An August 2025 Informal Guidance by SEBI for Welspun Corp Limited sought to clarify the applicability of contra trade on release of pledge. However, it goes on to say that: “…in case of creation of pledge/ revocation, the beneficial ownership does not change till pledge is invoked”. While the IG was specific to revocation of pledge, this seems to be creating a confusion on the contra trade restrictions on creation of pledge. In this article, we discuss the nature of pledge as a trade, and applicability of trading related restrictions on various stages of pledge. Also see a detailed article on treatment of various stages of pledge as trading under PIT Regulations.
Is pledge a trade?
Answer is yes
Trading means dealing in securities in any form [Reg 2(1)(l) of PIT Regulations]
Explanation to the definition expressly includes “pledging”
Creation of pledge may be considered equivalent to disposal/ intent to dispose the shares
Is release of pledge a trade?
Technically, a release (or so-called revocation) of a pledge is also a trade. However, given there is no change in beneficial ownership, there is no concern, at least from a contra trade perspective
There is no actual acquisition or intent to acquire shares, it is mere restoring back the position as it was prior to the creation of pledge
The shares are coming back to the person who was the beneficial owner of such shares previously.
Is invocation of pledge a trade?
No, since invocation of pledge is not at the discretion of the holder of shares
Invocation results in actual disposal of shares, however, related compliances w.r.t. such shares are undertaken at the stage of creation of pledge itself
Examples to understand contra-trade on pledge
Any opposite trade within 6 months of a prior trade attracts violation of contra-trade, except in case of specific waiver for a bona fide purpose. We discuss various combinations of trades within a span of 6 months to understand whether such trades attract contra-trade restrictions.
Transaction 1
Transaction 2
Is it contra-trade?
Can a waiver be granted by CO?
Purchase of shares (Buy)
Creation of pledge (Sell)
Yes, opposite trades within 6 months
Yes, if the DP is able to demonstrate the urgency and bona fide nature of such transaction
Creation of pledge (Sell)
Purchase of shares (Buy)
Yes, opposite trades within 6 months
In such a case, it is very difficult to prove bona fide of the subsequent trades of purchase of shares after creation of pledge.
Creation of pledge (Sell)
Release of pledge
No, since the release of pledge does not result in an opposite trade per se, it is incidental to the primary trade of pledge creation and only restores back the position as it was prior to creation of pledge.
NA
Release of pledge
Creation of pledge with another person (Sell)
No
Yes, if the DP is able to demonstrate the urgency and bona fide nature of the underlying transaction for which the pledge is to be created
Purchase of shares (Buy)
Invocation of pledge (Sell)
No, since the invocation of pledge is not at the discretion of the shareholder. The relevant act of disposal of shares is taken into account as a “trade” upon creation of pledge itself, and hence, not considered as “trade” again, upon such invocation.
NA
Invocation of pledge (Sell)
Purchase of shares (Buy)
NA
What is a bonafide purpose in the case of a pledge?
How does the Compliance officer verify/ensure that the purpose of the pledge is bonafide?
There cannot be any sure or one-size-fits-all response to this. Pledge is not for its own sake; pledge for an underlying transaction, which may be margin trading facility, borrowing, etc. The Compliance Officer should see whether that underlying transaction is within the regular business or activity of the pledgor. Whether the pledge is limited to the shares of the listed entity or has other securities? Whether the pledgee is an entity which is engaged in providing similar facilities to several unrelated entities? Whether the timing of the pledge is not indicating the advantage of a price spurt, etc.
Compliances applicable to various stages of pledge
The applicability of contra trade restrictions on the various stages of pledge are tabulated hereunder:
Stage of pledge
Nature of trade (Acquisition/ Disposal)
Pre-clearance required?
TWC applicable?
Contra-trade restrictions applicable?
Remarks
Creation of pledge
Disposal
Yes
No, if the trade is bona fide
Yes
While creation of pledge amounts to trade, exemptions from TWC and contra trade may be availed if the trade is for bona fide purpose.
Release of pledge
Acquisition
No
No
No
No change in beneficial ownership, and no actual acquisition/ disposal – mere restoration of the position prior to creation of pledge
Notice of invocation of pledge
NA
NA
NA
NA
No dealing in securities, mere notice specifying intent
Invocation of pledge
Disposal, however, continuation of the prior action of creation of pledge
No
NA
No
Invocation of pledge is done by the pledgee upon default. Once a pledge is created, the pledgor has no control over the invocation of such pledge upon default. Further, since creation of pledge is itself considered as ‘disposal’, the same shares cannot be considered to have been ‘disposed’ again, upon invocation.
Sale of pledged securities
Disposal, however, continuation of the prior action of creation of pledge
No (however, intimation to CO post sale, if not covered by System Driven Disclosure)
NA
No
Sale of pledged securities is done by the pledgee, and is not under the control of the pledgor. Further, since creation of pledge is itself considered as ‘disposal’, the same shares cannot be considered to have been ‘disposed’ again, upon sale.
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Staffhttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngStaff2026-03-09 18:32:312026-03-12 09:49:20Span of Welspun: Is pledge/unpledge a trade under PIT?
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Team Corplawhttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngTeam Corplaw2025-11-19 19:11:392025-11-27 16:54:51FAQs on contra trade restrictions under PIT Regulations
Designated persons, being insiders with regular privileged information flow, cannot be doing what other investors can do. Several option trades may be devices to skim short term swings in share prices. can designated insiders do these? This interesting question, mostly ignored in Indian corporate practice, is explored in this article.
Derivatives trading is becoming increasingly popular in India, including amongst the retail investors. A recent address by SEBI’s Chairman urges the retail investors to assess their risk capacity while dealing in derivatives and avoid speculative trades. A July 2025 study by SEBI on trading activity of investors in Equity Derivatives Segment (EDS) indicates a relatively very high level of trading in EDS, as compared to other markets, particularly in index options. Further, within EDS, options segment (in premium terms) has shown growth at the fastest rate with average daily premium traded growing at the CAGR of 72% for index options and 54% for single stock options.
Given the large volumes of derivatives trading, in addition to the concerns on loss of investor’s money (nearly 91% of individual traders incurred net loss in EDS in FY 2025), it is also important to examine the concerns which would arise from an insider trading perspective. Pertinent questions would be whether derivatives trading also comes within the purview of insider trading, and if the answer to this is yes, whether it will also attract the prohibition around contra-trade, where the market participants bet on the short-term future value of the underlying assets to make a profit.
This article examines the aforesaid questions in the light of extant laws, and global position.
Prohibition on insider trading
The prohibition on insider trading comes from Section 12A of SEBI Act –
“No person shall directly or indirectly—
(d) engage in insider trading;”
Reg. 4(1) of PIT Regulations applicable universally to all insiders, also puts a blanket prohibition on trading when in possession of UPSI:
“No insider shall trade in securities that are listed or proposed to be listed on a stock exchange when in possession of unpublished price sensitive information:”
Para 4 of Schedule B (model CoC for listed entities) specifically pertains to trading by Designated Persons (DPs). They can trade subject to compliance with the Regulations – which provide for monitoring through the concept of “trading window” that is, during which a DP can be reasonably expected to have access to UPSI. Therefore, at such times, the trading window is closed, and the DP cannot trade in securities of that company. When the trading window is open, trading can take place after getting pre-clearance from the Compliance Officer.
In case of a fiduciary, the monitoring happens through a grey list. The concerned persons have to take preclearance from the Compliance Officer. Here, trading restrictions are applicable for securities of such listed companies, for which the person/s is/are acting as fiduciary.
Derivative trading vis-a-vis insider trading norms in India
Prohibition on derivative transactions under 1992 Regulations
“4.2 All directors/ officers/ designated employees who buy or sell any number of shares of the company shall not enter into an opposite transaction i.e. sell or buy any number of shares during the next six months following the prior transaction. All directors/ officers/ designated employees shall also not take positions in derivative transactions in the shares of the company at any time.”
Thus, under the 1992 Regulations, there was a complete and explicit prohibition on derivative transactions for designated employees. Note that the ban was for “any time” and not restricted to only while in possession of UPSI.
Position under the 2015 Regulations
While the contra-trade restrictions have been retained in the existing (2015) Regulations, the provision explicitly calling for blanket prohibition on derivative transactions was omitted. The Sodhi Committee Report does not contain any specific discussions in this regard.
Nonetheless, derivatives, qualifying the definition of “securities”, continue to be covered by the insider trading regulations. Reg 6(3) of the 2015 Regulations specifically refers to trading in derivatives, for the purpose of disclosure of trading in securities.
The disclosures of trading in securities shall also include trading in derivatives of securities and the traded value of the derivatives shall be taken into account for purposes of this Chapter.
As regards the value of derivatives for such disclosures, the same refers to the “traded value” of the derivatives. The format for such disclosures, as specified in the SEBI Master Circular on Surveillance of Securities Market (Annexure – I), also refers to disclosure of trading in derivatives on the securities of the company, and requires calculation of notional value of options based on premium plus strike price of the options.
Further, trading in equity derivative instruments i.e. Futures and Options of the listed company are covered by the system driven disclosures [Para 3.3.3. of the SEBI Master Circular].
Whether the immediate relative of the designated person can trade in the derivatives of the company?
