SEBI and the Insider Trading Regulations

Insider trading in India is prohibited by Section 12A(d) and (e) of the Securities and Exchange Board of India Act, 1992 and regulated in detail by the SEBI (Prohibition of Insider Trading) Regulations, 2015, often called the PIT Regulations. In simple terms, a person who is an insider must not trade in listed securities while holding unpublished price sensitive information (UPSI), and must not pass that information on except for legitimate purposes. SEBI can impose heavy civil penalties under Section 15G, and the offence can also be prosecuted under Section 24 of the Act.

This explainer is written for B.A. LL.B. and LL.B. students studying company law or securities regulation, and for any reader who owns shares or works in a listed company. A clerk in a Chennai head office who hears about quarterly results before they are announced, or a relative in Nagercoil who gets a tip over the phone, can both fall within these rules without realising it.

What does the SEBI Act itself say?

The Act gives the framework and the punishment. The detail sits in the regulations. Three provisions matter most for an exam answer:

• Section 12A(d) and (e): no person shall "engage in insider trading" or "deal in securities while in possession of material or non-public information".
• Section 15G: an insider who deals in listed securities on the basis of UPSI, communicates UPSI except in the ordinary course of business or under law, or counsels or procures another person to deal on the basis of UPSI, is liable to a penalty of not less than ten lakh rupees, which may extend to twenty-five crore rupees or three times the profits made, whichever is higher.
• Section 24(1): contravention of the Act or regulations is punishable with imprisonment up to ten years, or fine up to twenty-five crore rupees, or both.

Any criminal prosecution now runs under the Bharatiya Nagarik Suraksha Sanhita, 2023 (BNSS), which replaced the Code of Criminal Procedure from 1 July 2024. Insider trading is not an offence under the Bharatiya Nyaya Sanhita; it is a special-statute offence under the SEBI Act.

Which definitions in the 2015 Regulations matter most?

Most insider trading cases are won or lost on definitions. Learn these from Regulation 2(1):

• Connected person (Reg 2(1)(d)): any person who is, or during the six months before the act has been, associated with the company in a way that gives access to UPSI. Certain categories are deemed connected "unless the contrary is established".
• Generally available information (Reg 2(1)(e)): information accessible to the public on a non-discriminatory basis.
• Immediate relative (Reg 2(1)(f)): a spouse, and a parent, sibling or child of the person or the spouse, who is financially dependent on the person or consults the person on trading decisions.
• Insider (Reg 2(1)(g)): a connected person, or anyone in possession of or having access to UPSI.
• Trading (Reg 2(1)(l)): includes subscribing, buying, selling and dealing, and agreeing to do so.
• UPSI (Reg 2(1)(n)): information about a company or its securities that is not generally available and is likely to materially affect the price on becoming available.

The definition of UPSI and its illustrative list have been revised by SEBI since 2015. Always check the latest consolidated text on the SEBI website before quoting it in a moot or a project.

What exactly is prohibited?

1. Communication (Reg 3(1)): no insider shall communicate, provide or allow access to UPSI, except for legitimate purposes, performance of duties or discharge of legal obligations.
2. Procuring (Reg 3(2)): no person shall procure UPSI from an insider or cause an insider to communicate it.
3. Trading (Reg 4(1)): no insider shall trade in securities listed or proposed to be listed while in possession of UPSI. Trades made while holding UPSI are presumed to be motivated by it.

The proviso to Reg 4(1) lets the insider prove innocence through listed circumstances, such as a transaction carried out under a statutory or regulatory obligation, certain off-market inter-se transfers, exercise of stock options, and trades under an approved trading plan under Regulation 5. For connected persons, Reg 4(2) puts the onus on them to show they did not possess UPSI.

How do companies prevent leaks?

• Trading plans (Reg 5): an insider may present a trading plan to the compliance officer. Once approved it is irrevocable and is notified to the stock exchanges. The text as amended up to 2019 barred trading under a plan for six months after the plan was disclosed. SEBI has since amended this cool-off period and other conditions, so check the current Regulation 5 before you cite figures.
• Disclosures (Reg 7): newly appointed key managerial personnel, directors and promoters disclose holdings within seven days of appointment. Promoters, designated persons and directors disclose trades within two trading days once the quarter's traded value exceeds ten lakh rupees, and the company informs the exchange within two trading days.
• Codes of conduct (Reg 9 and 9A): designated persons include the CEO and employees up to two levels below. Reg 9A requires internal controls and written procedures for inquiry into leaks.
• Trading window (Schedule B): designated persons and their immediate relatives cannot trade while the window is closed, which runs from the end of every quarter till 48 hours after financial results are declared.

How has the Supreme Court read these rules?

Chintalapati Srinivasa Raju v. SEBI: an earlier Supreme Court decision on which the Court relied in Balram Garg for the point that a family relationship cannot by itself be a foundational fact for inferring that a person had UPSI. Read the judgment itself before citing it in detail.

Balram Garg v. SEBI (Supreme Court, 19 April 2022): SEBI alleged that the promoter of a jewellery company passed UPSI to relatives who sold shares. The Court allowed the appeals. It held that the onus was on SEBI to prove the relatives possessed or had access to UPSI, that SEBI had not shown financial dependence to bring them within "immediate relative", and that Regulation 3 creates no deeming fiction, so communication must be proved by cogent material. Trading patterns alone were not enough.

SEBI v. Abhijit Rajan (Supreme Court, 19 September 2022): the chairman and managing director of Gammon Infrastructure Projects Limited sold about 144 lakh shares on 22 August 2013, before the company disclosed (on 30 August 2013) a board decision to terminate two shareholders' agreements. The Court found that news was in fact favourable to the company. Dismissing SEBI's appeal, the Court said that actual gain or loss is immaterial but the motive to profit is essential, and that a sale made without waiting for the price to rise could be "devoid of any desire to make unlawful gains". It also held that the de minimis rule has no application to insider trading.

Appeals against SEBI orders lie to the Securities Appellate Tribunal within 45 days (Section 15T), and from there to the Supreme Court on a question of law within 60 days (Section 15Z). This is why the leading authority comes from the Supreme Court and SAT rather than from the Madras High Court.

How should you answer an insider trading question in an exam?

1. Open with the statutory base: Section 12A(d) and (e) of the SEBI Act and the 2015 Regulations.
2. Define insider, connected person and UPSI, citing Regulation 2(1).
3. State the prohibitions in Regulations 3 and 4, then the defences and the burden under Reg 4(2).
4. Explain penalties: Section 15G (civil) and Section 24 (criminal).
5. Apply Balram Garg and Abhijit Rajan to the facts, especially on proof and motive.
6. Conclude on whether SEBI can prove possession and trading on the given facts.

Reading the actual SEBI orders and judgments, not just summaries, is the best preparation. Company law and securities regulation are part of the law degree; see our programmes.

Sources

• Securities and Exchange Board of India Act, 1992 (Indian Kanoon): text of Sections 12A, 15G, 15T, 15Z and 24.
• Section 15G, SEBI Act, 1992 (Indian Kanoon): penalty for insider trading.
• SEBI (Prohibition of Insider Trading) Regulations, 2015 (Indian Kanoon): text as amended up to 2019; check SEBI for later changes.
• Balram Garg v. SEBI, Supreme Court, 19 April 2022: judgment on burden of proof and immediate relatives.
• SEBI v. Abhijit Rajan, Supreme Court, 19 September 2022: judgment on motive and price sensitivity.
• India Code: SEBI regulations list: official listing of SEBI regulations.
• Securities and Exchange Board of India: official site for the current consolidated regulations and circulars.