CS Executive · Capital Market and Securities Laws

Prohibition of Insider Trading: formula sheet

Full chapter guide

Key formulas

Parent prohibition: SEBI Act, 1992, 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, or communicate such information, in contravention of the Act, rules or regulations.
Scope of section 12A: Securities listed or proposed to be listed on a recognised stock exchange; Sub-clauses (a) to (c) on manipulative and deceptive devices and fraud use this wording; always mention listing in your answer.
Penalty for insider trading (section 15G): Penalty ≥ ₹10 lakh, may extend to the higher of ₹25 crore or 3 × profits made; Applies to an insider who deals on the basis of UPSI, communicates UPSI, or counsels or procures dealing.
Three acts caught by section 15G: Deal + Communicate + Counsel/Procure; Communication is excepted if required in the ordinary course of business or under any law.
Companies Act position: Sections 194 and 195: omitted w.e.f. 9-2-2018; Insider trading is now governed by the SEBI Act and the PIT Regulations, 2015.
Insider: Insider = connected person OR any person in possession of / having access to UPSI; Connected person is a subset of insider. Possession of UPSI alone makes someone an insider.
Connected person: Any person who is or has been associated with the company during the 6 months before the act, in a way that gives access (or reasonable expectation of access) to UPSI; Association can be through directorship, office, employment or a professional or business relationship. Remember the six-month look-back.
UPSI test: UPSI = relates to company or its securities + not generally available + likely to materially affect price once published; All three limbs must be met. Examples listed in the regulations include results, dividend, capital structure changes, mergers, demergers, acquisitions, delisting, disposals, expansion and key managerial personnel changes.
Generally available information: Information accessible to the public on a non-discriminatory basis; Once information is generally available it ceases to be UPSI. Selective disclosure to a few persons does not qualify.
Section 15G, SEBI Act, 1992: Penalty: not less than ₹10 lakh, up to ₹25 crore or three times the profits made, whichever is higher; Applies to an insider who deals on the basis of UPSI, communicates UPSI (except in the ordinary course of business or under law), or counsels or procures another to deal on UPSI.
Section 12A(d) and (e), SEBI Act, 1992: No person shall directly or indirectly engage in insider trading, or deal in securities while in possession of material or non-public information, or communicate it, in contravention of the Act, rules or regulations; This is the statutory prohibition behind the regulations.
Regulation 3(1): communication: No communication, provision or access to UPSI, except for a legitimate purpose, performance of duties or discharge of legal obligations; Applies to any insider communicating to anyone, including other insiders.
Regulation 3(2): procurement: No person may procure UPSI from an insider, except in the same circumstances; Covers the receiver, not only the giver.
Regulation 4(1): trading while in possession: Insider cannot trade in listed or proposed-to-be-listed securities while in possession of UPSI; Possession triggers the presumption. The insider can rebut it using the defences.
Section 15G penalty (SEBI Act): Not less than ₹10 lakh; up to the higher of ₹25 crore or 3 × profits made; Applies to dealing on the basis of UPSI, communicating it, or counselling or procuring dealing.
Trading plan rules (Regulation 5): Plan is made in advance, pre-cleared by the compliance officer, and made public, and then must be implemented; A plan cannot start trading at once: a cooling-off period runs from its public disclosure, and it cannot cover trades in restricted periods such as the trading window closure. The plan cannot be cancelled to avoid a trade. Check the current cooling-off period in Regulation 5 before the exam.
Burden of proof: Presumption of use of UPSI, rebuttable by the insider; Shows why the defences matter.
Initial disclosure (new appointee): Within 7 days of appointment, or of becoming a promoter, KMP or director; The disclosure is to the company and states securities held at the time of appointment or becoming a promoter. Existing persons had a one-time disclosure within 30 days of the Regulations coming into force.
Continual disclosure by the person: Within 2 trading days of the transaction, if traded value over a calendar quarter exceeds ₹10 lakh (or other value SEBI specifies); Applies to promoters, members of the promoter group, designated persons and directors. The test is the aggregate value in the quarter, not each trade.
Continual disclosure by the company: Company informs stock exchanges within 2 trading days of receiving the disclosure or becoming aware of the trade; The exchanges then place the information on their websites.
Trading window closure: Closed from end of every quarter until 48 hours after declaration of financial results; The compliance officer may also close it at other times when designated persons may have UPSI. Designated persons cannot trade while it is closed.
Pre-clearance validity: Trade must be executed within 7 trading days of approval; Applies above the threshold value set by the Board in the code of conduct. If not executed in time, get fresh pre-clearance. The applicant also declares that he or she has no UPSI.
Contra trade restriction: No opposite trade within 6 months of the previous trade by a designated person; If a contra trade is done, profit is disgorged and remitted to the Investor Protection and Education Fund administered by SEBI. The trading window and pre-clearance rules apply separately.
Statutory prohibition: SEBI Act, 1992, s. 12A(d) and (e): no insider trading; no dealing while in possession of material or non-public information, or communicating it, in contravention of the law; Cite this as the base of the PIT Regulations.
Penalty for insider trading: SEBI Act, 1992, s. 15G: not less than ₹10 lakh; up to ₹25 crore or 3 × profits, whichever is higher; Applies to dealing on UPSI, communicating UPSI, or counselling or procuring others to deal.
Code of fair disclosure: Prompt public disclosure + uniform, non-selective disclosure + chief investor relations officer + need-to-know handling; Applies to every listed company, and the code must be published on its website.
Code of conduct: Board + compliance officer + designated persons + pre-clearance + trading window + structured digital database; Intermediaries and fiduciaries must also frame their own code.
Structured digital database: Names of UPSI recipients + sharing details + PAN or other identifier + time stamping and audit trail; Protects against tampering.
Cease and desist: SEBI Act, 1992, s. 11D: order to cease and desist after inquiry if a person has violated or is likely to violate; For a listed or to-be-listed public company, only if SEBI has reasonable grounds to believe it indulged in insider trading or market manipulation.
Section 15G penalty range: Penalty ≥ ₹10 lakh; maximum = higher of ₹25 crore or 3 × profits made out of insider trading; Floor is fixed. The ceiling is whichever of the two amounts is higher.
Three limbs of section 15G: (i) Dealing on UPSI; (ii) Communicating UPSI; (iii) Counselling or procuring dealing on UPSI; The person must be an insider. Dealing relates to securities of a body corporate listed on a stock exchange.
Exception to communication: Communication allowed if required in the ordinary course of business or under any law; Applies to limb (ii) only. It does not excuse dealing.
Companies Act sections 194 and 195: Section 194 (forward dealing by director or KMP) and section 195 (insider trading): omitted w.e.f. 9 February 2018; Say they are omitted. Do not present them as operative penalty provisions.

