Understanding Insider Trading and Governance in India

The SEBI (Prohibition of Insider Trading) Regulations, 2015, serves as the principal legal instrument to curb insider trading in India. These regulations were enacted to ensure transparency and equity in the securities market by restricting the misuse of Unpublished Price Sensitive Information (UPSI) by individuals who have privileged access to it.

1. Key Provisions of the Regulations:
2. Regulation 2 defines critical terms such as insider, connected person, and UPSI. An insider includes anyone who is in possession of or has access to UPSI, by virtue of their connection with the company (e.g., employees, directors, auditors, legal advisors).
3. Regulation 3 prohibits the communication or procurement of UPSI unless it is for legitimate purposes, performance of duties, or discharge of legal obligations. This is central to preventing information asymmetry and maintaining a level playing field.
4. Regulation 4 addresses trading in securities when in possession of UPSI. It establishes that mere possession of such information is sufficient to presume insider trading, unless contrary evidence is provided.
5. Regulation 7 mandates disclosures by insiders, promoters, and employees regarding their shareholding and any trading in securities, thereby promoting accountability and early detection of suspicious trades.
6. Regulation 9 requires listed entities to formulate a Code of Conduct to regulate, monitor, and report trading by employees and connected persons. This internal framework is key to integrating regulatory obligations within corporate policies.
7. Regulation 9A mandates companies to maintain a structured digital database containing details of persons with whom UPSI is shared. This helps SEBI in tracing the origin of any information leak and improving traceability of potential violations.

Amendment to SEBI (Prohibition of Insider Trading) Regulations, 2015 in the month of December 2024

The amendment in December 2024 to SEBI’s Insider Trading Regulations has strengthened the regulatory framework by expanding the definition of a “connected person.” The revised scope now explicitly includes intermediaries such as analysts, consultants, and service providers who may not be direct employees but can potentially access unpublished price-sensitive information (UPSI) through their professional engagement with listed entities.

• Insiders of the Company

Insiders in the companies means not only those persons who are directly connected with the company because of their position but those persons who are connected to or deemed to be connected with the company and have reasonable connection with “Unpublished price sensitive information” of the company. An “Insider” is defined as anyone who is a Connected Person or has access to UPSI.

A “Connected Person” includes relatives such as spouse, siblings and lineal descendants, partners or employees in a Connected Person’s partnership, body corporates under the Connected Person’s influence, and members of a Hindu Undivided Family.

The following persons come under the ambit of insiders:

• Merchant Banker, Debenture Trustee, Stockbrokers;
• Accountancy firms, Law firms and financial Consultants;
• Subsidiary of a company and relatives of connected persons;
• Asset Management Company;
• Shareholders and employees of the company;
• Independent Directors/Non-executive directors, it includes a person who is a person connected six months prior to an act of insider trading;
• Registrar and Share Transfer Agents;
• Portfolio Manager, Investment advisers;
• Trustee and Investment Companies.
• Any others who might not be directly employed by the company but have a role that reasonably gives them access to UPSI through professional, fiduciary, or contractual relationships are also included.

1. Unpublished Price Sensitive Information

It is the information which is with the Company and is accessible to insider but has not been made public. In other words, “the price sensitive information means any information which relates directly or indirectly to a company and which if published is likely to materially affect the price of securities of company”. This information will be having impact on the securities prices and leads to fluctuation in the secondary markets. The “unpublished price sensitive information” which is not in the public domain or the securities market is not aware of it. The person who is having this “unpublished price sensitive information” may use the same for gaining the profits or to avert the losses according to the situation. The scope of such information is having highest sensitive value in the course of the administration of the company and affects directly or indirectly on the prices of the securities.

The scope of such information may include:

• Business development and reconstruction of the company.
• Information relating to existing and future contracts.
• Legal consequences and future litigation of the company.
• Proposed change in the structure of the share capital of the Company.
• Change in the board of directors and change in the senior officials.
• Information on Dividend declaration.
• Information relating to the quarterly and yearly results of the company.
• Issue of securities or buy-back of securities of the Company
• Information relating to Inorganic reconstruction such as Amalgamation or Mergers or Take-over etc.
• Information relating to part or whole winding up of the company.
• Any significant changes in policies, plans or operations of the Company

Additionally, the amendment reinforces the presumption of possession, a regulatory assumption that any insider who engages in trading is presumed to have had access to UPSI. This shift places a greater burden of proof on the accused to establish their innocence, thereby aligning India’s enforcement standards more closely with international practices. Collectively, these changes underscore SEBI’s intent to build a regulatory regime that is both preventive and punitive, with the overarching goal of safeguarding market integrity and promoting investor confidence.

• Responsibilities of a Compliance Officer under SEBI (PIT) Regulations, 2015

The main obligations of a Compliance Officer are as below:

• 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 these regulations
• The Compliance Officer must review the trading plans submitted by designated persons. For doing so, he can ask them to declare that he does not have UPSI or that he must ensure that the UPSI in his possession becomes generally available before he commences his trades.
• All information shall be managed within the organisation on a need-to-know basis, and no UPSI shall be conveyed to any person except in furtherance of legal duties, subject to the Chinese wall procedures.
• When the trading window is open, trading by designated persons shall be subject to pre-clearance by the compliance officer if the value of the proposed trades is above such thresholds.
• The timing for re-opening of the trading window shall be determined by the Compliance Officer, upon considering several factors, including the UPSI becoming generally available and being capable of assimilation by the market, which shall not be earlier than forty-eight hours after it becomes generally available.
• Before approving any trades, the compliance officer shall 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 such a declaration is capable of being inaccurate. The compliance officer shall confidentially keep a list of certain securities as a “restricted list”, which shall be the basis for reviewing applications for pre-clearance of trades.