Answer
Yes. Designated person and its immediate relative can trade in derivatives when not in possession of UPSI and such trades are accordingly governed by the code of conduct.
Thus, the following points may be noted –
A person cannot undertake insider trading in securities – directly or “indirectly”. Derivatives are defined under Section 2(ac) of the Securities Contracts (Regulation) Act, 1956.
“Derivative”—includes
(A) a security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security;
(B) a contract which derives its value from the prices, or index of prices, of underlying securities;
(C) commodity derivatives; and
(D) such other instruments as may be declared by the Central Government to be derivatives;
Therefore, trading in derivatives may technically tantamount to trading in underlying securities – indirectly. This is irrespective whether the transaction results in actual delivery or is only net-settled in cash.
The definition of “securities” includes derivatives – hence, there should not be any confusion as to why trading in derivatives of the underlying securities should be excluded from the scope of “trading”
Chapter III of PIT Regs. which is applicable to all insiders (note, that DPs are closest insiders), explicitly says that trading in securities includes trading in derivatives.
SEBI FAQ (Q. 52 above) makes it clear that trading in derivatives is only possible when the DP/ immediate relative is not in possession of UPSI[1]. Of course, whether or not the DP/immediate relative is having possession of UPSI or not, is to be seen at the time the trading is proposed to be done.
Therefore, what is clear is that unlike the 1992 Regulations, there is no explicit provision calling for blanket prohibition on the derivative transactions by DPs and their immediate relatives. However, restrictions as are applicable otherwise in relation to securities of a listed company, would also apply to derivatives having such securities as underlying. Of course, the restriction is not a blanket prohibition as was in 1992.
In simple terms, a derivative should be treated no differently than the underlying security itself. Consequently, in view of the author:
When the trading window is closed, a DP should not be allowed to enter into a derivative in securities as well.
When the trading window is open, trading in derivatives should be subjected to preclearance.
The above position is also apparent in other jurisdictions, where, in the context of insider trading norms, dealing in derivatives is equivalent to dealing in underlying securities.
Once it is clear that trading in derivatives is equivalent to trading in underlying security, then it is obvious to conclude that trading in derivatives will also be governed by contra-trade prohibition in the same manner as trading in the underlying itself. See detailed discussion below.
Issues concerning contra-trade
Rationale for prohibiting contra-trade
The insider trading norms around the world prohibit contra trade or short swing trades by the persons privy to or likely to be privy to unpublished price sensitive information (UPSI) about the listed securities. The SEBI (Prohibition of Insider Trading) Regulations, 2015 restricts the Designated Persons (DPs) and their immediate relatives from undertaking reversal trades, within six months from undertaking the previous trade transaction. The intent is to prevent the abuse of UPSI by making short-term profits through unfair means.
The 2008 Consultation Paper states, “It is assumed that insiders have a long term investment in the company and are not expected to make rapid buy/sell transactions, which are assumedly based on at least some level of superior access to information, whether material or not.”
Hence, whenever there is a contra-trade within a short span of time (6 months), there is a presumption that the said trade is based on some “superior” access to information – as such, contra-trades are simply prohibited. The DP cannot undertake a contra-trade even if it is contended that he does not have UPSI.
Contra-trade in case of derivatives
Naturally, a question arises on whether DPs can trade in derivatives, and if so, when does the same qualify as contra-trade or otherwise, and the consequences that follow. Let’s take a simple illustration – Mr. A, a DP of X Ltd. purchases 100 shares of X Ltd. on 1.11.2024. Then purchases a put option on 15.11.2024, for all 100 shares. On 01.02.2025, on maturity of the put option, A exercised the put option and sold all the 100 shares. All these transactions, as one would note, are happening within a period of 6 months. The question is – whether A was allowed to undertake the 2nd transaction of purchasing a put option within 6 months of the 1st transaction.
There is a question appearing in SEBI FAQ, as follows:
37.Question
In case an employee or a director enters into Future & Option contract of Near/Mid/Far month contract, on expiry will it tantamount to contra trade? If the scrip of the company is part of any Index, does the exposure to that index of the employee or director also needs to be reported?
Answer
Any derivative contract that is physically settled on expiry shall not be considered to be a contra trade. However, closing the contract before expiry (i.e. cash settled contract) would mean taking contra position. Trading in index futures or such other derivatives where the scrip is part of such derivatives, need not be reported.
This question above clearly deals with treatment of expiry of a derivative contract or settlement of a derivative contract as to whether those events would be treated as contra-trade. That is, a culmination of a derivative contract, resulting in the delivery of the underlying will, of course, not amount to a separate “trade” – therefore, there is no question of a contra-trade. On the other hand, where no physical delivery is taken, rather, settled in cash (payment of the difference between the contract’s entry price and market price at expiry), the same amounts to a “sell” trade, thereby, a reversal of the position of the DP. Thus, where the contract is proposed to be settled prior to expiry, it would result in a different transaction/trade – thus, it should be treated as a contra-trade.
Now, if seen in a practical context, in India, the validity of derivatives contract would usually be less than 6 months (typically 1-3 months[2]). And, typically, these derivative transactions in such cases are net-settled before expiry, rather than culminating in actual delivery of securities[3]. Options enable the investors to speculate in shares of higher values and volumes as compared to the cash segment since the only amount payable would be the premium and the net difference in the strike price and spot price later on. Further, cash settlement in derivatives provides a higher leverage to the trader.
In the above scenario, there will always be a higher possibility of a contra-trade. The illustrations below explain the same:
S. No
Transaction
Remarks (assuming T1 and T2 happen within a period of 6 months)
1
T1 – Buy call option T2 – Cash settlement
Contra trade. Buying call option is equivalent to a “buy” transaction. Subsequent cash settlement indicates a “sale” transaction.
2
T1 – Buy call option T2 – Physical settlement
Not a Contra trade. Buying call option is equivalent to a “buy” transaction, subsequent physical settlement only results in delivery of such shares.
3
T1 – Buy call option T2 – Expiry of option on account of out-of-the money
Not a Contra trade. Buying call option is equivalent to a “buy” transaction, however, did not result in delivery on account of the strike price > market price at the time of expiry.
2
T1 – Sell call option T2 – Cash settlement
Contra trade. Selling call option is a “sale” transaction. Cash settlement indicates a “buy” transaction.
3
T1 – Buy put option T2 – Cash settlement
Contra trade. Buying put option is a “sale” transaction. Not taking physical delivery of the shares and carrying out cash settlement indicates a “buy” transaction.
4
T1 – Sell put option T2 – Cash settlement
Contra trade. Selling put option is a “buy” transaction. Cash settlement is deemed to be a “sale” transaction.
As such, trading in derivatives would be much more vulnerable to chances of insider trading, than actual trading in securities. Hence, it becomes extremely important to put mechanisms in place to ensure that derivatives trading be subjected to enhanced restrictions and controls, as suggested below.
Enhanced safeguards in respect of derivative transactions by DPs
It is quite clear that a derivative transaction that results in cash settlement construes a contra-trade. On the other hand, where physical delivery is taken (although it is not very common to close a derivative contract in physical settlement), the derivative transaction is not considered as a contra-trade (although the same is also to be matched against the previous trade in cash segment). Therefore, in order to ensure that the trade does not result in contra-trade, it is essential that the derivative is either settled by delivery or simply expires on the maturity date, and that there is no cash settlement.
In order to ensure this, in case of purchase of options (put/ call) by the DP, pre-clearance may be provided by the Compliance Officer subject to receipt of a declaration that the DP shall necessarily undertake physical settlement of such trades at the maturity date. Of course, there would be no concerns in case of an out-of-the money option, that is, where prior to the expiry of the contract, the market price remains below the strike price. An out-of-the money option does not result in any profits in the hands of the option holder, however, prevents additional loss in the face of exercising an option where the strike price at which the option is exercised and shares are acquired is higher than the current market price at the time of such exercise of option (upon maturity of the contract).
On the other hand, in case of sale of options (put/ call) by the DP (that is, where the DP is the writer of the option), the physical settlement cannot be guaranteed by the DPs, and chances of contra-trade are higher, as the counterparty (that is, buyer of the option) may choose to have cash settlement before the expiry of the derivative contract. Therefore, in order to obviate the possibility of a contra-trade happening, it might be necessary to completely prohibit sale/writing of options by DPs. This prohibition may be enabled through the code of conduct. . In fact, it is seen that several large listed companies have put a blanket prohibition on derivative transactions by DPs and their immediate relatives.
Contra-trade where there is a preceding/succeeding trade in securities
Besides, this FAQ does not deal with a scenario where a DP who has traded in securities already, now proposes to enter into a derivative contract within a span of 6 months from the date of original contract.
However, one thing is clear from this FAQ – the very entering into the derivative contract (and not expiry/maturity thereof) has been considered to be a trade by SEBI. Also, as discussed in the first part of this article, trading in derivatives should be considered as trading in securities itself. As such, if there has been a trade in securities, and there is a subsequent trade, although in derivatives of those very securities, it would result in contra-trade. That is, if in the above example, A enters into a “put option” – then he will have the right but not the obligation to “sell” the underlying shares, within 6 months of buying the shares. Whether to actually “sell” or have a concrete “right to sell” at a future date at or above a given price – it is nothing but a clear case of “contra-trade”.
