SEBI Insider Trading Regulations
BY- DR. PRIYANKA TAKTAWALA
PHD, LL.M (BUSINESS LAW), PGDIB, BBA LLB (CORPORATE LAW)
(d) "connected person" means,-
(i) any person who is or has during the six months prior to the concerned act been associated with a company, directly or indirectly, in any capacity 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 between himself and the company whether temporary or permanent, that allows such person, directly or indirectly, access to unpublished price sensitive information or is reasonably expected to allow such access.
(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 immediate 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 the 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 immediate relative or banker of the company, has more than ten per cent. of the holding or interest;
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that a connected person is one who has a connection with the company that is expected to put him in possession of unpublished price sensitive information. Immediate relatives 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 not seemingly 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.
(g) "insider" means any person who is:
i) a connected person; or
ii) in possession of or having access to unpublished price sensitive information;
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 an “insider” regardless of how one came in possession of or had access to such information. Various circumstances are provided for 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 or he could not access or that his trading when in possession of such information was squarely covered by the exonerating circumstances.
(n) "unpublished price sensitive information"
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, information relating to the following: –
(i) financial results;
(ii) dividends;
(iii) change in capital structure;
(iv) mergers, de-mergers, acquisitions, delistings, disposals and expansion of business and such other transactions;
(v) changes in key managerial personnel. 6[***].
NOTE: It is intended that information relating to a company or securities, that is not generally available would be unpublished price sensitive information if it is likely to materially affect the price upon coming into the public domain. The types of matters that would ordinarily give rise to unpublished price sensitive information have been listed above to give illustrative guidance of unpublished price sensitive information.
Role of SEBI
Regulation and Framework SEBI has put in place robust regulations to curb insider trading, most notably the Prohibition of Insider Trading (PIT) Regulations, 2015. These rules:
Clearly define what constitutes insider trading and who qualifies as an insider.
Mandate companies to have internal codes of conduct to monitor and report trading by employees and connected persons.
Establish the principle of Chinese Walls to prevent the flow of UPSI within organizations.
Surveillance and Detection SEBI employs advanced tools like the Integrated Market Surveillance System (IMSS) to monitor unusual trading patterns, particularly around sensitive corporate announcements. Using big data analytics and AI-driven algorithms, SEBI can identify suspicious trades that may indicate insider trading.
Investigation Process When suspicions arise, SEBI launches detailed investigations. This includes:
◦ Scrutinizing trading data, communication logs, and financial transactions.
◦ Identifying individuals or groups with access to sensitive information.
◦ Connecting dots between leaks of UPSI and abnormal trading activities.
Enforcement and Penalties SEBI has strong enforcement powers, and its penalties for insider trading are substantial. Guilty parties may face:
Fines of up to ₹25 crore or three times the profit made, whichever is higher.
Bans from the securities market, sometimes for years.
Confiscation of illicit profits through disgorgement orders.
Criminal action in coordination with law enforcement agencies.
Education and Prevention SEBI also emphasizes awareness and training for market participants. By encouraging compliance through education, SEBI ensures a culture of ethical trading.
In recent years, SEBI has further strengthened its mechanisms:
It now monitors digital communications, such as WhatsApp messages, to track leaks of UPSI.
Enhanced whistleblower frameworks have been implemented to encourage reporting.
SEBI is leveraging blockchain and AI tools for better surveillance and enforcement.
Distinction and responsibilities of insiders and connected persons
Connected Persons (Section 2(d))
A "connected person" is any individual or entity associated with a company directly or indirectly, who has access to unpublished price-sensitive information (UPSI) due to their relationship with the company. The connection can arise from:
◦ Frequent communication with officers.
◦ Contractual, fiduciary, or employment relationships.
◦ Being a director, officer, or employee.
◦ Any temporary or permanent business relationship.
Deemed Connected Persons include:
◦ Immediate relatives of connected persons.
◦ Holding, subsidiary, or associate companies.
◦ Key financial institutions like bankers, trustees, and intermediaries.
◦ Members of boards or employees in asset management companies, stock exchanges, or mutual fund trustees.
Insiders (Section 2(g))
An "insider" is a broader category and includes:
Any connected person.
Anyone who possesses or has access to unpublished price-sensitive information (UPSI), regardless of their connection with the company.
