.
· To achieve the above stated objectives, over a period of time, SEBI has formulated various regulations, guidelines, and directions etc., each addressing a specific aspect of the securities market. Some of these regulations have been substantially modified / improved compared to the one originally formulated based on experience gained with the evolution of the securities markets.
· One of such regulations is SEBI (Prohibition of Insider Trading) Regulations (“PIT Regulations”). PIT Regulations were originally formulated in 1992 which was applicable until the commencement of new set of PIT Regulations. In January, 2015, SEBI has notified a new set of PIT Regulations which was come into force from May 15, 2015 and amended thereon. The PIT Regulations seeks to regulate the dealing in securities by so called “Insiders” so as to provide level playing field for all to deal in securities market in a fair and transparent manner. This can be well understood from an interesting example cited below:
Imagine a situation where we visit in a fun n fair and there is stall put up which has 3 glasses, 1 stone kept on a transparent table. Unknown to the stall owner under the table there is a person (“Mr. Insider”) seated. The game is to guess under which glass the stone is present after all the glasses have been well juggled, here the crowd standing in front of the stall would apply their guessing abilities but the person hiding beneath the table could clearly view the stone as the table was transparent hence he could correctly say under which glass the stone was present. He won all the rounds which were played. In such a case the crowd standing in front of the stall are at a great disadvantage as the person hiding under the table would always guess the correct glass. This same situation occurs when an insider in a listed company deals in shares of the company.
The PIT Regulations seek to restrict/regulate Mr. Insider from participating in the game and allow all others to equally play the game.
Following are certain abbreviations used in this course:
PART B: LIST OF AMENDMENTS UNDER PIT REGULATIONS
PART C: RESTRICTION ON COMMUNICATION AND TRADING BY INSIDERS
· PIT Regulations imposes strict restrictions on Insiders from trading in securities of and communicating Unpublished Price Sensitive Information (“UPSI”) concerning, the listed companies or the companies which are in the process of listing.
· The above stated fundamental provision of PIT Regulations requires a person to understand the terms “Insider” and “UPSI” to properly appreciate the restrictions imposed. So let us answer the following questions:
Who is an Insider?
“Insider” means any person who is:
i. a connected person; or
ii. in possession of or having access to UPSI.
Note: Since "generally available information" is defined, it is intended that anyone in possession of or having access to unpublished price sensitive information should be considered as an "insider” regardless of the manner in which one came into possession of or had access to such information. Various circumstances are provided to enable such a person to demonstrate that he has not indulged in insider trading. Therefore, this definition is intended to bring within its reach any person who is in receipt of or has access to unpublished price sensitive information. The onus of showing that a certain person was in possession of or had access to unpublished price sensitive information at the time of trading would, therefore, be on the person leveling the charge after which the person who has traded when in possession of or having access to unpublished price sensitive information may demonstrate that he was not in such possession or that he has not traded or he could not access or that his trading when in possession of such information was squarely covered by the exonerating circumstances.”
Ø Thus the definition of “Insider” broadly covers two categories of persons viz.
i) the connected persons (it covers such person who are closely associated with the company and are in such a position that they have access to UPSI – this is further explained in detail below); and
ii) the persons who are in possession of or having access to UPSI (irrespective of the fact that such person is a connected person or not).
Who is a Connected Person?
“Connected Person” means
i. any person who is or has been during the six months prior to the concerned act, associated with a company, in any capacity directly or indirectly, including.
- by reason of frequent communication with its officers or
- by being in any contractual, fiduciary or employment relationship or
- by being a director, officer or an employee of the company or holds any position including a professional or business relationship whether temporary or permanent with the company, that allows such person, directly or indirectly, access to UPSI or is reasonably expected to allow such access;
(Note: to summarise, it includes such persons who are so associated with a company that allows such person access to UPSI viz. association allowing access to UPSI)
ii. Without prejudice to the generality of the foregoing, the persons falling within the following categories shall be deemed to be connected persons unless the contrary is established:
a) an relative of connected persons specified in clause (i); or
b) a holding company or associate company or subsidiary company; or
c) an intermediary as specified in section 12 of the Act or an employee or director thereof; or
d) an investment company, trustee company, asset management company or an employee or director thereof; or
e) an official of a stock exchange or of clearing house or corporation; or
f) a member of board of trustees of a mutual fund or a member of the board of directors of the asset management company of a mutual fund or is an employee thereof; or
g) a member of the board of directors or an employee, of a public financial institution as defined in section 2 (72) of the Companies Act, 2013; or
h) an official or an employee of a self-regulatory organization recognised or authorized by board; or
i) a banker of the company; or
j) a concern, firm, trust, Hindu undivided family, company or association of persons wherein a director of a company or his relative or banker of the company, has more than ten percent of the holding or interest;
k) a firm or its partner or its employee in which a connected person specified in sub clause (i) is also a partner; or
l) a person sharing household or residence with a connected person specified in sub clause (i);
Note: It is intended that a connected person is one who has a connection with the company that is expected to put him in possession of unpublished price sensitive information and other categories of persons specified above are also presumed to be connected persons, but such a presumption is a deeming legal fiction and is rebuttable. This definition is also intended to bring into its ambit persons who may seemingly not occupy any position in a company but are in regular touch with the company and its officers and are involved in the know of the company’s operations. It is intended to bring within its ambit those who would have access to or could access unpublished price sensitive information about any company or class of companies by virtue of any connection that would put them in possession of unpublished price sensitive information
Thus, the definition of “Connected Person” consists of two parts viz.
i) first part outlines the principles on the basis of which a person shall be treated as a connected person; and
ii) second part specifically includes certain persons who are deemed to be connected persons unless it is proved otherwise.
Who is considered as “relative”?
“relative” shall mean the following:
i) spouse of the person;
ii) parent of the person and parent of its spouse;
iii) sibling of the person and sibling of its spouse;
iv) child of the person and child of its spouse;
v) spouse of the person listed at sub-clause (iii); and
vi) spouse of the person listed at sub-clause (iv).
NOTE: It is intended that the relatives of a “connected person” too become connected persons for the purpose of PIT Regulations. It is a rebuttable presumption that a connected person had UPSI.
Who is considered as “immediate relative”?
“Immediate relative” means a spouse of a person, and includes parent, sibling, and child of such person or of the spouse, any of whom is either dependent financially on such person, or consults such person in taking decisions relating to trading in securities.
What is meant by Unpublished Price Sensitive Information (“UPSI”)?