For instance, assume a DP purchases shares of the listed company on 1.1.2025. Subsequently, on 1.3.2025, the DP purchased a put option. The put options, akin to a sale transaction, results in contra-trade when matched against the previous “buy” transaction in the cash segment, within a gap of less than 6 months between the two transactions. Similarly, where a call option is bought within 6 months of a previous sale transaction, the same results in contra trade.
Compliances in relation to trading in derivatives by DPs
(1) Appropriate mechanisms in the Code of Conduct
Prior to making trades in the derivatives, it is important for the DP to ensure that the Code of Conduct does not prohibit such trades. Unless expressly prohibited, the Code of Conduct may contain necessary clauses as discussed above, in order to enable derivative trading by DPs, subject to enhanced controls on the same.
(2) Manner of identification of derivative trades
The trading in equity derivative instruments i.e. Futures and Options of the listed company are covered by the system driven disclosures [Para 3.3.3. of the SEBI Master Circular]. Hence, an instance of contra trade through derivative instruments is easily identifiable by the Compliance Officer.
(3) Pre-clearance for the purpose of trading
Not all trades of DPs are pre-cleared by the Compliance Officer. The pre-clearance is required only for such trades that exceed the thresholds provided in the CoC of the respective listed entity, generally Rs. 10 lacs or more. Here, the value of trade becomes important, and cannot be just limited to the premium payable/ receivable at the time of purchase/sale of such contract. The price of the securities is also relevant. Pre-clearance may be granted by the Compliance Officer, subject to such conditions and undertaking as suggested above.
(4) Trading during closure of trading window
The DPs cannot trade in the derivatives of a company’s securities during the trading window closure period. In order to ensure the trades are not done during the trading window closure period, the concept of freezing of PAN has been introduced – both at the level of the DP as well as their immediate relatives (see an article here). However, the freezing of PAN is applicable only to the quarterly TW closure pending announcement of financial results.
The DP to ensure that neither him, nor his DPs trade in the derivatives of the company during the closure of trading window period.
(5) Reporting of trades in derivatives
As regards the reporting of trade in derivatives, the SEBI Master Circular provides guidance on calculation of notional value of trades, to be calculated based on premium plus strike price of the options. The disclosure of trades are primarily system-driven, based on the PAN details of the DPs updated with the designated depository. Having said that, in case of trades of the immediate relatives of the DPs, or where the PAN details are not updated with the depository, manual disclosures are required for such trades.
(6) Consequences of violation – disgorgement of profits and penal actions
A breach of contra trade restriction leads to disgorgement of profits made and its remittance to SEBI for credit to IPEF. Here, the question arises on what is considered the value of profits for disgorgement to IPEF, in the context of derivatives.
Where the transaction pertains to ‘sale’ of options, the profits would usually be the premium earned by the seller of options. On the other hand, in case of ‘purchase’ of options, the profits should be the difference between the buy and sale value, net of other expenses in connection with such option contracts.
Guidance may also be taken from 17 CFR § 240.16b-6(d) of the SEC Act, which states that the amount of profit shall be calculated as the profits that would have been realized had the subject transactions involved purchases and sales solely of the derivative security valued as of the time of the matching purchase or sale, and calculated for the lesser of the number of underlying securities actually purchased or sold. The amount of such profit shall not exceed the premium received for writing the option.
In addition to disgorgement of profits, penalty may also be levied. For instance, in an adjudication order dated 29th April 2022, the purchase and sale of options on consecutive days resulted in contra trade violation attracting a penalty of Rs. 2 lacs.
Global view on contra-trade in derivatives
Section 16(b) of the Securities and Exchange Commission Act, 1934 of the USA, restricts contra trade in equity securities, for a beneficial owner holding more than 10% of any class of any equity security, director and officer, including a security-based swap agreement involving any such equity securities. Exemptions have been prescribed for derivative transactions in certain cases in CFR § 240.16b-3 of the General Rules and Regulations.
The General Rules and Regulations of the SEC provides detailed guidance on when a derivative trade qualifies as a short swing trade and vice versa. The same has been summarised here:
Transactions that qualify as “purchase” of underlying securities:
establishment/ increase of a call equivalent position
liquidation/ decrease of a put equivalent position
Transactions that qualify as “sale” of underlying securities:
establishment/ increase of a put equivalent position
liquidation/ decrease of a call equivalent position
Transactions that are exempt from short swing restrictions:
increase/ decrease pursuant to fixing of the exercise price of a right initially issued without a fixed price, where the date the price is fixed is not known in advance and is outside the control of the recipient
Closing as a result of exercise or conversion of the option, that is,
Acquisition of underlying securities at a fixed exercise price due to the exercise or conversion of a call equivalent position
Except in case of out-of-the money option, warrant or right
Disposition of underlying securities at a fixed exercise price due to the exercise of a put equivalent position.
Where the person trading is not a major beneficial holder, and thus, an insider, at the time of both the transactions which are being termed as contra trade [Section 16-b of SEC Act].
Other exemptions apply w.r.t. transactions with the issuer, subject to certain conditions and transactions pursuant to tax conditioned plans [CFR § 240.16b-6]
Article 164 of the Financial Instruments and Exchange Act, 1948 of Japan also restricts reverse trades in specified securities, by major shareholders and officers etc, who may have obtained secret information in the course of their duty or by virtue of their position. Specified securities, for the purpose of the said provision, include Derivatives [Article 163 r/w Article 2(xix)].
Judicial precedents on contra trade transactions
In Allaire Corporation v. Ahmet H. Okumus, the Circuit Court held that when the option is written by the insider, he has no control over whether the options buyer will exercise the option or square it off. Thus, trade carried out pursuant to selling an option shall not be considered a transaction for the purpose of determining whether a set of transactions is a contra trade or not. The facts of the case involved writing another option within six months of expiry of the first option remaining un-exercised. Note that the expiration of the first set of options does not constitute a purchase matchable to the later sale of a different set of call options.
However, as clarified in Roth v. The Goldman Sachs Group, Inc., et al., No. 12-2509 (2d Cir. 2014), when matched against its own writing, the expiration of an option within six months is a “purchase transaction” for the purpose of section 16-b.
The danger of misuse of non-public information exists at the time the option is written, and the expiration of that option is the moment of profit. Matching writings with expirations of different options does not clearly advance the purposes of the statute. Options written at different times are less likely to give rise to speculative abuse, and matching the expiration of an option only to its own writing recognizes the more evident danger.
In Chechele v. Sperling,the Circuit Court held that where pursuant to the settlement of the futures contract, the pledge on shares is revoked, the revocation is not considered to be a ‘purchase’ transaction to be combined with the open market sale of such shares to identify these trades as contra trades.
The exercise of a traditional derivative security is a “non-event” for section 16(b) purposes.
In the case of Macauley Whiting v. Dow Chemical Company, the Court held that where the insider has exercised an option to purchase shares and his spouse has sold shares within a period of 6 months, these transactions shall be considered to be short swing trades (contra trades).
In the context of § 16(a), the Commission has evolved a dual test of an insider’s beneficial ownership of his or her spouse’s shares. Such beneficial ownership may derive from the insider’s “power to revest” in himself title to those shares.[6] Or it may result from his enjoyment of ‘benefits substantially equivalent to those of ownership.’
In the case of Kern County Land Co. v. Occidental Petr. Corp., a person fails in his attempt of a takeover due to a defensive merger carried out by the target company. During the period when the merger was being finalised, the acquirer entered into an option agreement with the transferee company. The option agreement stipulated that if and when the merger succeeds, the transferee company would buy the shares held by the acquirer pursuant to the takeover attempt. The US Supreme Court held that such a set of trades would not result in contra trade because the actions of the acquirer were involuntary.
The option was grounded on the mutual advantages to respondent as a minority stockholder that wanted to terminate an investment it had not chosen to make and Tenneco, whose management did not want a potentially troublesome minority stockholder; and the option was not a source of potential speculative abuse, since respondent had no inside information about Tenneco or its new stock.
Concluding Remarks
In practice, several large listed companies continue to prohibit trading in derivatives by the Designated Persons and their immediate relatives through their Code of Conduct. The regulations do not enforce such blanket prohibition, although no trading can be done that falls foul of other requirements of the Regulations – viz., trading while in possession of UPSI, contra trades, trading during closure of trading window, trading without pre-clearance etc.
Having said that, derivatives, by nature, are short term trades based on the expectations of the movement in price of the securities in a certain direction within a short period of time. Therefore, in case of trades by DPs, the chance of such trades being motivated by an information asymmetry is comparatively higher, thereby potentially resulting in an insider trading allegation on such DP.
[1] Annexure VII of ICSI Guidance Note on Prevention of Insider Trading states “The designated persons and their immediate relatives shall not take any positions in derivative transactions in the Securities of the company at any time.” However, the source of such stipulation is not clear, as currently there is no corresponding provision in PIT Regulations.
The position of a compliance officer is a reflection of challenges. As much as the individual holding this position enjoys reputation and superintendence, there is a constant expectation from regulatory authorities of ensuring compliance and active enforcement of the law. In the context of PIT regulations, SEBI does not expressly specify the extent of a Compliance Officer’s role(hereinafter referred to as CO) in supervising a particular compliance; however, various adjudication orders throw light on the expectations from CO. In recent cases, the regulatory watchdog has held the CO, amongst others, liable for lapses in complying with the PIT regulations, whereas in some cases, it has exonerated the CO from any liability imposed by default, owing to its superlative position in the company. The article delves into the nuances of the role of a CO, aiming to propose a clear, definitive line of duty to be observed and appreciated by the SEBI during instances of violation of this law.
