Introduction

Since its inception in 2003, Corporate Professionals has been providing unique integrated solutions in the domain of Insider Trading Laws.

There have been several changes in the SEBI (Prohibition of Insider Trading) Regulations, 2015, necessitating Listed Companies to put in place a robust Internal Control mechanism and a Structured Digital Database so as to ensure that Unpublished Price Sensitive Information (“UPSI”) is shared only for legitimate purposes and is done through proper medium and with suitable recordings.

The responsibility of establishing the Internal Control Systems is cast on various levels, including the Board of Directors, Audit Committee, Managing Director, Chief Executive Officer and Compliance Officer.

While addressing the industry participants in our webinars, we have observed some commonly asked queries related to key attributes of SEBI Insider Trading Regulations. With a view to help our industry participants, we have compiled these questions with answers.

Frequently Asked Questions

Applicability

1. Whether the requirement of compliance with the Code of Conduct would be applicable on trading done by a Portfolio Manager on behalf of a Designated Person?

Yes, any trading done by a Designated Person either directly i.e. on his own or indirectly i.e. through a portfolio manager should be done in compliance of the Code of Conduct of the Company.

SEBI has also confirmed the view in their informal guidance dated July 25, 2016 in the matter of HDFC Bank Limited.

2. Whether trading in ADRs and GDRs by Employees of Indian Companies who are Foreign Nationals is covered under the provisions of SEBI (PIT) Regulations?


Yes, PIT Regulations deal with “Securities” and ADRs & GDRs are securities. Hence, Employees of such companies, including Foreign Nationals, who are Designated Persons, shall be required to follow the Code of Conduct for trading in ADRs and GDRs. For such disclosures by such Designated Persons, a unique identifier analogous to PAN may be used.

The same has been provided by SEBI in its FAQs dated November 04, 2019.

3. Suppose a trainee at a firm of Practicing Company Secretary comes in possession of UPSI while handling an assignment of a Company, will he be required to adhere to the Code of Conduct of the Company whose UPSI is being handled?

No, the Trainee will not be required to comply with the Code of Conduct of the Company whose UPSI is being handled.

However, as per Regulation 9(2) of SEBI (PIT) Regulations, every Person who is required to handle UPSI in the course of business operations shall formulate a Code of Conduct to regulate, monitor and report trading by their Designated Persons and their Immediate Relatives.

Hence, the Trainee shall comply with the Code of Conduct formulated by the PCS in accordance with Regulation 9(2) of SEBI (PIT) Regulations.

4. When SEBI (PIT) Regulations would be deemed to be applicable on a Company whose securities are not listed but are aiming to get listed in future?

The PIT Regulations would be deemed to be applicable on a Company whose securities are not listed but which is aiming to get its securities listed if:

(i) such Unlisted Company has filed offer documents or other documents, as the case may be, with SEBI, Stock Exchange(s) or Registrar of Companies in connection with listing; or

(ii) if such Unlisted Company is getting listed pursuant to any scheme of Merger or Amalgamation and has filed a copy of such scheme of Merger or Amalgamation under the Companies Act, 2013.

5. If a Company has filed delisting application, till what time the SEBI (PIT) Regulations would be deemed to be applicable on such a Company.

In case a Company has filed delisting application, the SEBI (PIT) Regulations shall be deemed to be applicable on the Company till the delisting order is issued and the Company shares are stopped from trading on Stock Exchanges.

6. Whether an Employee being a Designated Person retired from the Company is required to abide by the Code of Conduct of the Company?


No, the Compliance of Code of Conduct shall be applicable only on a Designated Person of the Company till the point he is in the employment of the Company. If an Employee retires from the Company and ceases to be a Designated Person, he shall not be required to abide by the Code of Conduct of the Company. However, he shall remain as a Connected Person for a minimum period of 6 months post cessation and shall accordingly comply with SEBI (PIT) Regulations.

Classification as Designated Person

7. Whether every Person classified as a Promoter in Shareholding pattern of a Company pursuant to the provisions of SEBI (LODR) Regulations will be considered as a Designated Person and is required to adhere to the requirements of the Code of Conduct?

