Module 5: Insider Trading & Market Manipulation

The PIT Regulations 2015 replaced the 1992 Regulations based on recommendations of the N.K. Sodhi Committee for a more principles-based framework.

An "insider" under Reg. 2(1)(g) includes (i) connected persons, OR (ii) any person in possession of or having access to UPSI. The definition is broad and covers anyone with UPSI.

The illustrative list of UPSI includes financial results, dividends, change in capital structure, mergers/acquisitions, delisting, and material agreements. Personal investments of individuals are not UPSI relating to the company.

Under Reg. 2(1)(d), a connected person is one who was associated with the company during the six months prior to the concerned act and was reasonably expected to have access to UPSI.

The 2019 amendment introduced the mandatory structured digital database for recording UPSI sharing and the informant mechanism with rewards up to Rs. 1 crore for whistleblowers.

India follows a possession-based test. Trading while in possession of UPSI is prohibited regardless of whether the UPSI was actually used to make the trading decision.

Regulation 3(1) permits UPSI communication only for legitimate purposes, performance of duties, or discharge of legal obligations. Selective disclosure to investors is prohibited.

Regulation 3(2) prohibits procurement of UPSI -- actively seeking or causing communication of UPSI from insiders except for legitimate purposes.

Section 15G provides for penalty up to Rs. 25 crore OR 3 times the profit made/loss avoided, whichever is higher, for insider trading violations.

In tipping scenarios, both the tipper (under Reg. 3) and the tippee who trades (under Reg. 4) can be held liable. Liability extends through chains of tipping.

After the 2019 amendment, the minimum duration for a trading plan is 12 months (increased from 6 months) to ensure genuine long-term planning.

A 6-month cool-off period must elapse between approval of the trading plan and execution of the first trade under that plan.

The inter-se exception applies when both parties are insiders possessing the same UPSI, there is no breach of Reg. 3, and both made conscious and informed trade decisions.

For legitimate purpose sharing like due diligence: Board approval of the policy, execution of NDA with insider trading restrictions, and recording in the digital database are required.

Records in the structured digital database must be maintained for a minimum of 8 years after the creation of the entry.

Designated persons must disclose trades to the Compliance Officer within 2 trading days of the trade execution.

Schedule B prescribes the model Code of Conduct for listed companies. Schedule A prescribes the Code for market intermediaries and fiduciaries.

The Board of Directors determines designated persons based on their role and access to UPSI, as per the 2019 amendment.

Immediate relatives include spouse, parents (including in-laws), siblings (including in-laws), children (including step-children), and dependents. Cousins are not included.

The trading window must be closed when designated persons can reasonably be expected to have access to UPSI. This includes result periods, M&A transactions, material announcements, etc.

Designated persons cannot execute a contra (opposite) trade within 6 months of a prior trade. Violation requires disgorgement of profit.

Pre-clearance is typically valid for 7 trading days. If not executed within this period, a fresh application is required.

The trading window typically reopens 48 hours after the UPSI becomes generally available to allow adequate dissemination.

SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations were notified in 2003.

Pump and dump involves accumulating shares, spreading false positive information to inflate price, then selling at artificially high prices.

Circular trading involves coordinated buying and selling among related parties to create false impression of market activity with no genuine change in beneficial ownership.

Regulation 4(2)(q) of PFUTP specifically prohibits front running -- dealing in securities based on unpublished information about substantial orders.

Regulation 4(1) prohibits transactions with the intention of artificially raising or depressing prices. Actual profit is not required for a violation.

SEBI does not require direct proof of intent. Intent can be inferred from trading patterns, price/volume abnormalities, and relationships between parties.

Painting the tape involves executing trades near market close to artificially influence the closing price, which affects NAV calculations and benchmarks.

Wash sales involve selling and buying the same security (directly or through arrangements) to create appearance of trading activity without genuine change in ownership.

Regulation 4(2)(r) is a residuary clause covering any unfair trade practice in securities, allowing SEBI to address novel forms of manipulation.

Section 11C of the SEBI Act grants SEBI powers to call for information, summon persons, require document production, and conduct investigations.

The informant mechanism provides rewards of 10-30% of monetary sanctions recovered, up to a maximum of Rs. 1 crore.

SEBI can impose interim measures including trading ban, freezing demat accounts, prohibition from market access, and in extreme cases, impounding passport and attaching bank accounts.

The landmark Hindustan Lever case established possession-based liability and that the standard of proof is preponderance of probability, not beyond reasonable doubt.

The Samir Arora case (Alliance Capital) primarily involved allegations of front running fund trades, NAV manipulation, and preferential allotment abuse.

Appeals against SEBI orders lie before the Securities Appellate Tribunal (SAT). Further appeals from SAT lie to the Supreme Court.

SEBI settlement involves payment of settlement amount without admission of guilt. It provides closure without lengthy litigation.

IBEAT (Integrated Market Surveillance System) is used for detecting market abuse through pattern recognition and analysis of trading data.

Information is "generally available" when it is accessible to the public on a non-discriminatory basis, typically through stock exchange disclosure or major media.

For connected persons, there is a presumption of UPSI access. The burden to rebut this presumption lies with the connected person who must prove they did not have UPSI.

The Compliance Officer must report violations to SEBI and stock exchanges as part of the compliance framework.

ESOP exercise is a form of "trading" under PIT Regulations. Exercise while in possession of UPSI can constitute insider trading.

The N.K. Sodhi Committee (2014) recommended complete overhaul of the 1992 Regulations, leading to the principles-based PIT Regulations 2015.

WhatsApp leak cases have demonstrated that digital communication trails are powerful evidence in insider trading investigations.

SEBI can order disgorgement of profits with interest at 12% per annum from the date of violation until payment.

A trading plan cannot be commenced if the insider is in possession of UPSI at the time of formulation. The Compliance Officer must verify this.

SEBI considers multiple factors: disproportionate gain/unfair advantage, repetitive nature, cooperation with investigation, and market impact when determining penalties.

The primary objective of both PIT and PFUTP Regulations is ensuring market integrity and investor confidence by prohibiting unfair informational advantages and manipulation.