"Unpublished price sensitive information" or “UPSI” means
- 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 the securities and
- shall, ordinarily including but not restricted to, include the information relating to the following:
i) financial results;
ii) dividends;
iii) change in capital structure ;
iv) mergers, de-mergers, acquisitions, delisting, disposals and expansion of business award or termination of order/contracts not in the normal course of business and such other transactions and;
v) changes in key managerial personnel and other than due to superannuation or end of term, and resignation of a Statutory Auditor or Secretarial Auditor;
vi) change in rating(s), other than ESG rating(s);
vii) fund raising proposed to be undertaken;
viii) agreements, by whatever name called, which may impact the management or control of the company;
ix) fraud or defaults by the company, its promoter, director, key managerial personnel, or subsidiary or arrest of key managerial personnel, promoter or director of the company, whether occurred within India or abroad;
x) resolution plan/ restructuring or one time settlement in relation to loans/borrowings from banks/financial institutions;
xi) admission of winding-up petition filed by any party /creditors and admission of application by the Tribunal filed by the corporate applicant or financial creditors for initiation of corporate insolvency resolution process against the company as a corporate debtor, approval of resolution plan or rejection thereof under the Insolvency and Bankruptcy Code, 2016;
xii) initiation of forensic audit, by whatever name called, by the company or any other entity for detecting misstatement in financials, misappropriation/ siphoning or diversion of funds and receipt of final forensic audit report;
xiii) action(s) initiated or orders passed within India or abroad, by any regulatory, statutory, enforcement authority or judicial body against the company or its directors, key managerial personnel, promoter or subsidiary, in relation to the company;
xiv) outcome of any litigation(s) or dispute(s) which may have an impact on the company;
xv) giving of guarantees or indemnity or becoming a surety, by whatever named called, for any third party, by the company not in the normal course of business;
xvi) granting, withdrawal, surrender, cancellation or suspension of key licenses or regulatory approvals.
Explanation 1- For the purpose of sub-clause (ix):
a) ‘Fraud’ shall have the same meaning as referred to in Regulation 2(1)(c) of Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003.
Please refer definition of “Fraud” as per Regulation 2(1)(c) of Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003;
“fraud” includes any act, expression, omission, or concealment committed whether in a deceitful manner or not by a person or by any other person with his connivance or by his agent while dealing in securities in order to induce another person or his agent to deal in securities, whether or not there is any wrongful gain or avoidance of any loss, and shall also include-
1. a knowing misrepresentation of the truth or concealment of material facts in order that another person may act to his detriment;
2. a suggestion as to a fact which is not true by one who does not believe it to be true;
3. an active concealment of a fact by a person having knowledge or belief of the fact;
4. a promise made without any intension of performing it;
5. a representation made in recklessness and careless manner whether it be true or false;
6. any such act or omission as any other law specifically declares to be fraudulent;
7. deceptive behaviour by a person depriving another of informed consent or full participation;
8. a false statement made without reasonable ground for believing it to be true;
9. the act of an issuer of securities giving out misinformation that affects the market price of the security, resulting in investors being effectively misled even though they did not rely on the statement itself or anything derived from it other than the market price;
And “Fraudulent “shall be construed accordingly;
Nothing contained in this clause shall apply to any general comments made in good faith in regard to –
(a) the economic policy of the government
(b) the economic situation of the country
(c) trends in the securities market or
(d) any other matter of a like nature
Whether such comments are made in public or in private.
b) ‘Default’ shall have the same meaning as referred to in Clause 6 of paragraph A of Part A of Schedule III of Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“SEBI Listing Regulations”).
Please refer definition of ‘Default’ as per Clause 6 of paragraph A of Part A of Schedule III of SEBI Listing Regulations;
Default’ shall mean non-payment of the interest or principal amount in full on the date when the debt has become due and payable.
Explanation 2- For identification of events enumerated in this clause as UPSI, the guidelines for materiality referred at paragraph A of Part A of Schedule III of the SEBI Listing Regulations as may be specified by the Board from time to time and materiality as referred at paragraph B of Part A of Schedule III of the SEBI Listing Regulations shall be applicable.”
Thus, the informat0069on relating to a company or securities that is not generally available would be UPSI if it is likely to materially affect the price upon coming into the public domain. For example, it is often seen the price of the securities of the company remains very volatile on declaration of the financial results or any M&A event.
The “generally available information" means information that is accessible to the public on a non-discriminatory basis and shall not include unverified event or information reported in print or electronic media. It is stated that information published on the website of a stock exchange would ordinarily be considered generally available.
Thus, such price sensitive information is treated as UPSI till the time, the Company formally announces such information, and it is widely accessible to the public at large.
What is meant by proposed to be listed?
“Proposed to be listed” means
- includes securities of an unlisted company:
(i) if such unlisted company has filed offer documents or other documents, as the case may be, with the Board, stock exchange(s) or registrar of companies in connection with the listing; or
(ii) if such unlisted company is getting listed pursuant to any merger or amalgamation and has filed a copy of such scheme of merger or amalgamation under the Companies Act, 2013
Substantive Provisions of PIT Regulations
A) Restriction on communicating or procuring UPSI
I. Regulation 3(1) of PIT Regulations:
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
- except where such communication is in furtherance of legitimate purposes, performance of duties or discharge of legal obligations.
This provision casts an obligation on all Insiders who are essentially persons in possession of UPSI to handle such information with care and to deal with the information with them when transacting their business strictly on a need-to-know basis.
It also intends that the organisations develop practices based on need-to-know principles for treatment of information in their possession.
II. Regulation 3(2), 3(2A) and 3(2B) of PIT Regulations:
No PERSON shall
- procure from or cause the communication by any insider of UPSI,
- relating to a company or securities listed or proposed to be listed,
- except in furtherance of legitimate purposes, performance of duties or discharge of legal obligations.
This provision intends to impose a prohibition on ALL PERSONS on unlawfully procuring possession of UPSI. Inducement and procurement of UPSI not in furtherance of one’s legitimate duties and discharge of obligations would be illegal under this provision.
The board of directors of a listed company shall make a policy for determination of “legitimate purposes” as a part of “Codes of Fair Disclosure and Conduct” formulated under regulation 8 of PIT Regulation.
Any person in receipt of UPSI pursuant to a “legitimate purpose” shall be considered an “insider” for purposes of PIT Regulations and due notice shall be given to such persons to maintain confidentiality of such UPSI in compliance with the PIT Regulation.
For instance: An officer (“Mr. Officer”) working in the Registrar of Companies office calls for the copy of the provisional financial statements of a listed company (“XYZ Limited”) for the quarterly period just concluded which are yet to be publicly announced (thus being an UPSI)in the course of scrutinizing and approving a statutory form filed by XYZ Limited under the Companies Act. There is neither any statutory requirement nor is such information warranted to scrutinize or approve the statutory form so filed by XYZ Limited. Mr. Officer can be prosecutedunder PIT Regulations for causing the communication of UPSI without there being a need of such information while discharging his official duties
III. Regulation 3(3),3(4), 3(5),3(6) of PIT Regulations:
An UPSI may be communicated, provided, allowed access to or procured, in connection with a transaction that would: –
If a listed company's board of directors determines that disclosing certain information is in the best interest of the company, they may be required to make a public offer of shares.