As per Regulation 9(4) of SEBI (PIT) Regulations, all Promoters of the Listed Company shall be identified as Designated Persons by the Company.

Hence, any Person classified as a Promoter in Shareholding pattern of a Company pursuant to the provisions of SEBI (LODR) Regulations will be considered as a Designated Person and will be required to adhere to the requirements of the Code of Conduct of the Company.

8. Whether the provisions of SEBI (PIT) Regulations shall be applicable on trading in Derivatives?

Yes, the term trading as defined in SEBI (PIT) Regulations, refers to trading in “Securities”, Securities include Derivatives; hence any trading in Derivatives shall be covered under SEBI (PIT) Regulations.

Trading Plan

9. Can a Trading Plan be revoked due to practical situations such as Medical emergency etc.?

As per Regulation 5(4) of SEBI (PIT) Regulations, the Trading Plan once approved shall be irrevocable and it shall be mandatorily implemented, without being entitled to either deviate from it or to execute any trade in the securities outside the scope of the Trading Plan.

Hence, in case of any medical emergency also, Trading Plan cannot be revoked. Trading

Trading Window

10. When should the Trading Window be closed by the Company so as to fully control any fishy activities and protect the UPSI?

The Compliance Officer shall close the trading window, at the very first instance at which UPSI may occur. The trading window shall be closed as and when the Compliance Officer shall deem fit and is of view that a Designated Person or class of Designated Persons can reasonably be expected to be in possession of UPSI.

11. In a Listed Company, a Non – Individual Promoter wants to sell Shares to its Wholly Owned Subsidiary during trading window closure. Whether trading window restrictions will apply.

The Designated Persons shall not trade when the trading window of the Company is closed by Compliance Officer. However, Clause 3 of Schedule B read with Regulation 4(1), provides certain exemptions wherein trade can be done by the Designated Person even when trading window is closed subject to the stated conditions.

The stated exemptions include following transactions:

• The transaction is an off – market inter-se transfer between Insiders having possession of same UPSI
• The transaction is carried out through block deal mechanism between Persons having possession of same UPSI
• The transaction carried out pursuant to a statutory or regulatory obligation to carry out a bona fide transaction.
• The transaction was undertaken pursuant to the exercise of Employee Stock Options
• The transaction was undertaken pursuant to a Trading Plan
• The transaction involves pledge of Shares for bona fide purpose
• The transaction was undertaken pursuant to respective SEBI Regulations such as Bonus Issue, Rights Issue etc, preferential allotment, buyback offer, open offer etc.

Hence, the Non – Individual Promoter, may sell Shares to its Wholly Owned Subsidiary when Trading Window is closed in compliance with the stated exemptions.

12. If Pre clearance approval was taken before the Trading Window closure, whether Promoters can purchase the shares when Trading Window was closed?

The Designated Persons shall not trade when the trading window of the Company is closed by Compliance Officer. Hence, even if Pre – Clearance approval was taken by the Promoters before the closure of trading window, they still cannot make the trade if the trading window gets closed thereafter.

The Promoters can simply take a fresh Pre – Clearance when the Trading Window gets opened to execute their trade.  

E.g.: – If Pre – Clearance approval is taken by the Promoters 7 trading days before the closure of trading window, and the trading window post approval gets closed from 4th trading day, then the Pre – Clearance approval period will automatically be valid only for first 3 trading days. So, approval period gets reduced from 7 days to 3 days only.

13. If relatives of Designated Persons purchase shares when Trading window is closed, even though the relatives are not in talking terms? How to monitor or manage such situation?

The provisions of the Code of Conduct shall be applicable only on your Immediate Relatives i.e. persons who are financially dependent or consult you in taking their decisions relating to trading in securities.

Any other Relatives whom you are not in talking terms (it is presumed that such Relative does not satisfy any condition to be termed as your Immediate Relative under SEBI (PIT) Regulations as mentioned in above para )shall not be bound by the provisions of Code of Conduct hence no mandatory monitoring shall be required of their trades executed at the time when Trading Window of the Company is closed.  

