Capital Market and Securities Laws · Prohibition of Insider Trading

Communication of UPSI and Trading When in Possession

Updated 11 October 2026 · Fact-checked

Under Regulations 3 and 4 of the SEBI (Prohibition of Insider Trading) Regulations, 2015, an insider must not communicate or procure UPSI except for legitimate purposes, and must not trade while in possession of UPSI. Defences include the listed exceptions and a pre-cleared trading plan. Answer by stating the rule, applying it to the facts, then concluding.

Understand Communication of UPSI and Trading When in Possession

UPSI means unpublished price sensitive information. It is information not yet public that is likely to affect the price of a listed security once it becomes public. The law stops people with such information from using it for gain or passing it on.

The SEBI Act, 1992 sets the base. Section 12A bars any person from engaging in insider trading, and from dealing in securities while in possession of material or non-public information, or communicating it to another person, in contravention of the Act, rules or regulations. Section 15G sets the penalty. An insider who deals on the basis of UPSI, communicates it (except as required in the ordinary course of business or under any law), or counsels or procures another to deal, is liable to a penalty of not less than ten lakh rupees. It may extend to twenty-five crore rupees or three times the profits made, whichever is higher. The detailed conduct rules are in the PIT Regulations, 2015.

Regulation 3 (communication and procurement). No insider may communicate, provide or allow access to UPSI relating to a company or its securities to any person, including other insiders. The exception is where it is in furtherance of a legitimate purpose, performance of duties or discharge of legal obligations. Likewise, no person may procure UPSI from an insider, except in the same circumstances. Examples of legitimate purposes are sharing with auditors, lawyers, bankers, consultants or merchant bankers who need it for their work. The recipient is then treated as an insider and the company must keep a structured digital database of such persons. Where a transaction such as an open offer, merger or demerger needs UPSI shared, the board must decide that the sharing is in the company's best interest.

Regulation 4 (trading when in possession). No insider may trade in securities that are listed or proposed to be listed when in possession of UPSI. The law presumes that a person in possession who trades has used the information. This is a rebuttable presumption. The insider has to prove otherwise, using the defences the regulations allow.

The main defences and routes are these:

An off-market inter-se transfer between promoters who were all in possession of the same UPSI, made in compliance with the regulations.
A trade by a non-individual insider. Three conditions must be met. The individuals who took the trading decision were not in possession of the UPSI. Appropriate and adequate arrangements (Chinese walls) existed so that UPSI was not communicated between those in possession and those who decided the trade. The trades were in compliance with the Regulations.
A trade carried out under a statutory or regulatory obligation to carry out a bona fide transaction.
A trade under a trading plan that was formulated and disclosed in line with Regulation 5. Regulation 4(1) allows a trading plan under Regulation 5 as a means of trading without breach. The plan's conditions are in Regulation 5.

The insider may also show other facts, such as that the trade was not motivated by UPSI. A trading plan lets an insider who may have UPSI access set up future trades in advance. This is meant to ensure the trades cannot be influenced by UPSI later.

Key rules to remember

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.

How to solve Communication of UPSI and Trading When in Possession questions

Use this order for any problem or theory question on communication of UPSI or trading in possession.

1Identify whether the information is UPSI: unpublished, and likely to affect price once published.
2Identify who the person is: an insider, a connected person, or someone who procured the information.
3Decide the act: communication, procurement, or trading while in possession.
4State the matching rule: Regulation 3 for communication and procurement, Regulation 4 for trading, with the SEBI Act provision (Section 12A) where it helps.
5Test for the exceptions: legitimate purpose, legal obligation, board determination for transactions, or a defence or route under Regulation 4 such as information barriers, or a trading plan made under Regulation 5.
6Apply the facts. Check the timing, who knew what, and whether the exception conditions are met.
7Conclude clearly: violation or no violation, then the penalty exposure under Section 15G if there is one.

Quickest way: Four-question check

When to use it: Use when you have little time on a case-style question.

Was it UPSI? If not, stop: no violation.
Did the person share it, receive it, or trade on it?
Is there a legitimate purpose, legal duty or approved trading plan?
If there is none, conclude breach and state the Section 15G penalty range.

Common mistakes in Communication of UPSI and Trading When in Possession

Saying every sharing of UPSI is banned.
Students remember the prohibition and forget the exception.
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.
The focus is on the leaker.
Fix: Remember Regulation 3 also bars procuring UPSI, and Section 15G covers counselling or procuring dealing.
Treating possession of UPSI as conclusive proof of misuse.
Confusing a presumption with a final finding.
Fix: Say the presumption is rebuttable and the insider can use the defences.
Believing a trading plan can be made at any time and cancelled freely.
Students only remember that plans are a defence.
Fix: Explain that the plan must be made in advance, pre-cleared and disclosed, and must be carried out, so it cannot be used to time trades on UPSI.
Quoting the old Companies Act section on insider trading.
Older notes cite it.
Fix: Section 195 of the Companies Act, 2013 has been omitted. Cite Section 12A and Section 15G of the SEBI Act and the PIT Regulations.
Giving a penalty figure without the floor and the higher-of rule.
Students remember only the upper figure.
Fix: Write: not less than ₹10 lakh, up to the higher of ₹25 crore or three times the profit.