2. Identifying a CO- SEBI (PIT) Regulations 2015
Reg 2(1)(c) of the SEBI (PIT) Regulations defines a Compliance Officer as: 1. Any senior officer, designated so and reporting to the board of directors 2. A financially literate person capable of deciding compliance needs. 3. A person responsible for compliance with policies, procedures, maintenance of records, and monitoring adherence to the rules for the preservation of:
Unpublished price-sensitive information (hereinafter referred to as UPSI)
Monitoring of trades, and
The implementation of the codes specified in these regulations is under the supervision of the board of directors of the listed company.
It is to be noted that the definition gives way for any senior officer to be a compliance officer to perform obligations[1] stated in the following segment. The SEBI had also noted in a matter that the interim company secretary of a company who has not been appointed as the compliance officer under PIT during the UPSI period cannot be forthwith held liable.[2] The above duties (monitoring, implementation, maintenance, etc) are, though explanatory of the role of a compliance officer, not definitive or fenced in form and substance. The SAT held in a case that a CO cannot be blamed for disclosures under the above regulation, of board-approved misstatements.[3] Relevant extracts are given below:
“The Compliance Officer works under the direction of the Board of Directors of the Company. It was not open to the Compliance Officer to comply with Clause 36 of the Listing Agreement. At the end of the day, the Compliance Officer is only an employee of the Company and works on the dictates and directions of the management of the Company. Thus, when the entire management is being penalised, it was not open to the AO to also book the Compliance Officer for the said fault.”
Now this brings us to the question as to the actual duties and obligations of a CO, and its viable extent to avoid stretched expectations. There cannot be a straight-jacket formula, as this depends on the nature of the violation of a particular category of regulations under SEBI PIT.
3. Responsibilities of a CO – SEBI (PIT) Regulations 2015
Before proceeding to the liabilities of a CO, it is important to delineate the main obligations of a CO as per SEBI (PIT) Regulations. These are given below:
Every listed company, intermediary and other persons formulating a code of conduct shall identify and designate a compliance officer to administer the code of conduct and other requirements under these regulations [Reg 9(3)].
The CO must review the trading plans submitted by designated persons. For doing so, he can ask them to declare that he does not have UPSI or that he must ensure that the UPSI in his possession becomes generally available before he commences his trades [Reg 9(3)]. The CO shall report to the board and shall provide reports to the Chairman of the Audit Committee, or to the Chairman of the board at such frequency stipulated by the board, being not less than once a year [Reg 9(3)].
All information shall be managed within the organisation on a need-to-know basis, and no UPSI shall be conveyed to any person except in furtherance of legal duties, subject to the Chinese wall procedures [Reg 9(3)].
When the trading window is open, trading by designated persons shall be subject to pre-clearance by the compliance officer if the value of the proposed trades is above such thresholds [Reg 9(3)].
The timing for re-opening of the trading window shall be determined by the CO, upon considering several factors, including the UPSI becoming generally available and being capable of assimilation by the market, which shall not be earlier than forty-eight hours after it becomes generally available [Reg 9(3)].
Before approving any trades, the compliance officer shall seek declarations to the effect that the applicant for pre-clearance is not in possession of any UPSI. He shall also have regard to whether such a declaration is capable of being inaccurate. The compliance officer shall confidentially keep a list of certain securities as a “restricted list”, which shall be the basis for reviewing applications for pre-clearance of trades [Reg 9(3)].
These are some of the duties specified in the Regulations. However, the extent of liability of the CO arising from the aforesaid duties requires determination.
4. Potential liabilities of CO:
To determine the extent of obligations of a CO with respect to disclosures, records, or any compliance, there is a need to segregate the duties of a CO into specific categories crafted according to the several aspects to be considered while ensuring adherence to the PIT regulations. In this direction, an effort has been made below:
Closure of Trading window:
A CO cannot be held responsible for not closing the window for certain traders, if the UPSI was not disclosed by the designated person or if the person executed a trade much before the UPSI becomes generally available, in contravention of the trading plans approved or if the disclosure was concealed inadvertently by the board[4].
A CO can also not be held liable if an insider trades in the securities of the company with UPSI, without obtaining pre-clearance from him, even after asking the person to disclose UPSI. He cannot claim that he did not close the trading window on the grounds of lack of awareness of a demand notice received from an operational creditor, which was the start date of UPSI, upon being disclosed to the stock exchange.[5]
So, it is important to understand that a Compliance Officer is not expected to possess perfect foresight, but to exercise prudent diligence. When the trading window is closed in good faith, established procedures are adhered to, and no proof of negligence or systemic failure exists, regulatory liability cannot be imposed on a CO merely on the basis of retrospective evaluation of his inherent duty[6]. He must tend to certain nuances (such as whether the issue of ESOPs is permissible during the window closure)[7], and employ the best professional judgment to red-circle information as UPSI to ensure effective closure of the trading window without breaches.[8]
Maintenance of structured digital database (SDD):
A CO can be held liable for not maintaining SDD as per Annexure 9 of the guidance note on insider trading. However, the SDD must be “real-time and tamper-proof”. The CO would not be held liable if no particular system/controls existed, such as an audit trail mechanism to secure the SDD and prevent leaks. However, citing delay in procurement of software, accidental omissions[9] or the lack of manpower to scrutinise bulky entries of transactions[10] cannot be regarded as valid arguments by a CO.
It is also pertinent that the CO of a listed company adheres to the standard operating procedure for filing the SDD certificate with the stock exchange within a particular deadline. Failure to do so shall attract the following actions by the exchange within 30 days from the due date of filing the SDD certificate: a. Display the name of the company as “non-compliant with SDD” and the name of the compliance officer on the SE website; b. No new listing approvals will be granted (except for bonus issue and stock split); among other actions.[11]
Verifying documents given by the Board:
The SAT has held in the appellate order of V Shanker vs SEBI, taking reference from the case of Prakash Kanungo, that compliance officers are not responsible for re-auditing board-approved documents related to any information on securities, transactions, etc, to test their financial literacy[12]. As seen in the definition, a CO shall work under the supervision of the board and cannot question the decisions of the board. Ergo, he cannot be held liable for making invalid, board-approved disclosures per Reg 7 of the regulations.
Trading by designated persons: Granting of Pre-Clearance and Contra trade restrictions
Pre-clearance becomes a mandatory action in cases where a trading plan has not been submitted/approved by him. The CO must ensure that no designated person executes a trade after expiry of 7 days from the date of granting pre-clearance [13] and must consider the possibility that the declaration given by the person may turn inaccurate.
Prima facie, it is important that the CO can effectively assess and discern a piece of information as UPSI, and the possibility of traders possessing UPSI, before giving a nod. The SEBI has held that a CO is expected to comprehend that the materiality of an event lies not only in its price tag but in its ability to shape market perception. He can be held liable if he limits his view to on-record numerical data, and not the quantum of the event.[14] For instance, the knowledge related to setting up a branch in a higher strategic area amounts to UPSI, and if clearance was granted to those in possession thereof, the CO will be penalised for lack of diligence.[15] Furthermore, his inaction is tagged as dereliction of duty when he couldn’t foresee a contra trade by a person who was granted pre-clearance for “dealing in the shares of the company”, on grounds of being “occupied with work”.[16]
However, a CO cannot be held liable for a bona fide lack of knowledge of the exposure of a Designated person to UPSI on the very date of granting pre-clearance to that person. In such a case, the CO cannot be held responsible for any trade executed by such a person while in possession of UPSI [17], but compelling evidence must be furnished by the CO to back his claim of genuine unawareness.
Finally, it is the core duty of the CO to promptly inform the same to the stock exchange(s) where the concerned securities are traded, in case any violation of Regulations is observed[18]. The CO can take assistance from the chief investor relations officer (CIRO) if it is the company’s discretion to designate two separate persons as CIRO and CO, respectively, for meeting specified responsibilities as to the dissemination of information or disclosure of UPSI[19].
5. Conclusion
A compliance officer is designated as a key managerial person. His role is not one of flawless foresight but of demonstrable diligence. As underscored in Rajendra Kumar Dabriwala v. SEBI[20], the responsibility for compliance must not be burdened on a single individual—it must be embedded within the organisational fabric in the backdrop of PIT regulations. To that end, building a resilient compliance ecosystem can enable a CO to define its limitations effectively while ensuring that inherent obligations are fulfilled with efficiency. This requires adopting formalised Standard Operating Procedures (SOPs), automated monitoring tools, structured checklists[21] for promoters, directors, and intermediaries to map recurring corporate events, and AI-assisted detection of UPSI, among other measures.
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Staffhttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngStaff2025-10-16 21:00:562025-10-16 22:40:24Defining Duty: Extent of Liability of a Compliance Officer under Insider Trading Regulations
The idea of unpublished price sensitive information (‘UPSI’) is something which companies have to guard as confidential until disclosed to investors, as it may materially impact the stock prices. Price sensitivity of an event has to do with the impact of the event on the company’s profitability, turnover, long-term or short-term prospects, shareholding base, etc. The identification of these events is done based on the materiality of the event to the business and business model. The more prescriptive the list supplied by the lawmaker is, the more one takes away the sense of responsibility and accountability to the corporate team that flags corporate events as material. If the lawmakers flag them all, or flag a lot, the very seriousness of tagging an information as price sensitive is taken away.