Key Features:
Unlike "connected persons," an "insider" can include individuals who may have no formal or direct connection with the company but still have access to UPSI.
The burden of proving that they did not misuse the UPSI lies with the insider.
Key Distinction:
"Connected Persons" are defined based on their association or relationship with the company, which gives them a reasonable expectation of having access to UPSI.
"Insiders" encompass a wider group, including connected persons and any individual in possession of UPSI, irrespective of their relationship with the company.
Responsibilities of Insiders
1. Avoiding Trading While in Possession of UPSI (Regulation 4)
Insiders are prohibited from trading in securities of the company while in possession of UPSI unless they can demonstrate that:
The trade was conducted without knowledge of the UPSI.
A pre-approved trading plan was implemented under Regulation 5.
2. Non-Disclosure of UPSI (Regulation 3)
Insiders must not communicate, provide, or allow access to UPSI to any other person unless it is for legitimate purposes, performance of duties, or legal obligations.
3. Adherence to Trading Plans
If an insider adopts a trading plan, it must be approved by the compliance officer and cannot be modified or deviated from once approved.
4. Maintenance of Confidentiality
Insiders must handle UPSI responsibly and ensure it is not leaked or misused.
5. Disclosures of Trades (Regulation 6 & 7)
Insiders must disclose their trading activities as per the regulations, including:
Immediate relatives' transactions.
Trades above specified thresholds (e.g., ₹10 lakh in value) within two trading days.
6. Proving Innocence
In case of allegations, the insider must demonstrate that they have not misused UPSI or violated the regulations.
Responsibilities of Connected Persons
1. Prevention of Insider Trading
Connected persons are presumed to have access to UPSI. They must refrain from:
Using UPSI for personal gain.
Sharing UPSI with others unless for legitimate purposes.
2. Disclosure of Trades
Connected persons must disclose their holdings and trades if required by the company (Regulation 7(3)).
3. Adherence to Codes of Conduct
Connected persons must follow the company’s Code of Conduct for trading in securities and ensure compliance with SEBI's minimum standards, as specified in Schedule C.
4. Maintenance of Confidentiality
They must safeguard any UPSI they have access to and ensure that no information is leaked, even inadvertently.
5. Burden of Proof
Connected persons bear the burden of proving that they did not possess UPSI at the time of trading in case of investigations.
Unpublished Price-Sensitive Information
Unpublished Price-Sensitive Information (UPSI) includes any material information about a company that is not publicly available but could impact investor decisions and stock prices. It is crucial to safeguard UPSI to prevent its misuse and ensure fair trading practices in the securities market. By strictly regulating the disclosure and handling of UPSI, SEBI aims to maintain the integrity of financial markets and protect the interests of all investors.
1. Financial Results
Information related to the company’s financial performance before its official disclosure can significantly influence the stock price. Examples include:
Quarterly earnings reports indicating a profit or loss.
Annual financial statements revealing significant changes in revenue or profitability.
Adjustments or restatements of previously reported financial results.
Example: If a company has generated record-breaking revenue for the quarter, but this information is disclosed prematurely to select individuals, it constitutes UPSI.
2. Dividends
The declaration or non-declaration of dividends is a key indicator of a company’s financial health. Examples include:
Declaration of interim or final dividends.
A significant change in dividend payout policy (e.g., an increase or suspension).
A special one-time dividend announcement.
Example: If a company decides to issue a high dividend due to surplus cash reserves, but this information is shared selectively before public disclosure, it becomes UPSI.
3. Changes in Capital Structure
Changes in the capital structure of the company can directly impact share prices. Examples include:
Issue of new shares through public offerings, rights issues, or preferential allotments.
Stock splits, reverse splits, or consolidations.
Buyback of shares.
Conversion of debentures or bonds into equity shares.
Example: If a company plans a buyback to boost its share price but discloses this plan only to certain investors, this is UPSI.
Example: If a company is in advanced discussions to acquire a competitor, and this information leaks before a formal announcement, it constitutes UPSI.
4. Mergers, Acquisitions, and Restructuring
Corporate actions like mergers, acquisitions, de-mergers, or business restructuring often have a significant impact on stock prices. Examples include:
Details of an impending merger or acquisition.
Plans for de-merging a business unit.