14. Do we need to close the trading window for every UPSI?

Yes, the Trading Window shall be closed by the Compliance Officer every time he determines that a Designated Person or class of Designated Persons can reasonably be expected to have possession of UPSI. The same shall be done for safe guarding and ensuring that no incident of Insider Trading takes place in the Company.

15. Do we need to close the trading window if we are proposing any preferential allotment?

Yes, preferential allotment involves issuance of securities and raising or capital / conversion of loan / share swap which can have an impact on the price of the securities in future. Hence, the Compliance Officer shall close the Trading Window at the time of proposing any preferential allotment.

16. Can ESOP be exercised during trading window closure?

As per guidance note issued by SEBI dated August 24, 2015, Exercise of ESOPs shall not be considered to be trading except for the purposes of Chapter III of SEBI (PIT) Regulations, 2015. Hence exercise of ESOPs can be done at the time when Trading Window of the Company is closed.

17. Can transmission of shares be done during trading window closure?

Trading window closure is a mechanism to prevent insider trading. Hence, the restriction is to prevent the act of trading. Transmission is not a voluntary act and hence can be done at the time when Trading Window of the Company is closed.

18. Can grant of ESOP be made in trading window closure period?

Grant of ESOP refers to a right but not an obligation to acquire the Shares of the Company as and when the Options are vested and correspondingly exercised by the Employees. Hence, grant of ESOP per se is not trading and accordingly can be made at the time when Trading Window of the Company is closed.

19. Can two insiders trade through block deal during trading window closure?

Yes, two Insiders can trade through Block Deal Mechanism at the time when the Trading Window of the Company is closed. However, following two scenarios should be kept in mind:

• When an Insider is also a Designated Person: If any one of the Insider is a Designated Person, then such trade shall not be done when the trading window of the Company is closed by Compliance Officer. However, Clause 3 of Schedule B read with Regulation 4(1), provides certain exemptions wherein trade can be done by the Designated Person even when trading window is closed subject to the stated conditions.

Hence, the inter–se transfer can be done when Trading Window is closed in compliance with the stated exemptions.

• When an Insider is not a Designated Person but is in possession of UPSI: As per Regulation 4(1)SEBI (PIT) Regulations, if any one of the Insiders is in possession of UPSI, then such trade shall not be done.  However, the said Regulations provide an exemption to it wherein if both the Insiders are in possession of same UPSI, then such Insiders can trade between themselves via inter se transfer of Shares.

20. What trades can be executed while the Trading Window is closed?

As per Schedule B Clause 4(3), following transactions can be executed while the Trading Window is closed:

• transactions specified in clauses (i) to (iv) and (vi) of the proviso to sub-regulation (1) of regulation 4 of SEBI (PIT) Regulations and in respect of a pledge of shares for a bonafide purpose such as raising of funds, subject to pre-clearance by the compliance officer and compliance with the respective regulations made by SEBI;
• transactions which are undertaken in accordance with respective regulations made by the SEBI such as acquisition by conversion of warrants or debentures, subscribing to rights issue, further public issue, preferential allotment or tendering of shares in a buy-back offer, open offer, delisting offer or transactions which are undertaken through such other mechanism as may be specified by the SEBI from time to time.

Internal Control

21. What does the “process for how and when people are brought ‘inside’ on sensitive transactions” mean?

This basically means that a Company should have a process to ensure

• Where the information has emerged;
• Who is authorized to share the information;
• With whom the information is shared;
• Analyzing the reason of sharing such information;
• The protocol of sharing the information;
• Notifying the person with whom the information is to be shared;
• Executing confidentiality agreements;
• Disclosing the information to the Stock Exchange(s);
• Tracking the information until the same is disclosed to the public.

22. How Audit Committee can review that the Internal Control of the Company is adequate and is operating effectively?

The Audit Committee can conduct an internal audit w.r.t to the compliances being made by the Company as required under SEBI (PIT) Regulations. The Audit Committee can also hire an external party for conducting an Audit specifically for SEBI (PIT) Regulations and can form an opinion on the basis of the report for such Auditor.

