3.1 PIT Regulatory Framework
The SEBI (Prohibition of Insider Trading) Regulations, 2015 replaced the 1992 regulations following the N.K. Sodhi Committee recommendations. The new framework focuses on prevention, compliance, and deterrence.
Core Prohibitions
Under Regulation 4, trading while in possession of UPSI creates a presumption of insider trading. The burden shifts to the insider to prove the trade was NOT influenced by UPSI - a difficult evidentiary task.
Key Changes from 1992 Regulations
| Feature | 1992 Regulations | 2015 Regulations |
|---|---|---|
| Approach | "While in possession" | "When in possession" (stricter) |
| UPSI Definition | Illustrative list | Comprehensive + catch-all |
| Connected Person | Limited categories | Expanded + deemed insiders |
| Trading Plans | Not available | Pre-approved trading plans permitted |
| Compliance Officer | No mandate | Mandatory appointment |
3.2 Unpublished Price Sensitive Information (UPSI)
Understanding what constitutes UPSI is fundamental to PIT compliance. The definition is deliberately broad to capture all potentially market-moving information.
Definition
UPSI Categories (Non-Exhaustive)
- Financial Results: Quarterly/annual results, profit warnings, dividend decisions
- Corporate Actions: Mergers, acquisitions, demergers, buybacks, bonus issues
- Business Changes: Major contracts, capacity expansion, new product launches
- Management Changes: CEO appointment/resignation, restructuring
- Regulatory Matters: License awards/cancellations, regulatory approvals
- Litigation: Material litigation outcomes, settlements
Information is material if it would likely affect the price of securities. No fixed percentage threshold - courts apply the "reasonable investor" test: would a reasonable investor consider this information important in making an investment decision?
When UPSI Becomes Public
UPSI loses its character when it becomes "generally available." This occurs through:
- Stock Exchange Disclosure: Filing on BSE/NSE portals
- Press Release: Wide media dissemination
- Company Website: Posted on official website
- Time Passage: After information adequately disseminates (typically 24-48 hours)
Maintain a UPSI tracker with creation date, nature, persons with access, and date of publication. This documentation is invaluable during SEBI investigations.
3.3 Insiders and Connected Persons
The regulations cast a wide net for who qualifies as an "insider." Understanding these categories is essential for compliance program design.
Definition of Insider
Connected Persons
| Category | Examples | Presumption |
|---|---|---|
| Immediate Relationship | Directors, employees, promoters | Deemed connected |
| Professional Relationship | Auditors, advisors, consultants | If expected to have UPSI |
| Shareholding Connection | 10%+ shareholders | Deemed connected |
| Relative Connection | Immediate relatives of above | Deemed connected |
| Entity Connection | Holding/subsidiary companies | Based on access to UPSI |
Under Regulation 2(1)(f), "immediate relative" means spouse, parent, sibling, and child (including those dependent financially). Their trades are presumed to be influenced by the insider unless proven otherwise.
Deemed Insiders
Certain persons are deemed to have access to UPSI unless proven otherwise:
- Promoters: Presumed to have UPSI access at all times
- Directors: Presumed connected by virtue of position
- KMPs: CEO, CFO, Company Secretary presumed connected
- Designated Persons: As identified by company in its Code
3.4 Trading Window and Restrictions
The trading window mechanism is a key compliance tool. Understanding closure periods and pre-clearance requirements is essential for designated persons.
Trading Window Closure
Standard Closure Periods
| Event | Closure Period | Opening |
|---|---|---|
| Financial Results | From end of quarter until 48 hours post-disclosure | After adequate dissemination |
| Board Meetings (material) | From intimation date to stock exchange | 48 hours after disclosure |
| AGM/EGM | If material matters to be discussed | 48 hours post-meeting |
| M&A Announcements | From negotiations initiation | 48 hours post-public announcement |
Pre-Clearance Requirements
Designated persons must obtain pre-clearance before trading, even when trading window is open:
- Application: Written application to Compliance Officer
- Declaration: Not in possession of UPSI
- Approval Validity: Typically 7 trading days from approval
- Holding Period: Must hold securities for minimum 30 days
- Post-Trade Disclosure: Within 2 trading days of trade execution
Under Regulation 4(3), designated persons cannot execute opposite transactions (buy after sell or vice versa) within 6 months. Violation requires disgorgement of profit to IEPF.
3.5 Structured Digital Database (SDD)
The Structured Digital Database is a mandatory compliance requirement ensuring audit trail of UPSI access. Non-compliance attracts severe penalties.
SDD Requirements
Database Contents
- Nature of UPSI: Description of the price-sensitive information
- Person Sharing: Identity of person who shared the UPSI
- Person Receiving: Identity of person who received UPSI
- Purpose: Legitimate purpose for sharing
- Timestamp: Date and time of sharing
- Confidentiality Agreement: Acknowledgment obtained
Non-Tamperable: Database must be non-tamperable with time-stamping
Audit Trail: Complete audit trail of modifications
Internal Controls: Access restricted to authorized personnel
Retention: Maintain for minimum 8 years after completion of transaction
Defenses Available
| Defense | Regulation | Requirements |
|---|---|---|
| Trading Plan | Reg. 5 | Pre-approved, disclosed, 12-month validity |
| Off-Market Transfers | Reg. 4(1) proviso | Between insiders with same UPSI |
| ESOP Exercise | Reg. 4(1) proviso | Only exercise, not sale |
| Chinese Wall | Compliance Code | Information barriers demonstrable |
When defending insider trading allegations, the SDD is critical evidence. Well-maintained SDD shows: (1) limited UPSI access, (2) legitimate purpose, (3) compliance culture. Conversely, poor SDD maintenance creates adverse inference.
Key Takeaways
- Regulation 4: Trading "when in possession" of UPSI - strict liability standard
- UPSI definition is broad - apply "reasonable investor" materiality test
- Connected persons include relatives, 10%+ shareholders, and professional advisors
- Trading window closure mandatory before financial results and material events
- Contra-trade restriction: 6-month prohibition on opposite transactions
- SDD maintenance is mandatory - 8-year retention with non-tamperable timestamps
Part 3 Assessment
Test Your Understanding
12 questions on PIT Regulations, UPSI, trading windows, and defenses