Sale of significant assets or subsidiaries.
Entry into a joint venture or strategic partnership.
5. Changes in Key Managerial Personnel (KMP)
Leadership changes within a company can greatly influence investor sentiment. Examples include:
Appointment, resignation, or removal of the CEO, CFO, or other key executives.
Sudden death or retirement of senior management.
Major reshuffling in the board of directors.
Example: The resignation of a high-profile CEO due to unforeseen circumstances, if not disclosed publicly but known to select insiders, qualifies as UPSI.
is shared only with certain investors prior to public disclosure, it is UPSI.
6. Material Events and Business Expansion
Events that indicate significant growth or challenges in a business can be classified as UPSI. Examples include:
Expansion into new markets or geographies.
Launch of a new product or service expected to drive significant revenue growth.
Closing or downsizing of an operational facility.
Securing a major contract or tender.
Example: If a pharmaceutical company secures FDA approval for a breakthrough drug, but this information
7. Delisting or Suspension of Securities
Actions involving the delisting of the company’s shares or suspension of trading qualify as UPSI. Examples include:
Voluntary delisting from stock exchanges.
Suspension of trading due to regulatory or financial issues.
Example: If a company decides to delist from the stock market to go private and informs certain investors in advance, this is UPSI.
8. Corporate Defaults or Bankruptcy
Financial distress and potential defaults can significantly impact stock prices. Examples include:
Non-payment of loans or debt defaults.
Filing for bankruptcy protection or insolvency proceedings.
Example: If a company is on the verge of defaulting on its bond obligations, but this information is not disclosed publicly, it constitutes UPSI.
9. Regulatory Approvals or Actions
Regulatory developments often have material implications for a company. Examples include:
Approval or rejection of a significant license or regulatory application.
Pending or concluded investigations by regulatory authorities.
Fines, penalties, or sanctions imposed by regulators.
Example: If a mining company secures approval for a large-scale project, but the information is selectively leaked, it qualifies as UPSI.
10. Legal Developments
Legal matters that can materially affect a company’s performance or reputation are also considered UPSI. Examples include:
Outcome of high-profile lawsuits or arbitration cases.
Settlements or damages awarded in litigation.
Regulatory changes impacting the company’s operations.
Example: If a technology company wins a billion-dollar patent lawsuit but this news is not immediately disclosed to the public, it is UPSI.
11. Changes in Credit Ratings
Credit ratings influence investor perceptions and borrowing costs. Examples include:
Upgrades or downgrades by credit rating agencies.
Placement on a watchlist for a potential downgrade or upgrade.
Example: If a company’s credit rating is downgraded, and this information is selectively shared with lenders before public disclosure, it qualifies as UPSI.
12. Strategic Investments or Disinvestments
Decisions related to acquisitions or divestitures of stakes in other companies or ventures. Examples include:
Acquiring or selling stakes in subsidiaries or associate companies.
Investments in new technologies or start-ups.
Example: If a company decides to sell its controlling stake in a high-performing subsidiary and the information is not yet public, it constitutes UPSI.
13. Agreements and Contracts
Entering or terminating significant business agreements. Examples include:
Securing a major supply or distribution agreement.
Early termination of a critical contract with a client or supplier.
Example: If a company secures a billion-dollar supply agreement with a government agency but this is not disclosed publicly, it is UPSI.
Key Characteristics of UPSI
1. Non-Public Nature
UPSI, by definition, refers to information that is not generally available to the public.
Information becomes "generally available" only when it is disseminated to the public on a non-discriminatory basis. For example:
Information published on stock exchanges.
Press releases issued to the public.
Updates on the company's official website.
Until information is disclosed through these channels, it is considered UPSI.
Example: Quarterly financial results are UPSI until they are officially announced by the company via a stock exchange filing or press release.
2. Potential to Materially Impact Stock Price
For information to qualify as UPSI, it must be material, i.e., it should have the potential to significantly influence:
The stock price.
Investor decision-making.
Materiality is assessed based on how significantly the information would alter the valuation or perceived risk of a company's securities.
Example: An announcement of a merger with a competitor or a default on loan repayments could cause a significant movement in stock prices, making it UPSI before public disclosure.
3. Broad Scope
UPSI is not limited to financial data. It includes any information that could impact a company's stock price. Examples include:
Business expansions or closures.