If a listed company's board of directors believes it's in the company's best interests to share information that doesn't trigger the obligation for an open offer under takeover regulations, they must ensure that such information, which includes UPSI, is made widely accessible at least 2 trading days before the proposed transaction. The board determines the appropriate format to ensure all relevant and significant details are adequately disclosed.
The board mandates parties to sign confidentiality agreements to keep received information confidential for sub regulation 3 of regulation 3 of PIT Regulations purposes and prohibits trading in company securities while in possession of UPSI.
The board of directors or heads of organizations must maintain a structured digital database detailing UPSI, individuals who shared it, and recipients, including their Permanent Account Number or an authorized identifier if not available.
Provided that entry of information, not emanating from within the organisation, in structured digital database may be done not later than 2 calendar days from the receipt of such information.
The board of directors or organization heads must internally maintain an outsourced, structured digital database of UPSI, ensuring it includes time stamping, audit trails, and is preserved for at least eight years post-transaction completion, with information retained until the conclusion of any related investigation or enforcement proceedings notified by the Board.
For instance: The listed company (X) has appointed a Law firm or Merchant Banker (Y) in respect of fund-raising activity and (A) from listed company has shared the said UPSI with (B) of Law firm or Merchant Banker. The structured digital database of (X) should capture the nature of UPSI shared, details of (A), (Y) and (B), along with their PAN or other unique identifier (in case PAN is not available). The Law firm or the Merchant Banker (Y) shall in turn maintain another structured digital database internally capturing the nature of UPSI received/shared, details of (X), (A) and (B) along with their PAN or other unique identifier (in case PAN is not available), in accordance with Regulation 9A(2)(d) of PIT Regulations and as required under Schedule C.
B) Restriction on trading by Insiders
I. Regulation 4(1) of PIT Regulations:
No insider shall trade in securities that are listed or proposed to be listed on a stock exchange when in possession of UPSI.
Ø For this purpose, the word “trading” means and includes subscribing, buying, selling, dealing, or agreeing to subscribe, buy, sell, deal in any securities, and "trade" shall be construed accordingly. Therefore, even an act of agreeing to trade in securities shall amount to trading.
Ø Thus, PIT Regulations prohibits dealing in securities by Insiders when they are in possession of UPSIso as to ensure that they do not obtain undue benefit out of their possession of UPSI by stealing a march over the rest of the market owing to asymmetrical access to such information.
Ø Thus, a person who has traded in securities has been in possession of UPSI, his trades would be presumed to have been motivated by the knowledge and awareness of such information in his possession.
Ø Thus, a CFO of the company who is actively involved in the finalization of the financial results of the company is prohibited from trading in securities of the company till the time such financial results become generally available information.
Ø For instance: Head of Business Development (‘Mr. Smart’) of a listed company (‘XYZ Ltd.’), involved in negotiation and structuring the terms of a potential acquisition of another company which is expected to increase the market value of XYZ Ltd. substantially, knowing that the deal will materialize within a period of one month enters into a contract with a person (‘Mr. Needy’) (who is unaware of such acquisition deal) wherein Mr. Smart agrees to buy the equity shares held by Mr. Needy in XYZ Ltd. after a period of one and half months at 20% premium to the current prevailing market price. Subsequently, deal materializes within a period of one month and as per the contract, Mr. Smart purchases the equity shares from Mr. Needy (who had to honor the contract as per the agreed terms) after the information became generally available and at that time the price of the equity shares of XYZ Ltd. shoot up heavily (say by 60%). In such a case, even though the actual trading (buying of shares by Mr. Smart) took place after the information relating to deal became generally available to the public, Mr. Smart is guilty of insider trading since he agreed to buy(which is squarely covered under the definition of‘trading’) the equity shares when he was in possession of UPSI viz. potential acquisition of another company by XYZ Ltd.
Defenses available to Insiders: An Insider may prove his innocence by demonstrating the circumstances including the following:
(i) the transaction is an off-market inter-se transfer between insiders who were in possession of the same UPSI without being in breach of regulation 3 of PIT Regulations and both parties had made a conscious and informed trade decision
Provided that such UPSI was not obtained under sub-regulation (3) of regulation 3 of PIT Regulations.
Provided further that such off-market trades shall be reported by the insiders to the company within two working days. Every company shall notify the particulars of such trades to the stock exchange on which the securities are listed within two trading days from receipt of the disclosure or from becoming aware of such information.
(ii) the transaction was carried out through the block deal window mechanism between persons who were in possession of the UPSI without being in breach of regulation 3 of PIT Regulations and both parties had made a conscious and informed trade decision.
Provided that such UPSI was not obtained by either person under sub-regulation (3) of regulation 3 of PIT Regulations.
(iii) the transaction in question was carried out pursuant to a statutory or regulatory obligation to carry out a bona fide transaction.
(iv) the transaction in question was undertaken pursuant to the exercise of stock options in respect of which the exercise price was pre-determined in compliance with applicable regulations.
(v) in the case of non-individual insiders: –
a. the individuals who were in possession of such UPSI were different from the individuals taking trading decisions and such decision-making individuals were not in possession of such UPSI when they took the decision to trade; and
b. appropriate and adequate arrangements were in place to ensure that PIT Regulations are not violated and no UPSI was communicated by the individuals possessing the information to the individuals taking trading decisions and there is no evidence of such arrangements having been breached;
(vi) the trades were pursuant to a trading plan set up in accordance with regulation 5 of PIT Regulations.
NOTE: When a person who has traded in securities has been in possession of UPSI, his trades would be presumed to have been motivated by the knowledge and awareness of such information in his possession. The reasons for which he trades or the purposes to which he applies the proceeds of the transactions are not intended to be relevant for determining whether a person has violated the PIT Regulations. He traded when in possession of UPSI is what would need to be demonstrated at the outset to bring a charge. Once this is established, it would be open to the insider to prove his innocence by demonstrating the circumstances mentioned in the proviso, failing which he would have violated the prohibition.
(2) In the case of connected persons, the onus of establishing, that they were not in possession of UPSI, shall be on such connected persons and in other cases, the onus would be on the Board.
(3) The Board may specify such standards and requirements, from time to time, as it may deem necessary for the purpose of PIT Regulations.
PART D: TRADING PLANS
· PIT Regulations has introduced a new concept of Trading Plans. As stated earlier any trades executed by an Insider pursuant a Trading Plan set up in accordance with Regulation 5 of the PIT Regulations does not attract the consequences of insider trading.