Pursuant to SEBI (Prohibition of Insider Trading) Amendment Regulations, 2025 (‘present amendment’) SEBI has amended UPSI definition, effective from June 10, 2025[1] inserting a longer list of information, some of which may seem purely operational or business-as-usual for listed companies. Whether each of this information will be regarded as “deemed UPSI”, thereby requiring compliance officers to do the drill of structured digital database entry to even trading window closure every time such an event occurs? While the amended definition seems indicative of this, the intent of the regulator seems otherwise. This article tries to explain.
Linking UPSI determination with material events under Reg 30 : the journey
The idea of linking UPSI determination with Reg 30 events is not new. In fact, the definition of UPSI under PIT Regulations originally included “material events in accordance with the listing agreement”, within the definition of UPSI. The same was subsequently omitted vide Amendment Regulations, 2018 effective from 1st April, 2019.
The omission of material events under LODR from the definition of UPSI was a result of the recommendations of the Committee on Fair Market Conduct, under the Chairmanship of Shri T.K. Viswanathan. The Committee noted that every material event under LODR is not necessarily price sensitive, and therefore, the explicit inclusion of the same as UPSI is not appropriate.
The Committee noted that the aforesaid regulation require disclosures of material events or information which may or may not be price sensitive. Accordingly, the Committee is of the view that all material events which are required to be disclosed as per the Regulation 68 of the LODR Regulations may not necessarily be UPSI under the PIT Regulations. Since, the definition of UPSI is inclusive, the Committee recommends the removal of explicit inclusion of “material events in accordance with the listing agreement” in the definition of UPSI.
Thereafter, SEBI vide a Consultation paper dated May 18, 2023, proposed restoration of material events under LODR in the definition of UPSI. The public feedback largely pointed out that all events or information under Regulation 30 of LODR Regulations may not have an impact on the price of securities, hence, it is not rational to extend the UPSI definition to all material events under Reg 30 of LODR.
As mentioned above, the amendments have been notified vide the Amendment Regulations, 2025 effective from June 10, 2025 providing a long list of Reg 30 events within the meaning of UPSI.
List of information under definition of UPSI: illustrative or prescriptive?
The definition of UPSI contains two parts – (a) subjective meaning of UPSI, and (b) a list of events that may be considered as UPSI. To this end, the definition of UPSI reads as:
“unpublished price sensitive information” means … and shall, ordinarily including but not restricted to, information relating to the following:
XXX
The present amendment pertains to the second part of the UPSI definition. A question would arise on whether the list of events may be considered as indicative, illustrative of what may constitute UPSI, or prescriptive, providing a deeming status of UPSI to such events/ information without assessment of the probability of price-sensitive impact of such information.
The Committee also felt that some illustrative examples of what would ordinarily constitute UPSI should be set out to clearly understand the concept. It would be important to ensure that regardless of whether the information in question is price-sensitive, no piece of information should mandatorily be regarded as ―UPSI. Towards this end, examples of events and developments information about which would ordinarily be regarded as UPSI, are listed – such as financial results, dividends, mergers and acquisitions, changes in capital structure etc.
XXX
To conclude, whether or not a piece of information is generally available or is unpublishedwould necessarily be a mixed question of fact and law. A bright line indicating the types ofmatters that would ordinarily give rise to UPSI are listed to give illustrative guidance. Itcould well also be possible that information from such events could be routine in natureand consistent with a long history. Information about the repetition of the same event onpredictable lines would not render it to be UPSI unless deviated from. For example, thedeclaration of dividend at the same rate at which a company has declared dividend for theseveral years as per publicly stated dividend policy.
Hence, it can be well understood that the idea behind providing an illustrative list of events in the definition of UPSI is not to render the same as “deemed UPSI”, thus mandating the treatment of the same as UPSI. Rather, the intent is to provide illustrations for a better understanding of what may ‘ordinarily’, and not ‘mandatorily’, constitute UPSI.
As evident from the discussion in SEBI BM agenda, the events/ information added in the definition of UPSI pursuant to the present amendment are given for ‘illustrative guidance’. For instance, while addressing the comment in case of routine fund raising in the usual course of business, SEBI acknowledged the fact that if the fund raising is routine in nature and on predictable lines it would not materially affect the price and thus, may not be UPSI. Similarly, in response to the comment on providing specific meaning of ‘impact on management’, it was stated that the same would make it prescriptive, which is not the intent of law.
Therefore, listed entities continue to have the power to determine UPSI based on the expected impact of such an event or information on the price of securities of such entities. The list of events under the definition of UPSI only provides an indicative guidance.
Applicability of the amendments
The Amendment Regulations, though notified on 11th March, 2025, are effective on the 90th day from the publication of the same in the official gazette, that is, 10th June, 2025. Does that mean that the listed entities are not required to identify an event falling under the ‘illustrative list’ as UPSI during the said period, even if the same is price-sensitive? Can a listed entity contend that the categorisation of an event as UPSI, where such an event is falling under the elongated “attention list”, though price-sensitive, is not mandatory for UPSI originating prior to 10th June, 2025?
In our view, such a stance cannot be taken. The intent of the regulations have also been such that required companies to evaluate every event or information, for potential price-sensitivity, and based on such judgement, categorise an information as UPSI until made generally available to the public at large. Therefore, one cannot take a view that such an event was not UPSI prior to the amendments becoming effective, and will take the character of an UPSI only after 10th June, 2025.
An example will make the case clearer. Concrete discussions with respect to a proposed fund raising commenced from 1st May, 2025. The board meeting for approval of the fund raising proposal will take place on 12th June, 2025. Will the listed entity be required to categorise the information as UPSI from 10th June, 2025 (effective date of applicability of the amendments) to 12th June, 2025 (board meeting date on which the final decision will be made and Reg 30 intimation will be provided to the stock exchanges making the information generally available)?
Here, what needs to be evaluated is whether, in accordance with the UPSI guidelines of the entity, the person(s) in-charge of the identification of UPSI has considered the information to be of a price-sensitive nature. If the answer is yes, the information should have been categorised as UPSI from 1st May, 2025 itself, regardless of the applicability of the amendments.
On the other hand, if the same was evaluated and not considered to be price-sensitive at the time the information was concretised, assuming there has been no further developments subsequently that would give the information the character of being price-sensitive, such an information would not require UPSI categorisation even after 10th June, 2025. A third scenario would be where the information was, in fact, price-sensitive from the time of its concretisation, that is, 1st May 2025, however, not evaluated for price-sensitivity on the account of not explicitly covered under the definition of UPSI. In such a circumstance, the information was actually an UPSI since 1st May, and should have been categorised as such from that time itself. Pursuant to the present amendments, such information that was price-sensitive but not taken care of in the appropriate manner, would now come under the “attention list” of the listed entities.
Need for elongating the ‘illustrative list’ of UPSI
The discussion above makes it clear that the elongated definition does not necessarily result in providing a deeming character of UPSI to the specified events/ information under Reg 30. In such a case, a question may arise on the relevance of providing such an elongated list of UPSI.
The need for the present amendment has been set out in the Consultation Paper and BM agenda of SEBI in the following manner:
However, contrary to expectations, a study conducted by SEBI along with stock exchanges, revealed that, after the amendment to the definition of UPSI in the PIT Regulations, which removed the expression “material events in accordance with the listing agreement”, by and large, companies were seen to be categorizing only the items explicitly mentioned in PIT Regulations as UPSI. The market feedback also suggested that most companies consider this to be a ‘uniform practice’. Therefore, in light of the above observations, SEBI felt that there exists a need to review the definition of UPSI.
Events included in the ‘illustrative list’ of UPSI
A. Deemed material events (Para A of Schedule III) added to the UPSI list
Insertion in definition of UPSI
Relevant clause in LODR
Discussion in CP/ BM Agenda
VKCo guidance on UPSI categorisation
Change in rating(s), other than ESG rating(s)
New Rating(s) or Revision in Rating(s)
Upward/ downward revision to be considered UPSI.New ratings for fresh issue of securities will get covered under ‘change in capital structure’ or ‘fund raising proposed to be undertaken;Considering ESG Ratings are at a nascent stage, SEBI has excluded ESG rating.
Instances of revision may ordinarily have a price-sensitive impact. Also, while withdrawal of ratings is not explicitly covered, it should also be covered
Fund raising proposed to be undertaken
the decision with respect to fund raising proposed to be undertaken including by way of issue of securities (excluding security receipts, securitized debt instruments or money market instruments regulated by the Reserve Bank of India), through …
If the fund raising is routine in nature and on predictable lines it would not “be likely to materially affect the price of the securities” and thus may not be UPSI
It is common for NBFCs and other financial sector entities to raise funds through issuance of NCDs. Being routine in nature, such fund-raising would not constitute UPSI pursuant to the present amendment.
Agreements, by whatever name called, which may impact the management or control of the company
Agreements covered by Clause (5) and (5A) of Para A of Part A
Original proposal under CP required two conditions: (i) agreements that impact the management and control of the company and (ii) are in the knowledge of the company However, pursuant to BM, agreements impacting either ‘management’ or ‘control’ have been included.