Mergers and acquisitions.
Key managerial changes.
Regulatory approvals or penalties.
This broad scope ensures that companies and insiders cannot circumvent regulations by claiming certain critical information does not qualify as UPSI.
4. Subjective Nature
While SEBI provides an illustrative list of UPSI (e.g., financial results, dividend decisions, mergers, etc.), the determination of what constitutes UPSI can often be subjective.
Companies must assess whether specific information has the potential to influence investor decisions or the market price of securities.
Challenge: Preliminary discussions about a merger may not immediately qualify as UPSI
but become so once the discussions reach an advanced stage with clear implications.
5. Relevance Across Time
UPSI is time-sensitive and remains classified as such until it becomes generally available.
Information disclosed prematurely or selectively before public dissemination violates SEBI's regulations.
Example: If quarterly financial results are leaked even hours before their official announcement, it is considered a breach of UPSI handling.
6. Legal and Regulatory Implications
UPSI must be handled with utmost care to avoid: Insider trading. Market manipulation.
SEBI imposes strict legal consequences for the misuse or improper disclosure of UPSI.
Penalties:
Insider trading based on UPSI can attract fines of up to ₹25 crore or three times the illicit gains, whichever is higher.
Companies and insiders can also face debarment from accessing the securities market.
7. Dynamic Nature
UPSI is dynamic; the same piece of information can change its status over time:
Pre-Disclosure: Before formal public disclosure, it is UPSI.
Post-Disclosure: After being made public, it ceases to be UPSI and becomes "generally available information."
Example: The announcement of an upcoming rights issue is UPSI until officially disclosed to the stock exchange. Once disclosed, it becomes public information.
8. Necessity for Confidentiality
Confidentiality of UPSI is critical to ensure that:
All investors have access to the same information simultaneously.
No individual or group gains an unfair advantage by trading on inside information.
Companies are mandated to maintain structured digital databases for tracking UPSI access and ensure it is shared only for legitimate purposes.
Best Practices:
Use of confidentiality agreements when sharing UPSI with external parties.
Implementing "Chinese Walls" within organizations to segregate teams with access to UPSI from other employees.
9. Restrictions on Sharing and Use
UPSI can only be shared for:
Legitimate purposes (e.g., due diligence for mergers).
Performance of duties (e.g., sharing with auditors).
Legal obligations (e.g., disclosures required by law).
Any sharing beyond these purposes constitutes a violation.
Example: If UPSI is shared with a potential investor to influence their decision to invest in the company, it violates SEBI regulations.
possess the information at the time of trading).
10. Role in Insider Trading
UPSI is the cornerstone of insider trading regulations. Insiders or connected persons possessing UPSI must refrain from:
Trading in securities based on this information.
Sharing it with others unless it falls under legitimate purposes.
Burden of Proof:
Insiders accused of trading based on UPSI must prove their innocence (e.g., proving they did not
Handling and Disclosure of UPSI
1. Legitimate Sharing of UPSI
UPSI can only be shared for legitimate purposes as specified by SEBI regulations. Legitimate purposes are outlined to balance operational needs while safeguarding sensitive information.
UPSI cannot be shared to evade the prohibitions of insider trading regulations.
Sharing UPSI for speculative or personal gain is strictly forbidden.
Performance of Duties: Sharing UPSI with employees or teams within the company who require it for operational purposes.
Discharge of Legal Obligations: Sharing with regulators, auditors, or other legal authorities.
Transactions in the Ordinary Course of Business:
Sharing with partners, collaborators, legal advisors, merchant bankers, auditors, insolvency professionals, or consultants.
Examples include:
Due diligence for mergers, acquisitions, or investment deals.
Contract negotiations or partnerships.
Prohibition:
2. Structured Digital Database
To maintain transparency and traceability, companies are required to maintain a structured digital database for UPSI.
Key Features of the Database:
Details of the nature of UPSI shared.
Names and identifiers (e.g., PAN) of individuals/entities with whom UPSI is shared.
Time-stamped records for access and sharing.
Internal controls to ensure that the database is tamper-proof.
Retention:
The database must be preserved for a minimum of 8 years.
If an investigation or legal proceeding arises, records must be retained until the completion of such proceedings.