Regulation 5(1): Option to formulate a Trading Plan
An insider shall be entitled to formulate a trading plan and present it to the compliance officer for approval and public disclosure pursuant to which trades may be carried out on his behalf in accordance with such plan.
Ø This provision intends to give an option to persons who may be perpetually in possession of UPSI and enabling them to trade in securities in a compliant manner.
Ø This provision would enable the formulation of a trading plan by an insider to enable him to plan for trades to be executed in future. By doing so, the possession of UPSI when a trade under a trading plan is actually executed would not prohibit the execution of such trades that he had pre-decided even before the UPSI came into being.
Regulation 5(2): Conditions regarding the Trading Plan
Regulation 5(2) lists out certain conditions relating to the Trading Plan which are as follows:
Initial 120 calendar days cool-off period: Trading plan shall not entail commencement of trading on behalf of the Insider earlier than 120 calendar days from the public disclosure of the plan.
Ø It is intended that to get the benefit of a trading plan, a cool-off period of 120 calendar days is necessary.
For instance: In case a Trading Plan is disclosed to the stock exchange on July 1, 2015, then trading cannot be commenced with before October 28, 2015.
Ø It is intended that to get benefit of a trading plan, a 120-calendar-day cool-off period is necessary, considering that most companies have a trading restriction from the end of a quarter to two days after quarterly results are declared, typically lasting around one month.
Ø Thus, 120-calendar-day cool-off period is deemed sufficient for UPSI held by insiders to become generally available and to accommodate any new UPSI may come into being without adversely affecting the trading plan formulated earlier.
Ø Such a cool-off period is stipulated in order to ensure that the UPSI in possession of the Insider when formulating the trading plan becomes generally available.
Ø In any case, it should be remembered that this is only a statutory cool-off period and it would not grant immunity from action if the Insider were to be in possession of the same UPSI both at the time of formulation of the plan and implementation of the same.
For instance: At the time of formulation and adoption of a Trading Plan by Mr. Insider in the month of July-2025, talks for a potential M&A deal was going on (being UPSI). As per the Trading Plan, Mr. Insider was supposed to purchase shares worth Rs. 10 lacs on October 29, 2025 (i.e. after a cool-off period of 120 calendar days). However, by October 29, 2025, if information relating to M&A deal does not become generally available and talks would be still going on (thus still remaining UPSI) then Mr. Insider may not be eligible to purchase shares.
No overlapping plans: Trading Plan shall not entail overlap of any period for which another trading plan is already in existence.
Ø It is intended that it would be undesirable to have multiple trading plans operating during the same time period.
Ø Since it would be possible for an insider to time the publication of the UPSI to make it generally available instead of timing the trades, it is important not to have the ability to initiate more than one plan covering the same time period.
Highlights
1. Minimum time gap between disclosure of trading plan and trading: 120 calendar days;
2. No overlaps in trading plans.
Minimum parameters of trading: Trading Plan shall set out
i. either the value of trades to be effected or the number of securities to be traded;
ii. the nature of the trade;
iii. either specific date or time period not exceeding five consecutive trading days;
iv. price limit, that is an upper price limit for a buy trade and a lower price limit for a sell trade, subject to the range as specified below:
a. for a buy trade: the upper price limit shall be between the closing price on the day before submission of the trading plan and upto 20% higher than such closing price;
b. for a sell trade: the lower price limit shall be between the closing price on the day before submission of the trading plan and upto 20% lower than such closing price.
Explanation:
- - While the parameters in sub-clauses (i), (ii) and (iii) shall be mandatorily mentioned for each trade, the parameter in sub-clause (iv) shall be optional.
- The price limit in sub-clause (iv) shall be rounded off to the nearest numeral.
- Insider may make adjustments, with the approval of the compliance officer, in the number of securities and price limit in the event of corporate actions related to bonus issue and stock split occurring after the approval of trading plan and the same shall be notified on the stock exchanges on which securities are listed.
Ø This condition is prescribed with a view to ensure that the Trading Plan stipulates certain basic parameters with certain flexibility without making it too prescriptive and rigid.
Ø The nature of the trades entailed in the trading plan i.e. acquisition or disposal should be set out. The trading plan may set out the value of securities or the number of securities to be invested or divested.
Ø Specific dates or specific time intervals may be set out in the plan.
Ø Further, to protect the insider from unexpected price movements, he may, at the time of formulation of trading plan, provide price limits within the range specified in PIT Regulations.
Avoidance of market abuse: Trading Plan shall not entail trading in securities for market abuse.
Ø Trading on the basis of such a trading plan would not grant absolute immunity from bringing proceedings for market abuse.
For instance: In the event of manipulative timing of the release of UPSI to ensure that trading under a trading plan becomes lucrative in circumvention of regulation 4 of PIT Regulations being detected, it would be open to initiate proceedings for alleged breach of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to the Securities Market) Regulations, 2003.
To summarise, a valid Trading Plan should observe the specified conditions listed out under regulation 5(2) of PIT Regulations which are:
1) Initial 120 calendar days cool-off period;
2) No overlapping plans;
3) Minimum parameters of trading; and
4) Avoidance of market abuse.
Regulation 5(3): Approval and monitoring of Trading Plan by the Compliance Officer
The compliance officer shall:
- review the trading plan to assess whether the plan would have any potential for violation of PIT Regulations and;
- be entitled to seek such express undertakings as may be necessary to enable such assessment and;
- approve and monitor the implementation of the plan.
Provided that pre-clearance of trades shall not be required for a trade executed as per approved trading plan and trading window norms shall not be applicable for trades carried out in accordance with an approved trading plan.
Note: Restrictions on contra trades applied to trades under an approved trading plan.
For instance: The Compliance Officer may ask the insider to declare that he is not in possession of UPSI or that he would ensure that any UPSI in his possession becomes generally available before he commences executing his trades.
Compliance Officer means any senior officer, designated so and reporting to the board of directors orhead of the organization in case board is not there and who shall be responsible for compliance of
- policies,
- procedures,
- maintenance of records,
- monitoring adherence to the rules for the preservation of UPSI,
- monitoring of trades and
- the implementation of the codes specified in PIT Regulations
under the overall supervision of the board of directors of the listed company or the head of an organization, as the case may be.
Regulation 5(4): Binding nature of the Trading Plan
The trading plan once approved shall be irrevocable and the insider shall mandatorily have to implement the plan, without being entitled to either to execute any trade in the securities outside the scope of the trading plan or to deviate from it except due to permanent incapacity or bankruptcy or operation of law.
the implementation of the trading plan shall not be commenced if any UPSI in possession of the insider at the time of formulation of the plan has not become generally available at the time of the commencement of implementation.