Usually agreements which may impact the management or control are price sensitive in nature. However, if the change is purely inter-promoter transfers or similar agreements, which may not impact the working or operations of the entity, a view may be taken
Fraud or defaults by the company, its promoter, director, KMP, or subsidiary or arrest of KMP, promoter or director of the company, whether occurred within India or abroad
Fraud or defaults by a listed entity, its promoter, director, KMP, SMP or subsidiary or arrest of KMP, SMP, promoter or director of the listed entity, whether occurred within India or abroad
SMP excluded considering the same may not generally have a material impact on the price of securities of the listed entity. Such fraud, default or arrest should be in relation to the listed entity.
In determination of the materiality and hence, price-sensitivity of information under this clause, guidance may also be drawn from the ISN on Reg 30. Refer a brief note on the ISN here.
Changes in KMP other than due to superannuation or end of term, and resignation of a Statutory Auditor or Secretarial Auditor
Change in directors, KMP senior management, Auditor and Compliance Officer
MD/WTD/CEO not proposed to be re-appointed may be potential UPSI. Resignation of CFO or CS may be usual movement across entities, and , may not be in the nature of UPSI. On the other hand, any resignation citing governance issues, including that of an independent director, though not covered explicitly in the definition, should be considered as UPSI. Similarly, every instance of resignation by the statutory or secretarial auditor may not be UPSI. For instance, resignation on account of bandwidth or personal limitations of the auditor. .Resignation on account of corporate governance concerns, or indicating frauds/ accounting lapses etc may be considered as UPSI.
Resolution plan/ restructuring or one time settlement in relation to loans/borrowings from banks/financial institutions
Resolution plan/ Restructuring in relation to loans/borrowings from banks/financial institutions. One time settlement with a bank
No threshold limit provided since the same pertains to Para A item under Schedule III.
Admission of winding-up petition filed by any party /creditors and admission of application by the Tribunal filed by the corporate applicant or financial creditors for initiation of corporate insolvency resolution process against the company as a corporate debtor, approval of resolution plan or rejection thereof under the Insolvency and Bankruptcy Code, 2016
winding-up petition filed by any party / creditors events in relation to the corporate insolvency resolution process of a listed corporate debtor under the Insolvency Code
Filing a winding-up petition itself is a material event requiring intimation to the stock exchanges. Admission of such a petition is the second stage, and while the same may be ‘price-sensitive’, it is not clear as to what would be ‘unpublished’ for the purpose of ensuring PIT controls on the same. This appears to be one of the instances of events emanating from outside the entity, and hence, relaxations w.r.t. SDD entries and trading window closure may be availed (see discussion below).
Initiation of forensic audit, by whatever name called, by the company or any other entity for detecting mis-statement in financials, misappropriation/ siphoning or diversion of funds and receipt of final forensic audit report
Initiation of Forensic audit a) The fact of initiation of forensic audit along-with name of entity initiating the audit and reasons for the same, if available; b) Final forensic audit report (other than for forensic audit initiated by regulatory / enforcement agencies) on receipt by the listed entity along with comments of the management, if any.
While it was suggested to not consider receipt of final forensic report as UPSI, the suggestion was not accepted since the information regarding outcome of such forensic audit may also be UPSI
In our view, once the initiation of forensic audit is considered as UPSI, the said event, although disclosed as a material event, should continue to be considered as UPSI till the time the final forensic audit report is not made public.
Action(s) initiated or orders passed within India or abroad, by any regulatory, statutory, enforcement authority or judicial body against the company or its directors, key managerial personnel, promoter or subsidiary, in relation to the company
Clause (19) and (20) of Para A of Part A of Schedule III
SMP excluded considering the same may not generally have a material impact on the price of securities of the listed entity
The explanation to the amended definition to UPSI provides that for the identification of events enumerated as UPSI, the guidelines for materiality referred to in para A of Part A will be applicable. Therefore, an imposition of penalty will require disclosure if the same exceeds the limits of Rs. 1 lakh by sector regulators/ enforcement agencies and Rs. 10 lakhs for other authorities. The materiality of an action taken vis-a-vis the price of the securities of the listed entity depends on various factors, such as criticality of the non-compliance warranting an action, severity of the action/ penalty, impact of the penalty on the reputation and profits of the listed entity etc. Hence, not each instance of action taken or penalty imposed would require identification as UPSI. Further, the UPSI under this clause, being an event emanating from outside the listed entity, relaxations with respect to SDD entries and trading window closure may be availed (see below)
B. Events determined as material (Para B of Schedule III) added to UPSI list
Insertion in definition of UPSI
Relevant clause in LODR
Discussion in CP/ BM Agenda
Award or termination of order/contracts not in the normal course of business
Awarding, bagging/ receiving, amendment or termination of awarded/bagged orders/contracts not in the normal course of business
Expected to have a significant impact on the revenue and profitability of the company. Materiality will be based on thresholds provided under Reg 30(4) of LODR read with the ISN on Reg 30.
Outcome of any litigation(s) or dispute(s) which may have an impact on the company
Pendency of any litigation(s) or dispute(s) or the outcome thereof which may have an impact on the listed entity
Initial order and pendency or any litigation is available in the public domain, hence, not UPSI.Materiality will be based on thresholds provided under Reg 30(4) of LODR read with the ISN on Reg 30.
Giving of guarantees or indemnity or becoming a surety, by whatever named called, for any third party, by the company not in the normal course of business
Giving of guarantees or indemnity or becoming a surety , by whatever name called, for any third party.
Only such guarantees that are not in normal course of business will be UPSI Materiality will be based on thresholds provided under Reg 30(4) of LODR read with the ISN on Reg 30.
Granting, withdrawal, surrender, cancellation or suspension of key licenses or regulatory approvals.
Granting, withdrawal , surrender , cancellation or suspension of key licenses or regulatory approvals
As regards the suggestion of defining key licenses and regulatory approvals, the same being dependent on the industry or sector, the same has not been defined separately. Here again, emphasis has been given on the likelihood of materially affecting the price of security of a listed entity for UPSI identification.
In our view, wherever an event is determined to be material by a listed entity, under Para B or Para C or any other residual clauses, such events are in the nature of UPSI. Thus, the clauses not expressly covered by the definition of UPSI, viz. product launch, capacity addition, strategic tie-up, loan agreements not in the normal course of business etc can also be in the nature of UPSI, based on its expected impact on the price of the securities of the listed entity.
Actionables pursuant to the revised definition of UPSI
As discussed above, the definition of UPSI, so far as the items specified thereunder is concerned, is illustrative and not prescriptive. Items that are of routine nature, or otherwise, are not expected to have a material impact on the price of securities of the listed entity can be excluded from UPSI categorisation. This requires a listed entity to first of all, have internal guidelines for identification of an event/ information as UPSI. Given the diverse items of information that may be material, it will be impossible to have a closed list of all; therefore, the list of potential UPSI items (UPSI Library) needs to be formulated by every listed entity based on probable impact on the relevant financial parameters (guidance may be drawn from the ISN on Reg 30 for Para B items), as well as feedback based on past events in the listed entity or relevant to such listed entity. The list should be (a) Dynamic – it will have to be populated regularly, based on a feedback system and (b) Granular – the more granular the items are, easier it will be to assign the first point of responsibility and to minimise the nodes or the stop-overs that information travels, from its first source of recognition to the ultimate centre.
Secondly, record is to be maintained with proper rationale for non categorization of an event or information as UPSI, particularly if the same falls within the illustrative list of UPSI as provided in the definition.
Needless to say, sensitisation of the relevant persons handling UPSI or such information that may be categorised as UPSI is crucial to ensure smooth functioning of the PIT controls.
Other amendments
In addition to the amendments made in the definition of UPSI, some guidance has been given with respect to UPSI not originating from within the listed entity.
Entry in Structured Digital Database (SDD)
For information not emanating from within the listed entity, the SDD entry may be done within 2 calendar days from the receipt of such information.
Trading window closure
For UPSI not emanating from within the listed entity, trading window closure is optional.
The SEBI Consultation Paper or BM Agenda does not have reference to the aforesaid amendments. However, it can be understood that in case of events not emanating from within the listed entity, the UPSI is neither germinated from the listed entity, nor does it have a journey as an UPSI prior to disclosure, since the disclosure is required to be made within a maximum of 24 hours from the receipt of such information.
The intent of trading window closure is to caution the Designated Persons against trading, while in possession of UPSI. However, for events emanating from outside the listed entity, there is hardly much time between the receipt of information by the listed entity and the publication of such information through stock exchange intimation, thus making it generally available. Refer a presentation on the trajectory of an information from UPSI to material event disclosure here (slide 28 onwards).
Hence, the closure of the trading window is not relevant in such circumstances. The concept of trading window closure and related compliances has been discussed in a short video here. Having said that, any person in receipt of UPSI is bound by the primary charging section of the PIT Regulations to ensure that no trade is undertaken by the person while in possession of UPSI, irrespective of whether the trading window is closed or not.