3. Confidentiality of UPSI
UPSI must be handled with utmost confidentiality to prevent unauthorized access or leakage.
Best Practices:
Chinese Walls:
Establish barriers between departments or teams to restrict the flow of UPSI (e.g., separating the M&A team from the trading desk).
Limited Access:
UPSI should only be shared on a need-to-know basis with authorized personnel.
Confidentiality Agreements:
When UPSI is shared with external entities (e.g., legal advisors or consultants), they must sign confidentiality agreements to ensure compliance.
Internal Awareness:
Training programs for employees to educate them about UPSI and its handling.
4. Code of Fair Disclosure
Companies whose securities are listed must have a Code of Fair Disclosure, as per Regulation 8.
Key Requirements:
The company’s board of directors must publish the code on its official website.
The code must cover principles like: Timely and adequate disclosure of UPSI. Uniform and universal dissemination of information. Prevention of selective disclosure.
Amendments and Intimation:
Any changes to the Code of Fair Disclosure must be promptly notified to stock exchanges where the company’s securities are listed.
5. Public Disclosure of UPSI
When a company decides to disclose UPSI, it must ensure that the information is made publicly available in a non-discriminatory manner.
Modes of Disclosure:
Filing with stock exchanges.
Press releases or investor presentations.
Updates on the company’s official website.
Timing:
UPSI must be disclosed to the public before insiders or connected persons can trade in the company’s securities.
Example: Quarterly financial results must be disclosed publicly before board members or employees are allowed to trade.
Exception:
In certain cases, UPSI may be shared selectively for legitimate purposes, but the recipient must be treated as an "insider" and adhere to confidentiality.
6. Whistleblower Mechanisms
SEBI regulations provide for the protection of whistleblowers who report misuse of UPSI.
Whistleblower Protections: Protection against retaliation, such as termination or harassment.
Confidentiality of identity and disclosures.
Eligibility for rewards under SEBI’s whistleblower framework.
Prohibition on Trading While in Possession of UPSI
General Prohibition:
◦ Insiders (persons with access to UPSI) are prohibited from trading in the securities of a company if they are in possession of UPSI at the time of the trade.
◦ The rationale is to prevent individuals from using confidential, non-public information to gain an unfair advantage or profit in securities trading.
Exceptions
to the Prohibition:
◦ Pre-Approved Trading Plans:
◦ Insiders may trade while in possession of UPSI if their trades are conducted under a pre-approved trading plan that adheres to SEBI’s requirements.
◦ Demonstrating Non-Use of UPSI:
◦ If accused of insider trading, the insider has the burden of proving that the UPSI in their possession was not used to influence their trading decision.
◦ For example, an insider may demonstrate that the trade was based on public information or was planned and executed before the UPSI was obtained.
Burden of Proof:
◦ In cases of allegations, it is presumed that the insider used the UPSI for trading. The insider must provide evidence to rebut this presumption and establish their innocence.
Trading Plan (Regulation 5)
SEBI introduced the concept of trading plans to allow insiders who are perpetually in possession of UPSI to engage in trading in a compliant manner. This ensures a balance between insider trading restrictions and the need for insiders to manage their investments.
Key Features of a Trading Plan:
Pre-Approval by Compliance Officer:
◦ The trading plan must be submitted to the company’s compliance officer for review and approval.
◦ The compliance officer will ensure that the plan does not violate insider trading regulations.
Public Disclosure of the Plan:
◦ Once approved, the trading plan must be disclosed publicly through stock exchanges where the securities are listed.
◦ This public disclosure ensures transparency and eliminates any perception of unfair advantage.
Cooling-Off Period:
◦ The trading plan cannot be implemented immediately after its approval.
◦ A "cooling-off" period of at least six months is required between the public disclosure of the plan and the execution of trades.
◦ This period ensures that the insider’s UPSI becomes "stale" or irrelevant by the time trading begins.
Irrevocability:
◦ Once the trading plan is approved, the insider cannot modify or withdraw it.
◦ This prevents misuse or selective trading based on changing market conditions or new information.
Minimum Duration of the Plan:
◦ The trading plan must cover a period of at least 12 months.
◦ This ensures that the plan is structured and not aimed at short-term gains or speculative trading.
Non-Overlapping Plans:
◦ Insiders cannot have multiple trading plans overlapping in the same time period.