Ø if the insider has set a price limit for a trade under sub-clause (iv) of clause (v) of sub-regulation 2 of regulation 5 of PIT Regulations, the insider shall execute the trade only if the execution price of the security is within such limit. If price of the security is outside the price limit set by the insider, the trade shall not be executed.
Ø In case of non-implementation (full/partial) of trading plan due to either reasons enumerated in regulation 5(4) of PIT Regulations or failure of execution of trade due to inadequate liquidity in the scrip, the following procedure shall be adopted:
o The insider shall intimate non-implementation (full/partial) of trading plan to the compliance officer within 2 trading days of end of tenure of the trading plan with reasons thereof and supporting documents, if any;
o Upon receipt of information from the insider, the compliance officer, shall place such information along with his recommendation to accept or reject the submissions of the insider, before the Audit Committee in the immediate next meeting. The Audit Committee shall decide whether such non-implementation (full/partial) was bona fide or not;
o The decision of the Audit Committee shall be notified by the compliance officer on the same day to the stock exchanges on which the securities are listed;
o In case the Audit Committee does not accept the submissions made by the insider, then the compliance officer shall take action as per the Code of Conduct.
The proviso is intended to address the prospect that despite a 120-calendar-day gap between formulating and commencing a trading plan, certain UPSI remains in the insider's possession and is not yet publicly available. In such cases, the commencement of execution of the trading plan ought to be deferred.
The second proviso is intended to address the scenario where the insider has set a price limit for a trade and due to adverse fluctuation in market prices, the price of the security is outside the price limit set by the insider, the trade shall not be executed. However, if the insider wishes to trade irrespective of the fluctuation in market price, he may not set any price limit at the time of formulation of the trading plan.
Regulation 5(5): Disclosure of the Trading Plan
The compliance officer shall approve or reject the trading plan within 2 trading days of receipt of the trading plan and notify the approved plan to the stock exchanges on which the securities are listed, on the day of approval.
Ø Since the trading plan is a material exception to the prohibitory rule in regulation 4 of PIT Regulations, a trading plan is required to be publicly disseminated.
Ø Investors in the market at large would also factor the potential pointers in the trading plan in their own assessment of the securities and price discovery for them on the premise of how the insiders perceive the prospects or approach the securities in their trading plan.
PART E: DISCLOSURES
Disclosure by Promoters, Directors and Employees
Initial Disclosures:
Every person on appointment as key managerial personnel or a director of the company or upon becoming a promoter or member of the promoter group shall disclose his holding of securities of the company as on the date of appointment or becoming a promoter, to the company within 7 days of such appointment or becoming a promoter.
Continual Disclosures:
Every promoter, member of the promoter group, designated person and director of every company shall disclose to the company the number of such securities acquired or disposed of within two trading days of such transaction if the value of the securities traded, whether in one transaction or a series of transactions over any calendar quarter, aggregates to a traded value in excess of Rs. 10 lacs or such other value as may be specified.
Every company shall notify the particulars of such trading to the stock exchange on which the securities are listed within two trading days of receipt of the disclosure or from becoming aware of such information.
For the avoidance of doubts, it is clarified that the disclosure of the incremental transactions after any disclosures under sub regulation (2) clause (b) of Regulation 7 of PIT Regulations, shall be made when the transactions effected after the prior disclosure cross the threshold specified in clause (a) of sub regulation (2) of Regulation 7 of PIT Regulations.
The above disclosure shall be made in such form and such manner as may be specified by the Board from time to time.
Disclosure by other Connected Persons
Any company whose securities are listed on a stock exchange may, at its discretion require any other connected person or class of connected persons to make disclosures of holdings and trading in securities of the company in such form and at such frequency as may be determined by the company in order to monitor compliance with PIT Regulations.
Notes: This is an enabling provision for listed companies to seek information from those to whom it has to be provide UPSI. This provision confers discretion on any company to seek such information. For example, a listed company may ask that a management consultant who would advise it on corporate strategy and would need to review UPSI, should make disclosure of his trade to the company
Notes:
1. Every public disclosure for this purpose shall be made in form no. D.
2. The disclosures to be made by any person shall include those relating to trading by such person’s relatives, and by any other person for whom such person takes trading decisions.
3. The disclosures of trading in securities shall also include trading in derivatives of securities, if such trading in derivatives is permitted.
4. The record of disclosures shall be maintained by the company, for a minimum period of five years.
PART F: CODE OF FAIR DISCLOSURE AND CODE OF CONDUCT
Code of Fair Disclosure
Every company whose securities are listed on stock exchanges is required to formulate a stated framework and policy for fair disclosure of events and occurrences and publish on its official website, that could impact price discovery in the market for its securities. Principles such as, equality of access to information, publication of policies such as those on dividend, inorganic growth pursuits, calls and meetings with analysts, publication of transcripts of such calls and meetings, and the like as are set out in Schedule A to the PIT Regulations.
Every such code of practices and procedures for fair disclosure of UPSI and every amendment thereto shall be promptly intimated to the stock exchanges where the securities are listed.
Code of Conduct
1. Every company whose securities are listed on stock exchanges and the board of directors or heads of the organisation of every intermediary shall ensure that the chief executive officer or managing director shall formulate a code of conduct with their approval to regulate, monitor and report trading by its designated persons and immediate relatives of designated persons towards achieving compliance with PIT Regulations, adopting the minimum standards set out in Schedule B (in case of a listed company) and Schedule C (in case of an intermediary) to PIT Regulations, without diluting the provisions of PIT Regulations in any manner For the avoidance of doubt it is clarified that intermediaries, which are listed, would be required to formulate a code of conduct to regulate, monitor and report trading by their designated persons, by adopting the minimum standards set out in Schedule B of PIT Regulations with respect to trading in their own securities and in Schedule C of PIT Regulations with respect to trading in other securities
2. The board of directors or head(s) of the organisation, of every other person who is required to handle UPSI in the course of business operations shall formulate a code of conduct to regulate, monitor and report trading by their designated persons and immediate relative of designated persons towards achieving compliance with PIT Regulations, adopting the minimum standards set out in Schedule C to PIT Regulations, without diluting the provisions of PIT Regulations in any manner.
Professional firms such as auditors, accountancy firms, law firms, analysts, insolvency professional entities, consultants, banks etc., assisting or advising listed companies shall be collectively referred to as fiduciaries for the purpose of PIT Regulations.
Every listed company, intermediary and other persons formulating a code of conduct shall identify and designate a compliance officer to administer the code of conduct and other requirements under PIT Regulations.
