SEBI (Prohibition of Insider Trading) Regulations, 2015

The SEBI (Prohibition of Insider Trading) Regulations, 2015 (hereafter PIT Regulations) were introduced to curb the misuse of unpublished price‑sensitive information (UPSI) by insiders of listed companies. The regulations apply to listed entities, their promoters, directors, employees, and any person who receives UPSI in any form.

For the NISM Series XXI‑A exam, the focus is on how these rules affect PMS distributors, who must ensure that their clients and the portfolio managers they work with comply with the disclosure and trading restrictions. Non‑compliance can lead to severe monetary penalties, disgorgement of profits, and even imprisonment.

Exam questions often test your ability to differentiate between ‘insider’ and ‘connected person’, recognise the prohibited period around price‑sensitive events, and recall the exact penalties prescribed under the regulations.

• Insider trading is a criminal offence under the Securities Contracts (Regulation) Act, 1956, reinforced by the PIT Regulations.
• SEBI monitors compliance through periodic reporting and surprise inspections.

Insider – Any person who, in connection with the company, possesses UPSI or is in a position to obtain it. This includes directors, officers, employees, and persons who have a fiduciary relationship with the company.

Connected Person – A person who is related to an insider by family ties, business relationship, or any other association that could enable the flow of UPSI.

Unpublished Price‑Sensitive Information (UPSI) – Any information that is not public, relates to the price of a listed security, and is likely to affect the price if disclosed. Examples are earnings forecasts, merger plans, or major contract awards.

Understanding these definitions is crucial because the PIT Regulations hinge on whether a person is classified as an insider or a connected person at the time of a trade.

During the prohibited period – typically 30 days before and after a price‑sensitive announcement – insiders are barred from buying, selling, or otherwise dealing in the securities of the concerned company.

The regulations also prohibit insiders from communicating UPSI to any other person, including family members, unless that person is also an insider and complies with the same restrictions.

For PMS distributors, this means they must screen client orders for any link to insiders and must refuse execution if the order falls within the prohibited window.

• Buying or selling securities while in possession of UPSI.
• Communicating UPSI to a non‑insider who then trades.
• Using UPSI to influence market price indirectly (e.g., through recommendations).

Every listed company must maintain an "insider list" that records the names of all insiders and connected persons, along with the nature of the UPSI they possess. The list must be updated within 24 hours of any change.

In addition, insiders must disclose any acquisition or disposal of securities within two trading days of the transaction. The disclosures are made to the stock exchange and SEBI via Form 3 (acquisition) and Form 4 (disposal).

PMS distributors need to verify that the portfolio manager’s insider list is current and that any client trade does not violate the reporting timelines. Failure to do so can expose the distributor to liability.

SEBI has wide‑ranging powers to enforce the PIT Regulations. Penalties can be monetary, disciplinary, or criminal. The fine for a first‑time insider can be up to ₹10 crore, and for repeated violations, up to ₹25 crore, along with disgorgement of profits.

Imprisonment up to ten years is possible for severe breaches, especially where the insider has deliberately concealed UPSI. SEBI may also bar the person or the entity from the securities market.

For PMS distributors, the key exam focus is the monetary fine structure and the fact that SEBI can impose both civil and criminal sanctions simultaneously.

Before executing any client order, verify the following:

1. Is the security linked to a listed company that currently has an insider list? 2. Does the client or the portfolio manager appear on that list? 3. Is the trade within the 30‑day prohibited window around a price‑sensitive event? 4. Have all required Form 3/Form 4 disclosures been filed by the insider?

If any answer is ‘yes’, the distributor must either obtain a compliance clearance from the company's compliance officer or reject the order. Maintaining a log of these checks helps demonstrate due diligence during SEBI inspections.

In 2023, SEBI introduced a clarification that the 30‑day prohibited period can be extended to 45 days for certain high‑impact announcements, such as large‑scale acquisitions. The amendment also emphasized electronic reporting of insider lists to improve transparency.

Practical tip for exam takers: When a question mentions a "price‑sensitive announcement", always assume the standard 30‑day window unless the scenario explicitly states an extended period.

Another update mandates that PMS distributors must retain records of all client orders and the corresponding compliance checks for a minimum of five years, aligning with SEBI’s record‑keeping norms.