◦ This avoids ambiguity and ensures that the trades are in line with the stated plan.
Details of the Plan:
◦ The trading plan must specify:
◦ The value or number of securities to be traded.
◦ The nature of the trade (buy or sell).
◦ The specific dates or time intervals when the trades will occur.
No Trading During Sensitive Periods:
◦ The trading plan must exclude periods such as:
◦ 20 trading days prior to the end of a financial period.
◦ 2 trading days after the disclosure of financial results.
◦ These blackout periods ensure that trades are not executed during times of high market sensitivity.
Role of Compliance Officer and Code of Conduct
Role of the Compliance Officer
Let’s start by talking about the Compliance Officer. A Compliance Officer is like the guardian of a company’s insider trading policy. Their role is multifaceted and critical to maintaining a robust compliance culture. Let’s dive into their responsibilities one by one:
1. Policy Development and Implementation
A Compliance Officer is responsible for creating and implementing the Code of Conduct for the company.
This policy defines the rules and procedures for handling Unpublished Price-Sensitive Information (UPSI) and trading in securities by employees and insiders.
The officer ensures that the company complies not just with SEBI regulations but also with any specific internal guidelines the company may have.
Example: If an organization plans to adopt a stricter trading window policy beyond SEBI’s mandate, it is the Compliance Officer who ensures its implementation.
2. Monitoring Insider Trading
A key responsibility is to monitor trading activities of insiders, connected persons, and designated employees.
The officer uses tools and processes to detect any suspicious patterns that may indicate misuse of UPSI.
Example: If a senior executive trades securities just before the announcement of quarterly results, the Compliance Officer would investigate to ensure there was no violation.
3. Approval of Trading Plans
The Compliance Officer reviews and approves trading plans submitted by insiders.
They ensure that these plans adhere to SEBI’s requirements, such as a cooling-off period and public disclosure.
Why is this important? It allows insiders, who are perpetually in possession of UPSI, to trade in a structured, transparent manner.
4. Handling UPSI
Compliance Officers are tasked with maintaining a structured digital database to record: The nature of UPSI.
The names of individuals or entities with whom UPSI is shared.
Time-stamped logs of when the information was accessed or shared.
This database is crucial for tracing leaks and ensuring accountability.
Example: If UPSI is leaked to the media, the Compliance Officer can identify the source by auditing the database.
5. Pre-Clearance of Trades
Insiders and designated employees often need pre-clearance before executing trades. The Compliance Officer evaluates these requests to ensure the individual doesn’t have access to UPSI at the time of the trade.
Example: If an employee requests to sell shares during a blackout period, the Compliance Officer would reject the request to avoid regulatory violations.
6. Training and Awareness
Educating employees and stakeholders is an ongoing task. Compliance Officers conduct training sessions to ensure that everyone understands insider trading laws, the Code of Conduct, and their individual responsibilities.
Example: A workshop explaining the consequences of sharing UPSI on social media could prevent accidental violations.
7. Investigating Violations
The Compliance Officer is the first point of contact in case of suspected violations of insider trading regulations. They conduct detailed investigations, collect evidence, and report findings to the board or SEBI if necessary.
Example: If a whistleblower reports that an employee traded on UPSI, the Compliance Officer investigates and takes appropriate action.
8. Coordination with Regulatory Authorities
Liaising with SEBI and stock exchanges is another vital responsibility. The Compliance Officer provides reports, data, and evidence during regulatory audits or investigations.
Example: In the case of a major corporate event like a merger, the Compliance Officer
ensures all disclosures to SEBI are accurate and timely.
Code of Conduct
The Code of Conduct is the backbone of any company’s insider trading framework. It sets the rules and procedures for handling UPSI, monitoring trades, and promoting ethical practices. Let’s break down its critical components:
1. Protection of UPSI
The Code of Conduct must establish clear guidelines for safeguarding UPSI.
Need-to-Know Principle: Only individuals who require UPSI to perform their duties should have access to it.
Confidentiality protocols must also be defined. For example:
Avoiding casual discussions of UPSI in public places like elevators or cafeterias.
Encrypting sensitive emails or documents.
2. Trading Window Restrictions
The Code defines trading windows, which are periods during which employees and insiders can trade securities.
