Summary: The SEBI (Prohibition of Insider Trading) Regulations, 2015 (PIT Regulations) define “Unpublished Price Sensitive Information” (UPSI) as any non-public information related to a company or its securities that, if made public, can materially affect security prices. Insider trading regulations prohibit insiders—defined as connected persons or those with access to UPSI—from sharing or trading based on such information, except for legitimate purposes or legal obligations. Violations of Regulation 3(1) (prohibition of communication of UPSI) or Regulation 4(1) (prohibition of trading on UPSI) result in penalties under Section 15G and directions under Section 11B of the SEBI Act, 1992. Penalties can range from ₹10 lakh to ₹25 crore or three times the profit gained, whichever is higher. SEBI Act’s Section 12A prohibits trading or aiding insider trading and mandates that any breach of the PIT Regulations also violates this section. Information is considered “generally available” only when accessible to the public on a non-discriminatory basis. SEBI has broad powers under Section 11B to issue directives or impose penalties to protect investors and maintain market integrity. The PIT Regulations, 2015, replaced the earlier 1992 regulations to provide a stricter framework for insider trading and its associated liabilities.
Regulation 2(1)(n) of the PIT Regulations defines the term UPSI to mean any information relating to the company or its securities that is generally not available which upon becoming generally available is likely to materially affect the price of the securities. Thus, from a plain reading of the said definition under the PIT Regulations, it can be seen that the regulations have without any ambiguity defined the said term to cover under its ambit any information pertaining to the Company or its securities which, upon becoming public, is likely to make an impact on the price of such securities would be treated as UPSI. The definition is an ‘inclusive’ definition which enlists certain ‘information’ which can be treated as ‘price sensitive’ until the same is not generally available. Regulation 2(1)(e) of the PIT Regulations defines the term “generally available information” to mean an information that is accessible to the public on a non-discriminatory basis. Regulation 2(1)(g) of the PIT Regulations defines the term ‘insider’, to mean, any person who is:
- a connected person; or
- in possession of or having access to unpublished price sensitive information
The ‘Note’ to the said definition specifically clarifies that as “generally available information” is defined (under the PIT Regulations), it is intended that anyone in possession of or having access to the UPSI should be considered as an “insider” regardless of how one came in possession of or had access to such information.
Regulation 3(1) of the PIT Regulation prohibits the communication of any UPSI by an Insider, except if it is in furtherance of some legitimate purpose or in discharge of any legal obligation. Further, Regulation 4(1) of the PIT Regulations prohibits trading by insiders when in possession of UPSI. As discussed earlier, in terms of Regulation 2(1)(g), an insider can be either a connected person or a person who is in possession of or having access to UPSI. Once a person is found to be having access to UPSI or in possession of UPSI, such person also become an insider and therefore, is prohibited to trade when in possession of UPSI by virtue of Regulation 4(1) of the PIT Regulations. Possession of UPSI, in respect of persons who are termed insider by virtue of Regulation 2(1)(g)(ii) is not required to be proved separately while determining the violation of Regulation 4(1) because a person becomes ‘insider’ under Regulation 2(1)(g)(ii) when it is proved that he was in possession of UPSI or having access to UPSI.
Section 12A of the SEBI Act, 1992, as introduced by SEBI (Amendment) Act, 2002, in Clause (d) provides that no person shall directly or indirectly indulge in insider trading. The word “indulge” used in this Clause is of wide import. This Clause seeks to prohibit any assistance/aiding of insider trading, by any person, either directly or indirectly. Section 12A(e) provides that no person shall directly or indirectly deal in securities while in possession of material or non-public information or communicate such material or non-public information to any other person, in a manner which is in contravention of the provisions of this Act or the rules or the regulations made thereunder. SEBI (Prohibition of Insider Trading) Regulations, 1992 came to be repealed by PIT Regulations, 2015. Thus, at present, ‘regulations’ referred to in Section 12A(e) are PIT Regulations, 2015. Once a person is found to be in violation of PIT Regulations, 2015, it leads to violation of Section 12A(d) and (e), also.
Violation of PIT Regulations, 2015 committed renders liability for imposition of penalty under Section 15G read with Section 11B(2) of the SEBI Act, 1992, which provide as under:
“Penalty for insider trading.
15G. If any insider who,
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- either on his own behalf or on behalf of any other person, deals in securities of a body corporate listed on any stock exchange on the basis of any unpublished price sensitive information; or
- communicates any unpublished price-sensitive information to any person, with or without his request for such information except as required in the ordinary course of business or under any law; or
- counsels, or procures for any other person to deal in any securities of anybody corporate on the basis of unpublished price- sensitive information, shall be liable to a penalty which shall not be less than ten lakh rupees but which may extend to twenty -five crore rupees or three times the amount of profits made out of insider trading, whichever is higher.
Power to issue directions and levy penalty.
11B
(1) Save as otherwise provided in section 11, if after making or causing to be made an enquiry, the Board is satisfied that it is necessary, —
(i) in the interest of investors, or orderly development of securities market; or
(ii) to prevent the affairs of any intermediary or other persons referred to in section 12 being conducted in a manner detrimental to the interest of investors or securities market; or
(iii) to secure the proper management of any such intermediary or person, it may issue such directions,
(a) to any person or class of persons referred to in section 12, or associated with the securities market; or
b) to any company in respect of matters specified in section 11A, as may be appropriate in the interests of investors in securities and the securities market.
Explanation.—
For the removal of doubts, it is hereby declared that the power issue directions under this section shall include and always be deemed to have been included the power to direct any person, who made profit or averted loss by
indulging in any transaction or activity in contravention of the provisions of this Act or regulations made thereunder, to disgorge an amount equivalent to the wrongful gain made or loss averted by such contravention.
(2) Without prejudice to the provisions contained in sub-section (1), sub-section
(4A) of section 11 and section 15-I, the Board may, by an order, for reasons to be recorded in writing, levy penalty under sections 15A, 15B, 15C, 15D, 15E, 15EA, 15EB, 15F, 15G, 15H, 15HA and 15HB after holding an inquiry in the prescribed manner.”
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