23. How Company can increase its effectiveness of Internal Control System so as to ensure that no non – compliance occurs?

The Company can increase the effectiveness of Internal Control System so as to ensure that no non – compliance occurs in following ways:

• Adopting the best practices of control as suitable to the Company as per its own business model.
• Conducting educational sessions for the Designated Persons on regular basis.
• Establishing a digital database in the Company.
• Maintaining and disseminating a list of items which can act as a UPSI in the Company to its Designated Persons.
• Review of existing Internal Controls and finding the discrepancies against the standards formed.

24. Whether the Internal Control Policy is applicable on Designated Persons only or on  all the Employees.

The Internal Control Policy shall be applicable on:

1. All Designated Person(s), and
2. Such other Person(s) who in course of business operation gets access to or possession of UPSI of the Company

25. In case of using digital database software, if the information gets leaked, who shall be held liable, the Company selling the software or the Company using it?

The digital database software can be installed only on the server of the Company. In case any information gets leaked, the Company shall be held liable.

Hence, it is always recommended that before installing any third-party software, the Company shall verify that the software is having proper checking w.r.t data security, data leakage and other security measures.

26. Does the requirement of maintenance of structured digital database apply on Listed Companies only?

No, as per Regulation 3(5) of SEBI (PIT) Regulations, the Board of Directors or Head(s) of the Organisation of every person required to handle UPSI shall ensure that a structured digital database is maintained. Hence, the requirement of maintenance of structured digital database is not only applicable on Listed Companies but also on every person who handles UPSI.

27. Can the Company hire an agency under outsourcing model for maintenance of its structured digital database so that information can be supplied to the vendor and feeding of data is done at the vendors end?

No, as per Regulation 3(5) of SEBI (PIT) Regulations, database shall not be outsourced and shall be maintained internally preferably on its own server with adequate internal controls and checks such as time stamping and audit trails to ensure non-tampering of the database.

28. For how long the Company needs to maintain the data in its structured digital database?

As per Regulation 3(6) of SEBI (PIT) Regulations, the structured digital database shall be preserved for a period of not less than eight years after completion of the relevant transactions and in the event of receipt of any information from SEBI regarding any investigation or enforcement proceedings, the relevant information in the structured digital database shall be preserved till the completion of such proceeding.

29. What all information are required to be maintained under a structured digital database?

As per Regulation 3(5) of SEBI (PIT) Regulations, following information shall be maintained in structured digital database:

• nature of UPSI shared
• names of persons who have shared the UPSI
• names of persons with whom UPSI is shared
• Permanent Account Number or any other identifier authorized by law where Permanent Account Number is not available of all the persons.

UPSI and its sharing

30. The PIT regulations state that, Companies shall take PAN, from the persons with whom UPSI is shared. Suppose a Company gives unpublished results to its auditors, should the Company obtain PAN of:

1. Audit firm, or
2. Person to whom the information is shared by mail, or
3. its entire team handling the issue, or
4. all a, b and c.

The Company shall take the PAN of the Audit firm to which UPSI is being shared. The Audit Firm would in turn maintain list of Persons along with their PAN / other unique identifier with whom they have shared such UPSI as per their own Code of Conduct.

The same has been provided by SEBI in its FAQ dated November 04, 2019.

31. How my Employees will know that a particular information which he may transmit is a UPSI or not because practically the person giving the information is different from the person posting the information on website / stock exchanges.

The Company as a matter of Internal Control System, shall prepare a tentative list of information which shall act as a UPSI involving threshold limits, if any. Such list shall be disseminated to each and every Designated Person who may transfer such information to any person for legitimate purpose. Such list will act as a guiding tool to ensure whether an information which is about to be disseminated is a UPSI or not.

Further, in case of any confusion, Designated Person shall always intimate and ask the Compliance office before disseminating such information.