It also specifies blackout periods when trading is prohibited, such as:
20 days before the end of a financial period.
2 days after the announcement of financial results.
Example: If a company plans to launch a significant product, trading may be restricted until the official announcement.
3. Pre-Clearance of Trades
Employees and insiders must seek pre-clearance for trades that exceed certain thresholds.
The Code specifies the timeline within which approved trades must be executed—typically 7 days.
4. Trading Plans
The Code allows for pre-approved trading plans to enable insiders to trade without being accused of misuse.
Such plans must include: The number of securities to be traded. The nature of the trade (buy/sell).
Specific time intervals or dates.
5. Whistleblower Mechanism
The Code must provide a mechanism for employees and stakeholders to report suspected violations.
Whistleblower protections include: Confidentiality of identity.
Protection from retaliation.
6. Disclosures and Reporting
The Code requires:
Initial disclosures: When an individual becomes an insider or connected person.
Event-based disclosures: For trades exceeding a certain value (e.g., ₹10 lakh).
Periodic disclosures: To track holdings of insiders and connected persons.
7. Penalties for Non-Compliance
The Code must clearly state the consequences of violating SEBI regulations or internal policies. Penalties can include: Suspension or termination. Monetary fines.
Reporting the individual to SEBI.
8. Continuous Updates
The Code of Conduct must be updated periodically to reflect changes in SEBI regulations or corporate policies.
Methods Used by SEBI to Detect Insider Trading
1. Advanced Surveillance Systems
SEBI uses sophisticated surveillance technologies to monitor trading activities and identify unusual patterns that may indicate insider trading.
Integrated Market Surveillance System (IMSS)
IMSS analyzes trading data from stock exchanges in real-time.
It monitors large, sudden price movements, unusual trading volumes, and other irregularities.
The system flags suspicious trades for further investigation.
Data Warehousing and Business Intelligence Systems (DWBIS)
SEBI uses DWBIS to process large volumes of historical and real-time trading data.
This system enables detailed analysis, pattern recognition, and detection of anomalies across different securities.
Use of Artificial Intelligence (AI) and Machine Learning (ML)
AI and ML algorithms analyze historical data to identify patterns consistent with insider trading.
Predictive analytics help SEBI anticipate potential violations by monitoring behaviors such as trading around price-sensitive announcements.
2. Pattern Analysis
SEBI conducts detailed analyses of trading patterns to detect insider trading. This includes:
Identifying large trades or sudden market activity near corporate announcements, such as mergers, earnings releases, or dividend declarations.
Comparing the timing of trades with the timeline of Unpublished PriceSensitive Information (UPSI) events.
Analyzing trades across multiple accounts to uncover coordinated activities.
3. Monitoring of Key Individuals
SEBI keeps a close watch on the trading activities of insiders and connected persons within a company:
Directors and Key Management Personnel (KMP): SEBI monitors their disclosures and trading activities.
Immediate Relatives: Trades conducted by family members of insiders are also scrutinized.
Frequent Traders: Individuals or entities frequently trading in a company’s securities before major announcements are flagged.
4. Whistleblower Mechanisms
SEBI encourages whistleblowers to report suspected cases of insider trading under its Informant Mechanism:
Individuals can anonymously submit information about violations.
Whistleblowers are incentivized with monetary rewards (up to ₹1 crore) for providing actionable information.
SEBI ensures the confidentiality of whistleblower identities to promote reporting.
5. Tracking UPSI Leaks
SEBI investigates cases of UPSI leaks by:
Identifying the origin of leaks using structured digital databases maintained by companies.
Reviewing internal controls and confidentiality agreements within organizations.
Investigating the flow of UPSI among employees, advisors, consultants, and other connected persons.
6. Analyzing Social and Digital Media
SEBI monitors online platforms and social media channels to track potential leaks of UPSI:
Platforms like WhatsApp, Telegram, and email chains are reviewed for unauthorized sharing of sensitive information.
Example: SEBI has investigated cases of leaked financial results circulating on WhatsApp groups before official announcements.
7. Cross-Market Surveillance
Insider trading schemes often span across multiple securities or markets. SEBI:
Coordinates with stock exchanges to identify cross-market violations.
Monitors trading in derivatives and cash markets simultaneously for unusual correlations.