For the purpose of sub regulation (1) and (2) of regulation 9 of PIT Regulations, the board of directors or such other analogous authority shall in consultation with the compliance officer specify the designated persons to be covered by the code of conduct on the basis of their role and function in the organisation and the access that such role and function would provide to UPSI in addition to seniority and professional designation and shall include:-
i. Employees of such listed company, intermediary or fiduciary designated on the basis of their functional role or access to UPSI in the organization by their board of directors or analogous body;
ii. Employees of material subsidiaries of such listed companies designated on the basis of their functional role or access to UPSI in the organization by their board of directors;
iii. All promoters of listed companies and promoters who are individuals or investment companies for intermediaries or fiduciaries;
iv. Chief Executive Officer and employees up to two levels below Chief Executive Officer of such listed company, intermediary, fiduciary and its material subsidiaries irrespective of their functional role in the company or ability to have access to UPSI;
v. Any support staff of listed company, intermediary or fiduciary such as IT staff or secretarial staff who have access to UPSI.
Institutional Mechanism for Prevention of Insider trading
Ø The CEO, Managing Director, or equivalent leader of a listed company, intermediary, or fiduciary shall put in place adequate and effective internal control systems to ensure compliance with the PIT Regulations and prevent violations.
Ø The internal controls shall include the following:
§ all employees who have access to UPSI are identified as designated;
§ all the UPSI shall be identified and its confidentiality shall be maintained as per the requirements of PIT Regulations;
§ adequate restrictions shall be placed on communication or procurement of UPSI as required by PIT Regulations;
§ Maintain lists of all employees and individuals with whom UPSI is shared, and ensure they sign confidentiality agreements or receive notices accordingly;
§ all other relevant requirements specified under PIT Regulations shall be complied with periodic process review to evaluate effectiveness of such internal controls.
Ø The board of directors of listed companies and intermediaries ensures that the CEO, Managing Director, or such other analogous person oversee compliance with regulation 9 and its sub-regulations (1) and (2) of PIT Regulations.
Ø The Audit Committee of a listed company or other analogous body for intermediaries or fiduciaries must annually review compliance with PIT Regulations and verify the effectiveness of internal control systems.
Ø Every listed company must create approved written policies and procedures for investigating leaks or suspected leaks of UPSI, promptly notifying the Board and conducting appropriate inquiries, and reporting the findings.
Ø The listed company shall have a whistle-blower policy and make employees aware of such policy to enable employees to report instances of leak of UPSI.
Ø If an inquiry has been initiated by a listed company into leaks or suspected leaks of UPSI intermediaries and fiduciaries must cooperate.
Minimum Standards for Code of Conduct for Listed Companies to Regulate, Monitor and Report Trading by Designated Persons (Schedule B)
The compliance officer shall report to the board of directors and in particular, shall provide reports to the Chairman of the Audit Committee, if any, or to the Chairman of the board of directors at such frequency as may be stipulated by the board of directors, but not less than once in a year.
All information shall be handled within the organisation on a need-to-know basis and no UPSI shall be communicated to any person except in furtherance of the insider’s legitimate purposes, performance of duties or discharge of his legal obligations. The code of conduct shall contain norms for appropriate Chinese Walls procedures, and process for permitting any designated person to “cross the wall’.
Designated person and immediate relative of designated person in the organisation shall be governed by the internal code of conduct governing dealing in securities
(1) Designated persons may execute trades subject to compliance with PIT Regulations. Towards this end, a notional trading window shall be used as an instrument of monitoring trading by the designated persons. The trading window shall be closed when the compliance officer determines that a designated person or class of designated persons can reasonably be expected to have possession of UPSI. Such closure shall be imposed in relation to such securities to which such UPSI relates. Designated persons and their immediate relatives shall not trade in securities when the trading window is closed
Provided that entry of information, not emanating from within the organisation, in structured digital database may be done not later than 2 calendar days from the receipt of such information.
(2) Trading restriction period shall be made applicable from the end of every quarter till 48 hours after the declaration of financial results. The gap between clearance of accounts by audit committee and board meeting should be as narrow as possible and preferably on the same day to avoid leakage of material information.]
(3) The trading window restrictions mentioned in sub-clause (1) shall not apply in respect of –
(a) transactions specified in clauses (i) to (iv) and (vi) of the proviso to sub-regulation (1) of regulation 4 of PIT Regulations and in respect of a pledge of shares for a bonafide purpose such as raising of funds, subject to pre-clearance by the compliance officer and compliance with the respective regulations made by the Board;
(b) transactions which are undertaken in accordance with respective regulations made by the Board such as acquisition by conversion of warrants or debentures, subscribing to rights issue, further public issue, preferential allotment or tendering of shares in a buy-back offer, open offer, delisting offer or such other transactions which are undertaken in accordance with the mechanisms as may be specified by the Board from time to time;
(c) in respect of Offer for Sale and Rights Entitlements Transactions carried out in accordance with the framework specified by the Board from time to time;
(d) subscription to the issue of non-convertible securities, carried out in accordance with the framework specified by the Board from time to time.
The timing for re-opening of the trading window shall be determined by the compliance officer taking into account various factors including the UPSI in question becoming generally available and being capable of assimilation by the market, which in any event shall not be earlier than 48 hours after the information becomes generally available.
When the trading window is open, trading by designated persons shall be subject to preclearance by the compliance officer, if the value of the proposed trades is above such thresholds stipulated by the board of directors of your company.
Prior to approving any trades, the compliance officer shall be entitled to seek declarations to the effect that the applicant for pre-clearance is not in possession of any UPSI. He shall also have regard to whether any such declaration is reasonably capable of being rendered inaccurate
The code of conduct shall specify any reasonable timeframe, which in any event shall not be more than seven trading days, within which trades that have been pre-cleared have to be executed by the designated person failing which fresh pre-clearance would be needed for the trades to be executed.
Example: If Mr. A, the purchase head of the company has purchased shares of the company by making necessary disclosures and obtaining required pre-clearances while he was not in possession of UPSI, shall not sell (i.e. contra trade of purchase) the shares of the company within 6 months of purchase of such shares. The 6 months period referred in the example may be increased by the code of conduct of the company. You are requested to refer the code of conduct of your company for assessing the correct period for prohibition on contra trade.
The code of conduct shall specify the period, which in any event shall not be less than six months, within which a designated person who is permitted to trade shall not execute a contra trade. The compliance officer may be empowered to grant relaxation from strict application of such restriction for reasons to be recorded in writing provided that such relaxation does not violate PIT Regulations. Should a contra trade be executed, inadvertently or otherwise, in violation of such a restriction, the profits from such trade shall be liable to be disgorged for remittance to the Board for credit to the Investor Protection and Education Fund administered by the Board under the Act. Provided that this shall not be applicable for trades pursuant to exercise of stock options
The code of conduct shall stipulate such formats as the board of directors deems necessary for making applications for pre-clearance, reporting of trades executed, reporting of decisions not to trade after securing pre-clearance and for reporting level of holdings in securities at such intervals as may be determined as being necessary to monitor compliance with PIT Regulations.
