The SEBI (Prohibition of Insider Trading) Regulations, 2015 (PIT Regulations) were introduced to ensure market transparency and prohibit unfair practices like insider trading. Over the years, SEBI has periodically amended these regulations to address emerging issues and evolving market dynamics. In 2021, SEBI consolidated various guidance notes and FAQs into a comprehensive document, which was further updated on March 31, 2023. This revision particularly emphasizes the structured digital database (SDD) and contra-trade rules while addressing other critical aspects like trading, disclosures, pledges, and compliance obligations.
Trading, as defined by Regulation 2(1)(l), includes subscribing, buying, selling, dealing, or agreeing to trade in securities. This broad definition extends to activities like pledging, which may involve unpublished price-sensitive information (UPSI). The regulations apply to equity shares and other securities such as bonds, debentures, and derivatives, excluding mutual funds. Importantly, trading on the basis of UPSI is prohibited for all individuals, including those not classified as “designated persons,” if they possess access to such sensitive information. Even non-designated individuals can be deemed insiders under these regulations.
A critical component of the regulations is the Structured Digital Database (SDD). Regulation 3(5) mandates that listed companies, intermediaries, and fiduciaries maintain an internal database to record the sharing of UPSI. The SDD must log the details of UPSI shared, including the nature of information, identities of recipients, and their PAN or unique identifiers. These records ensure accountability and must be preserved for at least eight years. External hosting of the SDD, such as on cloud servers, is allowed but must comply with stringent security measures. The compliance officer and the board of directors are accountable for the confidentiality, integrity, and proper maintenance of the database. Any breach of these standards is considered a violation of SEBI regulations.
Pledging securities is categorized as trading under the PIT Regulations. This includes creating, revoking, or invoking a pledge. Disclosures for such transactions are based on the market value of securities on the transaction date. Demonstrating bona fide intent is critical for pledges made during trading window closures or when in possession of UPSI. For instance, if pledged shares are sold by lenders to recover loans, these transactions must be disclosed as “invocations” in Form C.
The trading plan framework under SEBI’s guidelines allows insiders to trade in securities in a structured manner, offering protection against allegations of insider trading. Such plans must be pre-approved, and trades must strictly adhere to the disclosed timeline and details. Even if new UPSI emerges after the plan’s approval, trading can proceed as long as the UPSI was unknown during the plan’s formulation. Disclosures are another cornerstone of the regulations. Designated persons and their immediate relatives must disclose trades exceeding ₹10 lakh in value within two trading days. Subsequent disclosures are required only when additional trades cross a new ₹10 lakh threshold. Additionally, trades through corporate actions such as rights issues, mergers, or bonus shares are exempt from disclosure requirements.
Pre-clearance of trades is mandatory for designated persons, except for ESOP exercises. However, the sale of shares acquired through ESOPs does require pre-clearance. Furthermore, trading during window closures is strictly prohibited, even if earlier pre-clearance was granted. Compliance officers must actively communicate the status of trading windows to ensure adherence.
Contra-trades, defined as transactions reversing earlier trades within six months, are generally prohibited to prevent potential misuse of insider information. However, exemptions apply for corporate actions like mergers, rights issues, and ESOP exercises. In such cases, trading restrictions are lifted to facilitate business continuity without compromising regulatory compliance. Despite these exemptions, entities must ensure documentation and adherence to SEBI’s overarching principles.
Designated persons, including promoters, employees, and support staff with access to UPSI, must adhere to strict codes of conduct. Immediate relatives are presumed to fall under these regulations unless independence can be demonstrated. For resigned employees, companies are required to maintain updated contact details for a year and preserve their records for five years to ensure accountability and regulatory compliance.
The SEBI PIT Regulations FAQs underline the regulator’s commitment to transparency and ethical practices. By addressing practical scenarios and clarifying ambiguities, these guidelines help stakeholders navigate complex compliance requirements. While the document serves as a comprehensive guide, it emphasizes that legal interpretations should be based on the full regulatory text and associated circulars. The revised FAQs also rescind earlier guidance documents issued between 2009 and 2021, ensuring stakeholders rely on the most up-to-date regulatory framework.