Quick revision

Section 12A(d) of the SEBI Act bars insider trading. Section 12A(e) bars dealing while in possession of material or non-public information, and communicating it.
The detailed rules are in the SEBI (Prohibition of Insider Trading) Regulations, 2015.
An insider is a connected person or anyone in possession of, or having access to, UPSI.
A connected person includes someone who had a connection with the company in the six months before the act in question.
UPSI is information that is not generally available and that, once published, is likely to materially affect the price of securities.
Prohibited acts are communicating UPSI and trading while in possession of it, subject to the permitted exceptions.
Listed companies must have a Code of Fair Disclosure and a Code of Conduct.
The trading window is closed for designated persons when UPSI exists, and trades are generally barred then.
Disclosures are required from promoters, directors and key managerial personnel, and continual disclosure applies above a set trade value.
Sections 194 and 195 of the Companies Act, 2013 were omitted with effect from 9 February 2018.
Section 102(5) penalty: ₹50,000 or five times the benefit, whichever is higher, for default in the explanatory statement.
Section 446B halves penalties for OPCs, small companies, start-ups and Producer Companies, capped at ₹2 lakh for the company and ₹1 lakh for an officer or other person.

Common mistakes

Citing Companies Act section 195 as the current law on insider trading. Fix: Write that sections 194 and 195 were omitted from 9 February 2018 and that the SEBI Act and PIT Regulations govern.
Saying section 12A applies to all companies. Fix: State that it covers securities listed or proposed to be listed on a recognised stock exchange.
Treating insider and connected person as the same thing. Fix: Remember that every connected person is an insider, but an insider need not be a connected person. A stranger holding UPSI is an insider.
Ignoring the six-month look-back for connected persons. Fix: Include the words 'is or has been associated during the six months prior to the concerned act'. A person who left four months ago can still be connected.
Saying every sharing of UPSI is banned. Fix: Always add the legitimate purpose, duty and legal obligation exceptions, and the safeguards that go with them.
Thinking only the person who gives UPSI is liable. Fix: Remember Regulation 3 also bars procuring UPSI, and Section 15G covers counselling or procuring dealing.
Saying the ₹10 lakh threshold applies to each single trade. Fix: The test is the aggregate traded value in a calendar quarter. Add up all trades in the quarter, and disclose once the total exceeds the threshold.
Mixing up the 7-day and 2-trading-day limits. Fix: Remember: 7 days is for the initial disclosure of a new appointee, and 2 trading days is for continual disclosure and the company's report to the exchanges.
Mixing up the code of fair disclosure and the code of conduct. Fix: Remember: fair disclosure is about releasing information to the market; conduct is about people's trading and handling of information.
Citing section 195 of the Companies Act, 2013 as the insider trading prohibition. Fix: Section 195 was omitted w.e.f. 9-2-2018. Cite s. 12A and s. 15G of the SEBI Act, 1992.

Exam tips

Always open with the definition and cite section 12A of the SEBI Act; examiners look for the section number.
Learn the section 15G figures exactly: ₹10 lakh minimum, ₹25 crore or three times profit, whichever is higher.
State clearly that Companies Act sections 194 and 195 are omitted from 9 February 2018.
In case-based questions, write provision, facts, then a clear conclusion.
Use the words unpublished price sensitive information, not just inside information.
Write the definitions in full for 5 to 6 mark questions, then add one example. Examiners reward the three-limb UPSI test and the six-month look-back.
In case-study questions, always run two tests: the person (connected or in possession) and the information (UPSI or generally available).
Draw the contrast between insider and connected person in two lines. This is a favourite short note.