Without prejudice to the power of the Board under the Act, the code of conduct shall stipulate the sanctions and disciplinary actions, including wage freeze, suspension, recovery, etc., that may be imposed, by the listed company required to formulate a code of conduct under sub - regulation (1) of regulation 9 of PIT Regulations, for the contravention of the code of conduct. Any amount collected under this clause shall be remitted to the Board for credit to the Investor Protection and Education Fund administered by the Board under the Act.
The code of conduct shall specify that in case it is observed by the listed company required to formulate a code of conduct under sub-regulation (1) of regulation 9 of PIT Regulations, that there has been a violation of PIT Regulations, it shall promptly inform the stock exchange(s) where the concerned securities are traded, in such form and such manner as may be specified by the Board from time to time.
Designated persons shall be required to disclose names and Permanent Account Number or any other identifier authorized by law of the following persons to the company on an annual basis and as and when the information changes:
immediate relatives
persons with whom such designated person(s) shares a material financial relationship
Phone, mobile and cell numbers which are used by them
In addition, the names of educational institutions from which designated persons have graduated and names of their past employers shall also be disclosed on a one-time basis
The term “material financial relationship” shall mean a relationship in which one person is a recipient of any kind of payment such as by way of a loan or gift from a designated person during the immediately preceding twelve months, equivalent to at least 25%of the annual income of such designated person but shall exclude relationships in which the payment is based on arm’s length transactions.
Listed entities shall have a process for how and when people are brought ‘inside’ on sensitive transactions. Individuals should be made aware of the duties and responsibilities attached to the receipt of Inside Information, and the liability that attaches to misuse or unwarranted use of such information
It is advisable that you thoroughly go through the code of conduct of the Company in order to understand your compliance obligations in this regard.
PART G: PENAL PROVISIONS
· SEBI laws prescribe very stiff penalties for violations of any provisions of the SEBI Act, the rules or regulations made or the directions issues by SEBI and the same is implemented very stringently in practical scenario. Further the SEBI officers are well equipped to investigate any possible violations in minute details that too in a timely manner.
· Thus, it is advisable to be fully compliant with SEBI laws without any failure to ensure avoiding stringent punishments.
· PIT Regulations mention that any contraventions of the PIT Regulations shall be dealt with by SEBI in accordance with the SEBI Act. Section 15G of the SEBI Act prescribes following penalty in relation to insider trading:
If any insider who, —
(i) either on his own behalf or on behalf of any other person, deals in securities of a body corporate listed on any stock exchange on the basis of any UPSI; or
(ii) communicates any UPSI to any person, with or without his request for such information except as required in the ordinary course of business or under any law; or
(iii) counsels, or procures for any other person to deal in any securities of anybody corporate on the basis of UPSI,
shall be liable to a penalty which shall not be less than Rs. 10 lacs but which may extend to Rs. 25 Crores or 3 times the amount of profits made out of insider trading, whichever is higher.
· Further Section 15HB of SEBI Act provides for penalty for contravention under SEBI laws for no separate penalty has been provided for. The said section reads as follow:
Whoever fails to comply with any provision of this Act, the rules or the regulations made, or directions issued by the Board there under for which no separate penalty has been provided, shall be liable to a penalty which shall not be less than Rs. 1 lacs but which may extend to Rs. 1 Crores.
For other violations under the PIT Regulations not covered by Section 15G of SEBI Act, penalty under section 15HB of SEBI Act can be imposed e.g. failure of the listed company to inform the SEBI of a possible violation of PIT Regulations which is within its knowledge.
PART H: CASE LAWS
Manmohan Shetty v. SEBI – Decision by Securities Appellate Tribunal, Mumbai Bench
Summary:
· In the stated case, Mr. Manmohan Shetty (“Appellant”) was a shareholder and director of Adlabs Films Limited (“Adlabs”) and thus he was a Designated Employee of Adlabs.
· Appellant had sold the shares of Adlabs on the date of announcement of key price sensitive decisions taken in the board meeting (viz. declaration of dividend and demerger of Adlabs’s FM Radio business) when Trading Window was closed. Thus, he violated the code of conduct of the Company which is required to be framed under PIT Regulations by every listed company.
· Adjudicating Officer of SEBI imposed penalty on Appellant under Section 15HB of the SEBI Act stating he violated the PIT Regulations.
· Appellant’s contention was that SEBI cannot impose penalty under Section 15HB of the SEBI Act as he did not violate any specific provisions of the PIT Regulations, but the Code of Conduct framed by Adlabs.
· It was held by Securities Appellate Tribunal (“SAT”) that Code of Conduct is required to be framed and implemented by every listed company under the provisions of the PIT Regulations and thus violation of Code of Conduct tantamount to violation of the PIT Regulations.
Important extracts from the judgment:
· Whether code of conduct prescribed by a company for prevention of insider trading as mandated by PIT Regulations, for all practical purpose is to be treated as a part of PIT Regulations, and any violation of code of conduct is punishable by SEBI as violation of PIT Regulations - Held, yes.
· Adjudicating Officer held appellant guilty of violation of regulation 12(1) of PIT Regulations, read with clauses 3.2-3 and 3.2-5 of code of conduct prescribed under Part A of Schedule I on ground that appellant had sold shares within a period when trading window was closed, i.e., before 24 hours of out-come of board of directors being made public by BSE and NSE – Penalty was imposed upon appellant.
· Conclusion para: Whether appellant had sold shares within period when trading window was closed and, thus, violated code of conduct prescribed by company in terms of obligations imposed upon it under PIT Regulations - Held, yes - Whether, therefore, order of adjudicating officer was to be upheld - Held, yes.
E. Sudhir Reddy vs. SEBI - Decision by Securities Appellate Tribunal, Mumbai Bench
Summary:
· The SEBI carried out investigation into the trading of the scrip of Hindustan Dorr Oliver Limited (the “Company”) for the period from February 2, 2009 to March 25, 2009 and found that Mr. E. Sudhir Reddy, the appellant, who was also the non-executive Vice Chairman and Director of the company, traded in the scrip of the company while he was in possession of UPSI.
· Investigations also revealed that the appellant traded through CIL Securities Ltd and bought 40,000 shares during the investigation period. The Company bagged a contract for uranium ore processing plant from Uranium Corporation of India Limited (UCIL) worth Rs. 441 crores and informed about the same to the stock exchanges on February 25, 2009.
· However, before providing this information to the stock exchanges, the appellant bought 19,721 shares of the Company on February 9/10, 2009 when information regarding award of the contract was still unpublished. Being an insider and being in possession of UPSI, the appellant dealt with the shares of the company and hence allegedly violated section 12A of the SEBI Act read with regulation 3(i) and 4 of the PIT Regulations. A penalty of Rs. 3,00,000 (Rupees Three Lacs) imposed on the Appellant was upheld by SAT.
