Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015

The Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015, commonly referred to as SEBI (PIT) Regulations, 2015, constitute the principal legal framework for preventing, detecting, and penalising insider trading in India’s securities markets. These regulations, issued by the Securities and Exchange Board of India (SEBI) under the powers conferred by the SEBI Act, 1992, replaced the earlier 1992 and 2002 insider trading regulations.
The 2015 regulations align India’s insider trading laws with global best practices, promoting market integrity, transparency, and investor confidence. They were amended periodically (notably in 2018, 2019, 2020, and 2021) to strengthen corporate governance and address emerging challenges in modern financial markets.

Background and Evolution

The need for a comprehensive insider trading framework arose from the growing complexity and depth of Indian capital markets. Prior to 1992, India lacked a clear legal definition or prohibition of insider trading. SEBI first introduced the Insider Trading Regulations, 1992, which were later revised in 2002. However, these earlier frameworks were criticised for being ambiguous and inadequate in addressing issues such as the definition of insiders, the scope of price-sensitive information, and enforcement mechanisms.
To modernise the law, SEBI established a High-Level Committee on Insider Trading in 2013, chaired by Justice N.K. Sodhi. The committee’s recommendations formed the basis for the SEBI (Prohibition of Insider Trading) Regulations, 2015, which came into force on 15 May 2015.

Objectives

The principal objectives of the SEBI (PIT) Regulations, 2015 are to:

• Prevent misuse of unpublished price-sensitive information (UPSI).
• Promote fairness, equality, and transparency in securities trading.
• Strengthen corporate governance and accountability of insiders.
• Protect investors from manipulative or unethical trading practices.
• Facilitate prompt and fair disclosure of material information by listed entities.

Key Definitions

The 2015 regulations provide precise definitions that form the foundation of enforcement and compliance:

• Insider: Any person who is either a connected person or possesses/accesses UPSI.
• Connected Person: Anyone directly or indirectly associated with the company in a way that allows access to UPSI, such as directors, employees, auditors, legal advisors, consultants, or bankers.
• Unpublished Price-Sensitive Information (UPSI): Any information relating to a company or its securities that is not publicly available and, if disclosed, is likely to materially affect the price of those securities. Examples include:
  • Financial results or performance data.
  • Dividends, bonuses, or rights issues.
  • Mergers, acquisitions, or takeovers.
  • Changes in capital structure.
  • Regulatory or policy decisions impacting business operations.
• Trading: Buying, selling, or dealing in securities, including pledging shares, subscribing to rights, or executing derivatives contracts.
• Immediate Relative: A spouse, parent, sibling, or child of an insider who is financially dependent or consults the insider on trading decisions.

Core Provisions of the Regulations

1. Prohibition on Insider Trading: No insider shall trade in securities while in possession of UPSI or communicate UPSI to others, except for legitimate purposes, legal obligations, or transactions carried out under an approved trading plan.
2. Communication of UPSI: The communication or procurement of UPSI is strictly prohibited unless it is for legitimate purposes, performance of duties, or legal requirements. Companies must maintain a structured digital database of persons with whom UPSI has been shared.
3. Trading When in Possession of UPSI: Trading is prohibited while in possession of UPSI. However, certain exceptions exist, such as pre-approved trading plans or transactions that do not involve misuse of information (e.g., inter-se transfer between insiders with the same UPSI).
4. Disclosure and Reporting Requirements:
   • Promoters, directors, and key managerial personnel (KMPs) must disclose their holdings and changes in holdings within prescribed timelines.
   • Companies must notify stock exchanges of such disclosures.
   • Initial disclosure is mandatory within seven days of appointment, and subsequent disclosure within two working days of any transaction above a specified threshold.
5. Trading Plans: Insiders who are perpetually in possession of UPSI (such as senior executives) may formulate pre-approved trading plans, allowing them to trade in securities without violating the regulations. Such plans must be approved by the Compliance Officer and disclosed to the stock exchanges.
6. Code of Conduct: Listed companies, market intermediaries, and fiduciaries must adopt a Code of Conduct to regulate, monitor, and report insider trading. This includes:
   • Procedures for legitimate handling of UPSI.
   • Identification of designated persons and maintenance of restricted lists.
   • Supervision by a Compliance Officer.
7. Code of Fair Disclosure: Every listed company must frame a Code of Practices and Procedures for Fair Disclosure of UPSI. It mandates uniform and timely disclosure of material information, ensuring that all investors have equal access.
8. Trading Window Mechanism: The regulations require companies to specify a trading window period, during which insiders are allowed to trade. This window remains closed during sensitive periods such as before the announcement of quarterly financial results or other major events.
9. Digital Record Maintenance: 2020 amendments made it mandatory for companies to maintain a digital database containing names, PAN, and contact details of persons with whom UPSI is shared, ensuring traceability and audit compliance.
10. Whistle-blower Protection (Informant Mechanism): Introduced in 2019, this mechanism allows individuals to confidentially report insider trading violations to SEBI. Informants may receive monetary rewards up to ₹1 crore for credible information leading to enforcement actions.

Penalties and Enforcement

Violations of the SEBI (PIT) Regulations, 2015 attract civil and criminal penalties under the SEBI Act, 1992:

• Monetary Penalty: Up to ₹25 crore or three times the profit made, whichever is higher (Section 15G).
• Debarment: The individual may be barred from accessing the securities market or holding managerial positions in listed entities.
• Prosecution: In severe cases, imprisonment and criminal proceedings may be initiated under relevant sections of the Indian Penal Code.

SEBI has the authority to conduct investigations, issue summons, and seize documents to gather evidence of insider trading.

Amendments and Recent Developments

• 2018 Amendment: Strengthened disclosure norms and compliance frameworks for intermediaries.
• 2019 Amendment: Introduced the Informant Mechanism and provided for rewards to whistle-blowers.
• 2020 Amendment: Mandated digital databases for tracking UPSI communication and revised disclosure timelines.
• 2021 Amendment: Expanded definitions of “designated persons” and clarified obligations of fiduciaries.

These revisions aim to enhance transparency, simplify compliance, and align regulations with international practices.

Landmark Enforcement Cases

• Hindustan Lever Limited (HLL)–Brooke Bond Case (1998): Established early precedents on insider trading and clarified the definition of an “insider.”
• Rakesh Agrawal Case (2003): The Managing Director of ABS Industries was penalised for using UPSI in a takeover.
• Reliance Industries Limited (2021): SEBI imposed a ₹25 crore fine on RIL and senior officials for insider trading related to the sale of Reliance Petroleum shares.

These cases underscore SEBI’s commitment to maintaining fair and transparent markets.

Importance and Implications

The SEBI (Prohibition of Insider Trading) Regulations, 2015 are critical for safeguarding the credibility of India’s capital markets. Their implementation has:

• Enhanced corporate accountability and disclosure standards.
• Ensured level playing fields for all investors.
• Strengthened public confidence in the securities market.
• Promoted ethical behaviour and compliance culture among corporate insiders.

By curbing misuse of confidential information, the regulations uphold the principle that all investors must have equal access to information before making investment decisions.