Conclusion
The present amendments bring in an illustrative list of items that may ordinarily be considered as UPSI, to provide guidance to the listed entities in ensuring compliance with the PIT Regulations in letter and in spirit. As discussed above, this cannot be taken to mean that a list of deemed UPSI has been provided, and the determination of UPSI remains with the listed entities based on the expected impact on the price of the securities. Further, while the new amendments are inspired from Reg 30 of LODR, the definition of UPSI is common for both equity and debt-listed entities. Here, it is also to be noted that Reg 51 of LODR, as applicable to debt-listed entities, requires disclosure of all price-sensitive information to the stock exchanges.
[1] 90th day from the date of publication in the Official Gazette.
If your idea of unpublished price sensitive information (‘UPSI’), which companies have to guard as confidential until disclosed to investors, is something which may impact the stock prices, you now have a longer list of things, which may seem purely operational or business-as-usual for listed companies, but still sitting in the long list of “deemed UPSIs” that SEBI (Prohibition of Insider Trading) Amendment Regulations, 2025 has inserted, thereby making compliance officers do the drill of structured digital database entry to even trading window closure every time such an event occurs. The amendment takes effect from June 9, 2025 .
In our view, price sensitivity of an event has to do with the impact of the event on the company’s profitability, turnover, long-term or short-term prospects, shareholding base, etc. The identification of these events is done based on the materiality of the event to the business and business model. The more prescriptive the lists supplied by the lawmaker are, the more one takes away the sense of responsibility and accountability to the corporate team that flags corporate events as material. If the lawmakers flag them all, or flag a lot, the very seriousness of tagging an information as price sensitive is taken away.
Does the present amendment go in the same direction of making the regulations more prescriptive? May not be the case necessarily as SEBI BM agenda clearly demonstrates that the intent was to provide illustrative guidance and not define a scope making the regulations prescriptive, in view of the EODB perspective. For e.g. in case of routine fund raising in the usual course of business, SEBI acknowledged the fact that if the fund raising is routine in nature and on predictable lines it would not materially affect the price and thus, may not be UPSI. It also took note of certain suggestions and considered them in the final amendment., for e.g. doing away with trading window closure requirements where UPSI is not emanating from within the listed entity, excluding change in ESG ratings from UPSI ambit, excluding reference of senior management in some cases etc.
Background:
The N.K. Sodhi Committee Report of 2015 , while reviewing the definition of UPSI which included ‘material events in accordance with the listing agreement’, emphasized that it would be important to ensure that regardless of whether the information in question is price-sensitive, no piece of information should mandatorily be regarded as “UPSI”. Thereafter, in 2018, noting that all material events which are required to be disclosed as per the LODR Regulations may not necessarily be UPSI under the PIT Regulations, the Committee on Fair Market Conduct , recommended the removal of the explicit inclusion of “material events in accordance with the listing agreement” contained within the definition of UPSI. As listed entities did not follow the principles laid down in UPSI definition, it was decided to elongate the list of deemed UPSI events to guide the entities better in UPSI identification.
Earlier in May 2023, SEBI had proposed considering every material event as UPSI. Based on the feedback received for earlier CP citing concerns of significant increase in compliance management and potential perpetual closure of trading window, SEBI had kept the proposal on hold till revisiting the framework for material events disclosure, market rumour verification, trading plan provisions etc.
In December, 2024 SEBI notified LODR amendments in Reg. 30 & Schedule III for EoDB (effective December 12, 2024). The Industry Standards Note issued in relation to Reg. 30 disclosures guide on the manner of ascertaining the expected impact on value relevant for the purpose of determining the materiality (read our article here). Trading Plans were made flexible (effective November 1, 2024) to enable persons perpetually in possession of UPSI be able to trade.
Present Amendment:
A. Deemed material events (Para A of Schedule III) added to the UPSI list
Change in rating(s), other than ESG rating(s) [sub-clause vi] ■ Upward/ downward revision to be considered UPSI. ■ New ratings for fresh issue of securities will get covered under ‘change in capital structure’ or ‘fund raising proposed to be undertaken’; ■ Considering ESG Ratings are at a nascent stage, SEBI has excluded ESG rating. VKCo Comments: Rating revision need not necessarily result in security/ instrument going below investment grade or resulting in a breach of any covenant, to be considered as UPSI. By virtue of the present amendment, revision from AAA to AA+ or from AA to AA (-) will also be considered as UPSI, as it will impact the cost of funds, investor’s perspective etc.
Fundraising proposed to be undertaken [sub-clause vii] VKCo Comments: Reg 29 covers intimation of fund raising by issue of securities, term loans are anyways excluded. While fundraising by way of issue of capital is deemed UPSI, every instance of debt issuance may not necessarily be UPSI. SEBI BM agenda further clarifies that if instances of fund raising are routine in nature then the particular would not materially affect the price of securities in the first place. Therefore, such fundraising events may not be considered as UPSI.
Agreements, by whatever name called, which may impact management or control of the company. [sub-clause viii] VKCo Comments: Where the company has knowledge about the agreement.
Fraud or defaults by the company, its promoter, director, KMP, or subsidiary or arrest of KMP, promoter or director of the company, whether occurred within India or abroad [sub-clause ix] VKCo Comments: Fraud and default to have the same meaning as assigned to them under LODR Regulations [Sch III, Part A, Para A (6)]. ■ As explained in LODR, default by a promoter, director, key managerial personnel, subsidiary shall mean default which has or may have an impact on the listed entity. ■ Fraud, defaults, etc. by senior management may not generally have a material impact on the price of securities and therefore, the same has been not included within the ambit of the said clause.
Changes in KMP, other than due to superannuation or end of term, and resignation of Statutory Auditor or Secretarial Auditor [sub-clause v] VKCo Comments: MD/WTD/CEO not proposed to be re-appointed may be potential UPSI. Further, resignation of CFO or CS for better prospects, while may result in a change, may not be in the nature of UPSI. Resignations citing governance issues should be considered as UPSI. ■ Similarly, every instance of resignation by the statutory or secretarial auditor may not be UPSI. Resignation on account of corporate governance concerns, may be considered as UPSI.
Resolution plan/ Restructuring or one-time settlement in relation to loans/borrowings from banks/financial institutions [sub-clause x]
Admission of winding-up petition filed by any party / creditors, admission of application by the tribunal filed by the corporate applicant or financial creditors for initiation of CIRP against the company as a corporate debtor, approval of resolution plan or rejection thereof under the Insolvency Code [sub-clause xi]
Initiation of forensic audit (by whatever name called) by the company or any other entity for detecting mis-statement in financials, misappropriation/ siphoning or diversion of funds and receipt of final forensic audit report [sub-clause xii]
Action(s) initiated or orders passed within India or abroad by any regulatory, statutory, enforcement authority or judicial body against the company or its directors, KMP, promoter or subsidiary, in relation to the company. [sub-clause xiii] VKCo Comments: Intent is to include matters covered in Clause 19 and 20 of Para A. Clause 19 items viz. search or seizure, re-opening of accounts, investigation may be in the nature of UPSI, but each of clause 20 items may not be UPSI. Actions like suspension, disqualification, debarment or closure of operations may be in the nature of UPSI. However, in case of fines & penalties, SEBI amended the monetary limits for disclosure of fine or penalty under clause 20 – Rs. 1 lakh for fine/ penalty imposed by sector regulators/ enforcement agencies (as provided in ISN dated February, 2025) and Rs. 10 lakhs for other authorities. Amounts lower than the thresholds are required to be disclosed on a quarterly basis as part of the Integrated Filing (Governance). While imposition of penalty or fine by sector regulators/ enforcement agencies reflect on the state of governance/ functioning of the entity, every instance of levy of fine or penalty may not be UPSI.
B. Determined material events (Para B of Schedule III) added to UPSI list
Award or termination of order/contracts not in the normal course of business [sub-clause iv]
Outcome of any litigation(s)/dispute(s) which may have an impact on the company [sub-clause xiv]
Giving of guarantees or indemnity or becoming a surety, by whatever name called, for any third party, by the company not in the normal course of business [sub-clause xv]
Granting, withdrawal, surrender, cancellation or suspension of key licences or regulatory approvals. [sub-clause xvi] VKCo Comments: In our view, each of the events that is determined to be material by the listed entity are in the nature of UPSI. The clauses not expressly covered above viz. product launch, capacity addition, strategic tie-up, loan agreements not in the normal course of business etc can be in the nature of UPSI.
Actionable arising on UPSI identification under PIT Regulations
Authorised KMPs to consider the illustrative guidance and the industry standards note for determination of expected impact of value (in case of Sch III Para B items) and determine if the information in hand is a UPSI.
The rationale should be recorded for future reference, in case of any query from stock exchange or SEBI in this regard.
Closure of trading window for DPs in possession of UPSI;
Trading window shall not be closed for event / info emanating outside the listed entity;
The facility of PAN freeze is presently available only in case of financial results. In other cases, the DPs will be required to be informed about the trading window closure and opening.
Recording of sharing of such UPSI, internally or externally, for legitimate purpose in the Structured Digital Database;
Recording of UPSI which is emanating outside the listed entity has to be made in SDD within 2 calendar days from the receipt of such information.
Preserving the confidentiality of UPSI and ensuring making it generally available in accordance with the Code of Fair Disclosure.