32. Generally, UPSI is being shared within the Company on an informal basis. How to control such practice?

Communication of UPSI whether orally or written shall be termed as on offence if not done for a legitimate reason. The Company shall conduct education sessions so as to minimise such incidents where UPSI is shared on informal basis. Also, any such instance shall be immediately be reported by the Compliance Officer to SEBI.

33. Management is always engaged in talks of some transaction or the other. However at the time of recording the data in digital database, their contention is that the transaction is not final and may also not happen.

Whether recording of nature / purpose of sharing UPSI shall only be done once transaction is final or it should be done irrespective whether the transaction takes place in future or not.

As per Regulations 3 and 9A, the Company shall maintain a Digital Database containing names and PAN and other information of Persons with whom UPSI is being shared. Hence, Designated Persons shall always record relevant details as and when UPSI is shared irrespective whether a transaction gets finalised / takes place in future or not. 

34. Whether Executive Directors who happen to be Promoters, can be considered as not in possession of UPSI?

A Person being the Promoter and Executive Director is always aware of the ongoing and future plans of the Company as he is involved in day to day affairs of the Company. Hence, he is deemed to be privy of UPSI at all times.

35. At what stage an information is considered as UPSI?

Any information which can materially impact the price of the Company shall be termed as UPSI. Different information shall be termed as UPSI for different segment of persons involved.

Suppose in a particular JV, there are various stages, such as receipt of offer, evaluating the option of forming JV, negotiations, due diligence etc. It shall be deemed as UPSI at every stage but coverage is limited to number of persons involved. The same shall continue to be deemed in effect till public disclosure of the same is given or the proposal is discarded.

Miscellaneous

36. All the disclosures received by the Company are to be maintained for 5 years, suppose there is a fire and disclosures get burnt out, would it be non-compliance then?

Yes, as per Regulation 6(4), all the disclosures received by the Company shall be maintained for a minimum period of 5 years. However, in case of fire, the Company shall immediately intimate the Stock Exchanges under Regulation 30 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. The Company shall also have all requisite proof such as FIR, insurance survey report etc. so as to prove the damages caused. The question w.r.t compliance or non – compliance will be subject to the decision of relevant authorities in this regard. 

37. In case a Designated Person resigns, what information should be collected by the Company?

Upon resignation from service of Designated Person, the Company should maintain the updated address and contact details (Mobile No. and Email) of such Designated Person.

The Company should make efforts to maintain updated address and contact details of such persons for one year after resignation from service. Such data should be preserved by the Company for a period of 5 years.

38. PIT Regulations require that PAN or other identifier shall be disclosed by the Designated Person for self and immediate relatives.

However, many Designated Persons residing outside India are not sharing any identifier because of the prohibition of sharing data as per the relevant laws of the Country in which they are residing.

How to deal with this situation?

The Company shall be having PAN or other identifier of its Designated Persons. However, for the immediate Relatives, the Company can initially ask for the same from Designated Person and in case of non – availability, the Company can take requisite declaration/ undertaking from the Designated Persons stating that they shall be liable for the trading done by their Immediate Relatives and maintaining confidentiality of Company’s UPSI.

39. Whether Compliance Officer is required to monitor the trades of Ex – Employees, who were Designated Persons. If yes, till what period after the Employee has exited the Company.

The Compliance Officer shall monitor the trading of the Designated Person. Upon cessation of employment, the employee ceases to be the Designated Person and the Compliance Officer is not mandated to monitor the trades of Ex – Employees.  

However, the Ex – Employee shall be a Connected Person for a minimum period of 6 months post cessation and he shall ipso facto on his own comply with SEBI (PIT) Regulations.

40. In a Listed Company, how practicable is it to compare BENPOS to check for trading?

The Company may through its Digital Database compare the shareholding of its Designated Persons through PAN based BENPOS so as to track the trading activities. Such measure shall act as an additional safeguard so as to ensure that no non-compliance occurs within the Company.

41. What constitutes Insider Trading and is it always illegal?

Insider Trading in normal parlance is known as trading by any Person in the Securities of a Company on the basis of certain Price Sensitive Information which is not published in the Public. Any act of Insider Trading is considered to be illegal in India.