V. K. Kaul vs. SEBI - Decision by Securities Appellate Tribunal, Mumbai Bench
· In this case, Appellant was an independent director of Ranbaxy Laboratory Limited (“Ranbaxy”)
· Ranbaxy had a subsidiary, Solrex –
· On 20-3-2008 Ranbaxy through Solrex decided to invest huge funds in 'target company' –
· Solrex began to purchase shares of 'target company' from 31-3-2008 –
· 3 to 4 days before 31-3-2008 wife of appellant purchased 35,000 shares of 'target company' at Rs. 131.71 per share and sold them off after few months at Rs. 219.94 per share - Funds for such purchase were arranged by appellant –
· Whether since appellant apart from being a director, was also a member of audit and compensation committee's of Ranbaxy and attended all meetings of such committees and further since appellant was in constant touch with high officials of Ranbaxy from 24-3-2008 to 26-3-2008, he was an 'insider' - Held, yes –
· Whether since decision to purchase shares of 'target company' was likely to materially affect price of securities of 'target company', such decision was 'UPSI' for insiders of Ranbaxy group and, therefore, insiders were prohibited from dealing in shares of 'target company' till such information became public - Held, yes - Whether appellant and his wife were guilty of insider trading - Held, yes.
Balram Garg vs. SEBI – Decision by Supreme Court of India
· Mr. Balram Garg, is the company's managing director and Mr. P.C. Gupta served as company’s chairman both are bothers. Mr. Sachin Gupta (the son of Mr. P.C. Gupta); Mrs. Shivani Gupta (the daughter-in-law of Mr. P.C. Gupta) and Mr. Amit Garg (the nephew of Mr. P.C. Gupta) and Mr. Balram Garg are accused of trading in PC Jewellers shares.
· The case of SEBI was premised on two important propositions: (i) there existed a close relationship between the appellant (ii) based on the circumstantial evidence (trading pattern and timing of the trading) and based on that Securities Appellate Tribunal passed order identifying insider trading and penalising the involved parties accordingly. The same was challenged by the appellant.
· The Supreme Court emphasized that proving communication of UPSI requires direct evidence like letters, emails, or witness testimony. Simply assuming communication occurred because of a close relationship between the parties is not enough.
· On facts, held there was no correlation between the UPSI, and the sale of shares undertaken by the appellants. Further in the absence of any material available records to show frequent communication between the parties, there could have not been a presumption of communication of UPSI.
· Further it was imperative on the respondent SEBI to place on record relevant material to prove that the appellant were “immediate relatives” who were “dependent financially” on the appellant in taking decisions relating to trading in securities, however SEBI failed to do so.
· SEBI failed to prove foundation facts and to place on record that the appellants were “connected persons” as none of the appellants were financially dependent in taking decisions relating to trading in securities.
· Hence, The Supreme Court overturned the findings of SEBI and the Securities Appellate Tribunal (SAT).
Future Corporate Resources Pvt. Ltd. V. SEBI - Decision by Securities Appellate Tribunal
· SEBI investigated the scrip of Future Retail Limited (FRL/noticee) and issued show-cause notices to its promoters and promoter group. The investigation focused on trades conducted by them before announcing a scheme of arrangement to demerge FRL’s Hometown business and merge it with FabFurnish (owned by Bluerock e-Services Pvt. Ltd. - BSPL).
· Preliminary discussions for the scheme began on March 10, 2017. FRL made a corporate announcement on April 20, 2017 about the demerger, which impacted FRL’s stock price. SEBI’s investigation cantered on whether the noticees traded during the period March 10 to April 20, 2017 (the alleged UPSI period) based on unpublished price-sensitive information (UPSI).
· In Défense, noticees argued that the demerger information was "generally available" and did not constitute UPSI, as it was widely reported in the media before the trades. The noticees provided evidence showing the information was discussed in television interviews, print, and digital publications. Noticees also argued that the impact of the Hometown and FabFurnish businesses on FRL’s revenue was minimal, thus unlikely to affect the stock price.
· The Whole-Time Member (WTM) of SEBI disagreed with the noticees’ arguments, stating that the media reports were vague and did not contain specific details about the demerger (e.g., shareholder considerations). WTM ruled that FRL’s March 3, 2017 clarification to the stock exchange about ongoing discussions but no final decisions confirmed that the information was not "generally available." Consequently, penalties were imposed on the noticees, along with disgorgement of gains and a one-year ban from the securities market.
· Securities Appellate Tribunal (SAT) overturned the WTM’s order, ruling that "generally available information"is not limited to information disclosed through stock exchanges. SAT found the media reports specific enough and noted that the discussions around the Hometown and FabFurnish businesses were widely covered, including references to the demerger. SAT emphasized that media coverage of such information could render it publicly available and not UPSI, SAT held that the newspaper/media reports about the merger were sufficient to make the information generally available.
SEBI vs. Shruti Vora and Others - Decision by Supreme Court of India
· Shruti Vora was accused of circulating UPSI regarding the financial results of several companies, through WhatsApp groups.
· SEBI launched a preliminary investigation, which included a search and seizure operation on entities involved in these WhatsApp groups. They confiscated devices and documents during the operation. The investigation focused on identifying individuals who forwarded these messages containing UPSI about quarterly financial results of companies, particularly from WhatsApp.
· Shruti Vora was fined by SEBI for sending WhatsApp messages containing UPSI about the financial results of companies before their official public announcement.
· Shruti Vora argued that the "Heard on Street" (HOS) concept was widely used by traders, analysts, and institutional investors to share unsubstantiated information. She contended that such information was widely circulated by news outlets and not inherently confidential.
· On appeal by Shruti Vora and others, SAT dismissed SEBI's charges, reasoning that SEBI had failed to trace the source of the messages and was only prosecuting individuals who forwarded the information. SAT ruled that the information in question was "generally available", and therefore, did not qualify as UPSI.
· SAT held that forwarding such messages did not make individuals "insiders", as it was not proven that they knew the information was unpublished or sensitive. SAT emphasized that UPSI applies only when the recipient is aware that the information is unpublished and price sensitive. According to SAT, SEBI must prove this with a preponderance of probability.
· SAT noted that incorrect data had been forwarded by the appellants in some instances, suggesting they were unaware of the information’s sensitivity. SAT also observed that SEBI could not pinpoint the original source of the leaked information, and it might have come from public domain sources, such as brokerage firms.
· The Supreme Court upheld SAT's decision on September 26, 2022. The Court agreed with SAT’s interpretation that merely forwarding messages without knowledge of their unpublished or price-sensitive nature does not constitute insider trading.
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