Conclusion
While the present amendment indicating specific material events as illustrative guidance is better than the earlier proposal, law cannot prescribe an exhaustive list of UPSI events as it will differ from entity to entity. Given the diverse items of information that may be material, it will be impossible to have a closed list of all; therefore, the list of potential UPSI items (UPSI Library) needs to be formulated by every listed entity which is (a) Dynamic – it will have to be populated regularly, based on a feedback system and (b) Granular – the more granular the items are, easier it will be to assign the first point of responsibility and to minimise the nodes or the stop-overs that information travels, from its first source of recognition to the ultimate centre.
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Vinita Nair Dedhiahttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngVinita Nair Dedhia2025-03-13 19:04:412025-03-18 18:58:16Sebi elongates unpublished price sensitive information list
The concept of Trading Plan (‘TP’) that existed since May 2015 continued to remain unpopular due to the stringent conditions laid down in the Insider Trading Regulations. The framework was set to be reviewed based on empirical evidence and feedback post introduction and determine if SEBI needs to dilute or increase the regulatory requirement. In order to make it more realistic and captivating, SEBI’s Working Group suggested reforms vide Consultation Paper dated 24th November, 2023[1] that was approved by SEBI in its board meeting held on March 15, 2024. SEBI (Prohibition of Insider Trading) (Second Amendment) Regulations, 2024notified on June 25, 2024 will be effective from September 24, 2024. As a concept, it is not unique to India, globally, both the US and UK have similar TP concepts with some or the other variations when compared to our legislation. This article discusses the amendments, including the rationale provided in the CP, relevant points discussed in the SEBI Board meeting and our analysis on the same.
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00sanyaagrawalhttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngsanyaagrawal2023-11-29 13:49:262023-11-29 13:56:52SEBI Consultation Paper (CP) to ease trading plans by company insiders
-Consultation paper proposes to rationalise the existing framework under insider trading
Anushka Vohra | Senior Manager
corplaw@vinodkothari.com
Background
The concept of trading plan was introduced for the first time in the SEBI (Prohibition of Insider Trading) Regulations, 2015 (‘PIT Regulations’). The rationale for introducing the same, as indicated in the Report of the High Level Committee constituted for the purpose of reviewing the erstwhile 1992 Regulations, chaired by Mr. N.K. Sodhi, was that there may be certain persons in a company who may perpetually be in possession of UPSI, which would render them incapable of trading in securities throughout the year. The concept of trading plan would enable compliant trading by insiders without compromising the prohibitions imposed in the PIT Regulations.
Trading plan means a plan framed by an insider (and not just a designated person) for trades to be executed at a future date. Trading plan is particularly suitable for those persons within the organization, who may by way of their position, seniority or any other reason, be in possession of UPSI at all times. Since, the PIT Regulations prohibit trading when in possession of UPSI, trading plans are an exemption to such prohibition. In order to ensure that the insiders while formulating the trading plan do not have possession to UPSI, cooling-off period of 6 months has been prescribed in the PIT Regulations. As per Reg. 5(1) of the PIT Regulations, the trading plan has to be presented before the compliance officer of the company for approval. As per sub-regulation (3), the compliance officer has to review the trading plan and assess for any violation of the PIT Regulations. If at the time of formulation of trading plan, there was no UPSI or later on a new UPSI was generated, then the trading can be carried out as per the trading plan, even if the new UPSI has not been made generally available.
When the trades are executed as per trading plan, certain provisions of the PIT Regulations are exempted viz. trading window restrictions, pre-clearance of trades and contra trade restrictions.
SEBI has issued a Consultation Paper on November 24, 2023 for inviting public comments on the recommendations of the Working Group (‘Report’) to review provisions related to trading plans.
This article discusses the proposed amendments to the framework of the trading plan as mentioned in the Consultation Paper.
Challenges in the present framework
The Report discusses that during the last 5 years only 30 trading plans have been submitted annually by the insiders, which indicates that the trading plans are not very popular.
The year wise data on trading plans as mentioned in the Report is given below:
The data w.r.t. number of listed companies and DPs during FY 2022-23 is also given below:
The above clearly shows that during FY 2022-23, the number of designated persons among the listed companies was around 2,56,878 and there were only infinitesimal trading plan received by the exchange(s).
Further, the five features of the trading plan as highlighted in the Report are as under:
(i) can be executed only after 6 (six) months from its public disclosure;
(ii) are required to cover a period of at least 12 (twelve) months;
(iii) must be disclosed to the stock exchanges prior to its implementation (i.e., actual trading);
(iv) are irrevocable; and
(v) cannot be deviated from, once publicly disclosed.
As evident from above, while the concept has been into existence since 2015, trading plans have not been very popular owing to certain restrictive conditions viz. mandatory execution of the same even if the market prices are unfavorable for an insider, inability to trade for a reasonable period around the declaration of financial results and mandatory cooling off period of 6 months etc.
Proposed amendments
Cooling-off period
Cooling-off period means gap between the formulation and public disclosure of the plan and actual execution of the plan. Reg. 5(2) of the PIT Regulations presently provides a cooling-off period for 6 months as the period of 6 months was considered reasonable for the UPSI that may be in the possession of the insider while formulating the trading plan to become generally available or any new UPSI to come into existence.
This period is proposed to be reduced to 4 months. The Report states that as per the current requirement, the insiders have to plan their trade 6 months ahead which may not be favorable, considering the volatility in the markets. It was proposed to either reduce the period or to do away with it.
The Report classifies UPSI into two types; short-term UPSI and long-term UPSI to ascertain the time within which the UPSI is expected to become generally available.
The Report further highlights that in case of short-term UPSI, a period of 4 months would be sufficiently long for it to become generally available.
In case of long-term UPSI, the Report refers back to proviso to Reg. 5(4) according to which the insider cannot execute the trading plan if the UPSI does not become generally available.
The Report also gives reference to the cooling-off period for trading plans in the US, where SEC introduced the cooling-off period only in December 2022.
Minimum coverage period
Reg.5(2)(iii) states that a trading plan shall entail trading for not less than 12 months. A period of 12 months was specified to avoid frequent announcements of trading plans. This again provides a very long period for insider to execute their trading. This period is proposed to be reduced to 2 months.
Black-out period
As per Reg 5(2)(ii), trading plan cannot entail trades for the period between the twentieth trading day prior to the last day of any financial period for which results are required to be announced by the issuer of the securities and the second trading day after the disclosure of such financial results. This period is known as the black-out period.
The Report states that this period forms a significant part of the year, considering 4 quarters and hence it is proposed to omit the same.
The Report also discusses the potential concerns that may arise on removing the black-out period. The Working Group noted that the same is addressed by the cooling-off period and non alteration of plan once approved and disclosed.
Price limit
As per Reg. 5(2)(v) of the PIT Regulations, the insider can set out either the value of trades to be effected and the number of securities to be traded along with the nature of the trade, intervals at, or dates on which such trades shall be effected.
The Working Group noted that there was no price limit that the insider could mention. The Report recommends a price limit of 20%, up or down of the closing price on the date of submission of the trading plan.
Irrevocability
As per Reg. 5(4), the trading plan once approved shall be irrevocable and the insider will have to mandatorily implement the plan without any deviation from it. This puts the insider in a disadvantageous position as he has to execute the trades (buy / sell) even when the price is not favorable.
As per the proposed amendment, where the price of the security is outside the price limit set by the insider, the trade shall not be executed. The plan will be irrevocable only where no price limit is opted for.
Exemption from contra-trade restrictions
As per Reg. 5(3) of the PIT Regulations, restrictions on contra trade are not applicable on trades carried out in accordance with an approved trading plan.
The Working Group deliberated that it is difficult to envisage a reasonable and genuine need for any insider to plan two opposite trades with a gap of less than 6 months. The Report states that the insider may misuse the exemption for undertaking a contra position. Therefore, the exemption is proposed to be omitted.
Disclosure of trading plan: timeline & content
As per Reg. 5(5), upon approval of the trading plan, the compliance officer has to notify the plan to the stock exchange(s). However, presently there is no specific timeline indicated. The Working Group recommends disclosure within 2 trading days of the approval of the plan. Further, it recommends disclosure of the price limit as well.
While the format of the trading plan will be rolled out basis discussion with the market participants, the Consultation Paper, basis the recommendations of the Working Group on protecting the privacy of the insiders by masking the personal details, discussed three alternatives of disclosure, as under:
It was discussed that disclosing personal details of the insiders publicly may raise privacy and safety concerns for senior management and insiders and not disclosing personal details to the stock exchange(s) would lead to misuse / abuse of trading plans by other insiders. That is, a trading plan submitted by one person may instead be used by someone else.
Having discussed the above, the Consultation Paper suggests alternative 3 i.e. making two separate disclosures of the trading plan; (i) full (confidential) disclosure to the stock exchange and (ii) disclosure without personal details to the public through stock exchange. Further, these separate disclosures may have a unique identifier for reconciliation purposes.
Concluding remarks
The proposed amendments indicate a welcome change as it attempts to plug the gaps prevalent in the erstwhile framework and offers flexibility to the insiders. At the same time, the Compliance officer will have to remain mindful of any scope for potential abuse by the insiders, while approving the same.One will have to await the actual amendment, basis the receipt of public comments, to ascertain if trading plans are all set to become popular and more frequent.
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Anushka Vohrahttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngAnushka Vohra2023-11-28 14:38:012023-11-29 13:52:13SEBI proposals to ease trading plans by company insiders
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