Worked examples

Example 1

Anil is CFO of a listed company, Kaveri Pharma Ltd. Before the board approves a large merger, he tells his friend Rohit, a stockbroker, about it. Rohit buys shares and earns ₹40 lakh. Advise on the liability.

Show the solution

The merger plan is unpublished and likely to affect price, so it is UPSI.
Anil is an insider as CFO. He communicated UPSI to Rohit, who needed it for no legitimate purpose or legal duty. This breaches Regulation 3(1).
Rohit became an insider by receiving the UPSI, since a person in possession of UPSI is an insider under the PIT Regulations.
Rohit then traded while in possession of the UPSI. This breaches Regulation 4(1). The facts say Anil told him voluntarily, so Rohit did not procure it. A Regulation 3(2) breach would arise only if he had solicited the information. No defence appears from the facts.
Under Section 15G of the SEBI Act, Anil is liable for communicating UPSI, and for counselling or procuring if he encouraged the trade. Rohit, as an insider who dealt on the basis of UPSI, is liable for dealing.
The penalty is not less than ₹10 lakh and may extend to the higher of ₹25 crore or three times the profits made. Rohit's profit is ₹40 lakh, and three times that is ₹1.2 crore, which is below ₹25 crore. So the ceiling is ₹25 crore.

Answer: Both breach the PIT Regulations. Anil breached Regulation 3(1) by communicating UPSI. Rohit, an insider because he received the UPSI, breached Regulation 4(1) by trading while in possession of it. Each is liable to a Section 15G penalty of at least ₹10 lakh. The ceiling is ₹25 crore, because three times Rohit's profit of ₹40 lakh (₹1.2 crore) is lower and the higher figure applies.

Example 2

Meera, a promoter-director of a listed company, wants to sell shares worth ₹50 lakh in the next quarter, even though she has regular access to UPSI. Explain how she can do this lawfully.

Show the solution

Regulation 4(1) bars trading while in possession of UPSI, and she has regular access, so a plain sale is risky.
One route is a trading plan. Regulation 4(1) allows a trading plan made under Regulation 5 as a means of trading without breach. She should prepare a plan setting out the trades in advance.
She submits it to the compliance officer. The compliance officer reviews it and approves it only if it is not likely to breach the Regulations. The plan is then disclosed publicly to the stock exchange.
Implementation cannot commence until any UPSI she held when formulating the plan has become generally available information. Regulation 5 also imposes a cooling-off period from public disclosure and bars trades in restricted periods such as trading window closure. Check the current cooling-off period in Regulation 5.
Once approved, she must implement the plan. She cannot trade outside it. Whether a plan made now can support a sale in the next quarter depends on that cooling-off period.
A plan is not her only lawful route. She may sell outside a plan at a time when she is not in possession of UPSI, for example once the UPSI has become public. If she trades while in possession, she can try to rebut the presumption by showing the trade was not based on UPSI, or rely on another defence in Regulation 4.

Answer: Meera can sell lawfully through a pre-cleared, publicly disclosed trading plan under Regulation 5, made in advance and followed as approved. Regulation 4(1) allows this. The plan cannot start until UPSI she held at formulation becomes public and the cooling-off period has run, and it cannot cover restricted periods. If the plan cannot cover the next quarter, she may still sell lawfully when she is not in possession of UPSI, or rely on rebutting the presumption under Regulation 4.

Exam tips

Write the structure the examiner expects: rule, application to the facts, conclusion. Cite Regulation 3 or 4 and Section 12A or 15G.
Name the exact act in the facts: communicating, procuring, or trading. Each has its own rule.
In a case question, always check the exception before concluding a breach.
Do not cite Section 195 of the Companies Act, 2013; it has been omitted.
For the penalty, give the full range with the floor and the higher-of rule.

Practice questions from Prohibition of Insider Trading

Communication of UPSI and Trading When in Possession: frequently asked questions

What is a legitimate purpose for sharing UPSI?

It is sharing needed in the ordinary course of business, such as with auditors, lawyers, bankers or consultants who need it for their work. The recipient is then treated as an insider. The company must keep a structured digital database of such persons.

Can an insider with UPSI trade at all?

An insider cannot trade while in possession of UPSI, but may rely on a defence. A pre-cleared and disclosed trading plan made in advance is the main route. The insider can also rebut the presumption with other facts.

Is Regulation 4 the same as Section 12A of the SEBI Act?

No. Section 12A is the statutory ban on insider trading and on dealing while in possession of non-public information. Regulation 4 is the detailed rule in the PIT Regulations, 2015. Cite both when useful.

What is the penalty for communicating UPSI?

Under Section 15G, an insider who communicates UPSI other than in the ordinary course of business or under any law is liable to a penalty. It is not less than ten lakh rupees and may extend to the higher of twenty-five crore rupees or three times the profit.