42. Please provide certain Do’s and Don’ts for the Designated Persons?

Do’s for Designated Persons:

1. Make requisite Disclosure for Self, Immediate Relatives and Material Financial Relationship on becoming Designated Person.
2. Make true & fair disclosure of holding in securities of Company and changes therein for Self and Immediate Relatives.
3. Ensure that Trading Window is Open while entering trade in the securities of the Company.
4. Observe Trading Window compliance for Self and Immediate Relatives.
5. Obtain Pre clearance before executing trade in the Securities of the Company.
6. Report trade done post Pre – Clearance approval including approved trade not executed.
7. Adhere to the terms and conditions of the Code of Conduct and SEBI (PIT) Regulations.
8. Take safeguard while in possession of UPSI.
9. Make timely Initial Disclosure of holding & Continual Disclosures of trade under the Code of Conduct and SEBI (PIT) Regulations.
10. Remember not to trade on basis of Insider information
11. When in doubt consult the Compliance officer

Don’ts for Designated Persons:

1. Trade directly or indirectly (including Pledge, sale of ESOP Shares) when the Trading Window is closed
2. Trade directly or indirectly (including Pledge, sale of ESOP Shares) when in possession of UPSI
3. Share UPSI with relatives / friends / any third person.
4. Share information without Need To know Basis
5. Execute Contra Trade including Intra Trade
6. Share UPSI even for performance of duties where recipient is not authorized to receive the same
7. Make Trade suggestions or recommendation while in possession of UPSI
8. Trade indirectly through connected persons not covered under scope of immediate relatives
9. Share UPSI unless you are duly authorized and NDA & other disclosures have been obtained
10. Believe the hearsay or participate in grapevine

43. Regulation 7(2)(a) requires disclosure if number of securities acquired/disposed where traded value exceeds Rs. 10 lakhs. Will the case of allotment of shares on account of bonus/rights/merger, also be covered here?

Yes, the number of securities acquired or disposed beyond the prescribed threshold, irrespective of the mode of acquisition or disposal, shall be disclosed.

However, SEBI in their informal guidance in the matter of Kotak Mahindra Bank Limited dated April 28, 2017, specified that in cases where persons acquiring securities have no role in the transaction and a relevant disclosure for such transaction is already in the public domain (viz. bonus issuance, shares received pursuant to a scheme), separate internal disclosures to the Company may not be necessary.

44. When the reporting shall be done if there is a violation of SEBI (PIT) Regulations or a Code of Conduct as maintained under Schedule B or Schedule C of SEBI (PIT) Regulations.

If there is a violation of SEBI (PIT) Regulations or a Code of Conduct as maintained under Schedule B or Schedule C of SEBI (PIT) Regulations, the same shall be informed to Stock Exchanges promptly.

45. Is there any threshold for reporting to Stock Exchanges about the violation of Code of conduct by Insiders?

No, each and every violation irrespective of the money involved, shall be disclosed to SEBI.

46. If there is a violation of Code of Conduct and some amount is collected by the Company as a penalty, where shall such amount be deposited?

Any amount collected under clause 12 of Schedule B of SEBI (PIT) Regulations, shall be remitted to SEBI for credit to the Investor Protection and Education Fund administered by the SEBI Board under Securities and Exchange Board of India Act, 1992.

Legal – UPSI

47. What do you mean by ‘generally available information’?

Any information that is accessible to the public on a non-discriminatory basis shall be deemed to be a generally available information, such as Information on the Stock Exchanges, Website of the Company etc.

48. How SEBI can initiate action without much available proof that trading is based upon UPSI? And whether there is a difference in the standard of proof under the PIT Regulations, 1992 & the PIT Regulations, 2015?

Under new PIT Regulations, 2015 the onus is on the accused to prove that he/she has not traded on the basis of UPSI.

Yes, there is a difference as under the 1992 regulations, the onus was on SEBI to prove that the trading has been done on the basis of UPSI but now the burden of proof is on the accused /noticee.