• Potential liabilities of Compliance Officer

The Compliance Officer plays a crucial role in ensuring adherence to insider trading norms, particularly regarding trading window closure, maintenance of the Structured Digital Database (SDD), verification of disclosures, and monitoring trades by designated persons. A Compliance Officer is expected to exercise prudent diligence rather than possess perfect foresight and cannot be held liable where violations occur without his knowledge or despite following established procedures in good faith. However, failure to maintain a real-time and tamper-proof SDD, delays in filing compliance certificates, or lack of due diligence in granting pre-clearance for trades may attract regulatory action. While the Compliance Officer is not responsible for re-auditing board-approved disclosures, he must effectively assess whether information constitutes UPSI and ensure compliance with trading restrictions, including contra trade rules. Overall, the liability of a Compliance Officer depends on the presence or absence of negligence, diligence, and adherence to regulatory procedures under the PIT Regulations.

• Implications of Insider Trading for Board of Directors (Including Independent Non-Executive Director) of the company:

Directors are considered insiders under the Regulations because they are, by virtue of their positions, privy to sensitive information that can influence market behaviour. SEBI is continuously monitoring price movements of traded shares and the trades being affected, which means that directors are at a higher risk of being scrutinized for insider trading violations. Therefore, directors must exercise extreme caution in all their dealings, both within and outside the boardroom.

It is not enough for board members to avoid trading on UPSI themselves. They must also ensure that they are not inadvertently sharing price sensitive information with others who might use it improperly. The inclusive nature of Regulation 2(1)(d)(ii) means that even conversations with family members, friends, or professional advisors can potentially lead to insider trading violations if UPSI is disclosed and forms the basis of trades effected by “connected persons.”

Boards must also enforce confidentiality agreements and maintain a structured digital database recording details of UPSI shared, identities of recipients, and timestamps, preserved for at least eight years for compliance and audit purposes.

Board members must establish clear policies and regularly update a code of conduct to govern the handling of UPSI. These policies should define strict protocols for information sharing and mandate protective measures.

Board members must avoid conflicts of interest by ensuring their roles as leaders and investors do not overlap. They should not engage in trading that could appear to exploit access to UPSI and must keep personal financial interests separate from fiduciary duties. To prevent conflicts, they should adopt compliant personal trading plans and seek prior approval from the company’s compliance department before executing trades.

Board members must actively monitor trading activities and report suspicious behaviour to prevent insider trading. Regular audits and reviews of trading patterns among those with access to UPSI are essential for early detection of violations. Boards should also establish a strong whistle-blower policy to encourage reporting without fear of retaliation. Immediate investigation and corrective action must follow any potential breaches.

Under Regulation, the insider should adhere to the trading plan. All the trading plan are attached with certain conditions like minimum cool-off period of 120 calendar days between the public disclosure of the trading plan and the commencement of trading, once approved trading plan is Irrevocable in Nature, there can’t be two different trading plans at the same time. The trading plan must explicitly state the value of trades or number of securities to be traded, the nature of the trade (buy or sell), and the specific dates/intervals for execution. The compliance officer should notify the approved plan to the stock exchanges where the securities are listed.

• Consequences for Violation of Insider Trading:

Under the SEBI Act, 1992, insider trading is addressed primarily through Section 15G,13 which prescribes stringent penalties for those found guilty. The provision allows for a monetary penalty of up to ₹25 crore or three times the amount of profits made through insider trading, whichever is higher. In more severe instances, the Act also permits criminal prosecution, which may result in imprisonment of up to five years.

• Governance Framework

SEBI’s enforcement against insider trading has evolved significantly through landmark cases, stronger regulations, and technology-driven surveillance mechanisms. Cases such as Rakesh Agrawal v. SEBI established the principle of strict liability, while matters like Hindustan Lever, Satyam Computers, PC Jeweller, and IndusInd Bank highlighted SEBI’s increasing focus on corporate governance and real-time market monitoring.

The introduction of tools like the Structured Digital Database (SDD) has further strengthened the tracing of unpublished price-sensitive information (UPSI). Although SEBI has become more proactive and assertive in pursuing insider trading violations, concerns remain regarding low conviction rates, delayed adjudication, and the frequent use of settlement mechanisms, which may reduce the overall deterrent effect of enforcement actions.

Further enforcement of mandatory training for employees and connected persons is required to ensure awareness of obligations under the Regulations. By fostering a culture of compliance and vigilance, organisations can significantly reduce the risk of insider trading and uphold ethical standards and protect the organisation from severe insider trading consequences. Enforcement of strict compliance, implementation of strong internal policies, monitoring trading activities, and prevent conflicts of interest shall ensure good governance

Ignorance or complacency is no defence, as violations carry serious consequences for careers and reputations. A commitment to ethical governance is essential to maintain trust among shareholders, investors, and the public. Insider trading strikes at the very core of market integrity and investor confidence.