Collaborates with international regulators to track cross-border activities.
8. Investigations Based on Tips and Complaints
SEBI receives tips, complaints, or allegations of insider trading from:
Investors.
Media reports.
Other regulatory bodies.
These complaints are thoroughly investigated, often leading to the identification of broader violations.
9. Data Analytics on Bulk and Block Deals
SEBI scrutinizes bulk and block trades, as they often involve significant stakes in a company:
Anomalous timing of bulk trades around corporate events is flagged.
Trades conducted by large institutional investors are analyzed for connections to UPSI.
10. Regulatory Filings and Disclosures
SEBI reviews mandatory disclosures by insiders, such as:
Trades exceeding specified thresholds.
Transactions by promoters, directors, and KMPs.
Any non-compliance with disclosure requirements triggers an investigation.
11. Intermediary Audits
SEBI audits intermediaries, such as brokers and depositories, to trace:
Suspicious trading accounts.
The flow of funds and securities.
Links between multiple accounts involved in suspicious trades.
12. Coordination with Exchanges and Depositories
SEBI works closely with stock exchanges and depositories to:
Obtain real-time trading data.
Analyze account activities linked to unusual market behavior.
Access detailed records, such as account holder details and transaction histories.
13. Forensic Audits
SEBI orders forensic audits in complex cases to:
Trace financial transactions.
Identify connections between multiple parties.
Investigate potential manipulation of financial reports or disclosures.
The WhatsApp Leak Case (2017): A Comprehensive Analysis
The WhatsApp leak case of 2017 is one of India’s most significant insider trading investigations. It highlighted the role of technology in insider trading and SEBI’s commitment to addressing misuse of Unpublished Price-Sensitive Information (UPSI). The case involved the unauthorized sharing of sensitive financial data through WhatsApp groups before its official announcement.
Background of the Case
◦ In November 2017, media reports revealed that sensitive financial results of several prominent companies, such as Axis Bank, HDFC Bank, and Wipro, were circulating on WhatsApp before being officially announced.
◦ These messages included precise details of quarterly earnings figures, profit margins, and revenue projections.
◦ The leaked information was highly specific and closely matched the companies' eventual official disclosures to stock exchanges.
◦ The messages were shared across private WhatsApp groups comprising traders, brokers, analysts, and other market participants.
SEBI’s Investigation
◦ SEBI initiated an investigation into the leakage of UPSI under its Prohibition of Insider Trading (PIT) Regulations, 2015.
◦ The regulator aimed to trace the origin of the leaks, identify the individuals involved, and determine if insider trading had occurred.
◦ SEBI analyzed the content of the WhatsApp messages and compared it with the financial results officially declared by the companies.
◦ Forensic audits were conducted to trace the flow of information within the companies and among market participants.
◦ SEBI used advanced digital forensic tools to analyze electronic devices, email records, and messaging apps.
◦ Structured digital databases maintained by the companies were examined to determine who had
access to UPSI and whether proper controls were in place.
◦ SEBI questioned brokers, analysts, employees of listed companies, and other connected persons to trace the chain of information sharing.
◦ Evidence revealed that certain insiders had access to UPSI and may have shared it with external parties.
Key Findings
◦ The financial results of at least 12 companies, including Tata Motors, Ambuja Cements, and Mindtree, were leaked on WhatsApp.
◦ In some cases, the leaked numbers were accurate or marginally different from the officially declared figures.
◦ Many companies failed to maintain proper records of who accessed UPSI.
◦ In some cases, UPSI was shared informally within the organization or with external advisors, leading to untraceable leaks.
◦ The leaked information spread rapidly through WhatsApp groups, making it challenging to pinpoint the original source.
Actions Taken by SEBI
◦ SEBI imposed penalties on individuals and entities involved in the WhatsApp leaks.
◦ Brokers and traders found guilty of trading based on UPSI faced fines ranging from ₹5 lakh to ₹10 lakh.
◦ SEBI mandated stricter adherence to insider trading regulations, including the maintenance of structured digital databases to track the flow of UPSI.
◦ Listed companies were directed to enhance their internal controls, enforce robust Codes of Conduct, and implement stringent measures to safeguard UPSI.
◦ SEBI emphasized the use of whistleblower mechanisms to report insider trading violations.