49. Whether mere possession of UPSI is an offence under the PIT Regulations?

No. Mere possession of UPSI is not an offence, however, communication of the said UPSI (other than for legitimate purpose such as due-diligence etc.) & trading on the basis of such UPSI is an offence.

50. Whether ‘mens rea’ is a criterion for determining that trading has been undertaken based on UPSI?

Since, the onus of proof for trading undertaken on the basis of UPSI is on the accussed/noticee, it is essential to first prove that there was no access to UPSI or that the information was not UPSI, then only can the criteria of mens rea comes into the picture.

51. Whether the source of the UPSI is necessary to establish the charges of insider trading?

Under Regulation 2(1)(g) of the PIT Regulations, 2015, anyone in possession of UPSI is termed as an insider, hence, the source of UPSI is not necessary to be established.

52. Whether criminal prosecution can be executed on the charges of insider trading?

While it is rare for criminal prosecution to be executed only on the charges of insider trading, but SEBI is empowered under Section 24 of the SEBI Act to proceed against persons in criminal court if the facts of the case are such

53. Whether published information in form of speculation & news report, qualify as a suitable Defence for the information not being UPSI?

No, they do not form a suitable defence in all cases as under the PIT Regulations, the information published on the website of a stock exchange, is ordinarily considered as generally available.

54. Whether trading pattern of the noticee plays a role in establishing the charge of insider trading?

Yes, it plays a crucial role in determining whether the noticee was actually trading in the scrips of a particular company or the trade was motivated by possession of an UPSI.

55. What can be considered as legally valid defence for denying charges of insider trading?

There is no straight jacket formula for a legally valid defence, however, by showing that the noticee had no access to the information or the trades which were executed were motivated by other significant factors, one can form a suitable defence.

56. Whether communication of information without knowing that it was UPSI is a punishable offence?

It would have to be proved that the Noticee could not have reasonably known for the information to be an UPSI and that the information came upon to the knowledge of the Noticee by mere chance/without any active participation. However, it would depend on case to case basis.

57. Whether trading in equity shares only while in possession of UPSI is in violation of PIT Regulation?

Trading in any securities including futures, options, etc. is also prohibited while in possession of UPSI.

58. Whether trading on the basis of UPSI punishable for persons not falling under the definition of ‘Designated Persons’ under the PIT Regulations?

Yes, as soon as any person comes in possession of UPSI, he becomes an insider and he can be held liable for trading on basis of UPSI.

59. Since the Courts have allowed WhatsApp as a source of sending notices, should it be included under allowed means of information sharing?

Even though WhatsApp messages are now accepted as a form of electronic evidence under the Information Technology Act, 2000 read with the Indian Evidence Act, 1860, they are still not the officially accepted form of sharing information, due to their end-to-end privacy encryption. So, it would be advisable to not use WhatsApp a medium of sharing information.

60. What is the legal source of range of penalties under insider trading laws?

The legal source for the range of penalties imposed under the SEBI Act, 1992 is the analysis of the past trend of the cases of SEBI Adjudication, wherein penalty is imposed under Section – 15G for insider trading violations & Section – 15HB for the disclosure violations.

61. Can only Indian residents be penalized and prosecuted under Insider trading law?

No, it is to be understood that the SEBI Act, 1992 under Section – 11(1) provides powers to SEBI to take “any measures” it thinks fit for the protection of the investor & betterment of the securities market. In Pan Asia Advisors v. SEBI, the Hon’ble Supreme Court has also interpreted this power to include proceeding against non-citizens of India, if they are connected with any offence in relation to the securities market of India.

62. The price of shares of a company rises from Rs 5 to Rs. 1500 in 5 months. Can the regulators suo-motu probe an insider trading case or they should wait for a formal complaint to be lodged?

Yes, SEBI can suo-motu take cognizance of any matter by the powers vested with it under Section – 11, but mere rise of price cannot be a ground, but in most cases, SEBI conducts investigation to see whether such price rise was supported by any activity such as announcement of dividend, new venture etc. by the Company.

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