REGULATORY FRAMEWORK

FOR INSIDER TRADING

PRAGYA CHANDAK
ARUNIMA VIJAY
 STRUCTURE
• OVERVIEW/ HISTORY OF REGULATIONS
• INTRODUCTION TO RELEVANT CONCEPTS
• STUDY OF RELEVANT PROVISIONS
• EFFECTIVENESS OF REGULATIONS
 Introduction
Expanding business in the global markets

Considerable amount of growth in the financial markets- Bond

market, share market, derivative market and other markets.

With the increase in such trading, there has been a development

in one particular form of trading- Insider Trading.

Insider trading is trading in stock market while having a potential

access to private, non-public information of a company.
Historical development of Insider Trading Regulations
Thomas Committee
first attempt to regulate insider trading in the year 1948 under
the chairmanship of P. J. Thomas. 
• Introduction of: Sections 307 [Register of directors'
shareholdings, etc] and 308 [Duty of directors and persons
deemed to be directors to make disclosure of shareholdings]
which paved the way for certain obligatory and compulsory
disclosures by the directors and the managers, but was not
very successful in achieving the aim of preventing the harm
caused by insider trading. 
• Thereafter, by the Companies Amendment Act, 1960 had
extended this requirement to the shareholdings of a
company’s managers as well.
 Sachar Committee
Due to inadequate provisions of enforcement in the Companies Act,
1956, the Sachar Committee in 1979, the Patel Committee in 1986 and
the Abid Hussain Committee in 1989 proposed recommendations for a
separate statute regulating Insider Trading.
• Sections 307 and 308 of the Companies Act were insufficient to curb
insider trading.
• Identified certain category of persons who may be included in the
category of insiders, such as the company's directors, statutory
auditors, cost auditors, financial accountants or financial controller,
cost accountants, tax management consultants or advisers and the
whole time legal advisers or solicitors who would generally have
access to the price sensitive information not available to the outsiders.
• Additional requirements for the disclosures under the Companies Act
and the disclosures by other persons, who are temporary insiders or
who become insider by virtue of their possession of information.
 Patel Committee
• The Patel Committee had suggested that a malpractice such as
“insider trading” should be made a cognizable offence.
• Defined Insider Trading as “Trading in the shares of a
company by the person who are in the management of the
company or are close to them on the basis of undisclosed price
sensitive information regarding the working of the company,
which they possess but which is not available to others”.
• Insider trading should be fined heavily for first offence, and
imprisonment up to five (5) years should be given for second
and subsequent offences.
 Abid Hussain Committee,

• Established in 1989, said that a person guilty of insider trading

should be penalised both in the form of civil and criminal
proceeding. The most important recommendation made by
this committee was enactment of a separate statute for
prevention of insider trading.
 TISCO Case (1992)
Facts: The profit before tax of Tata Iron and Steel Company (TISCO) for the first half of
financial year 1992-93 felt steeply to Rs. 50.22 crore in comparison to profit of
Rs.278.16 crore for the financial year 1991-92 and Rs.238.13 crore for the financial year
1990-91.
Before the announcement of the half yearly financial results there was intense activity
in the activity of volume of TISCO shares traded.
The price of the share registered a sharp fall of 36.6 %.

The sharp fall in prices of TISCO shares and active trading indicated that insiders who
had knowledge of poor results of the company had manipulated the market to make
large short sales.

Ruling: Bombay Stock Exchange (BSE) authorities initiated investigation. Small investors
were hit badly. BSE authorities claimed that it would not be possible for the exchange to
initiate action even if it was proved that insider trading took place in the absence of any
law against it. Due to the absence of insider trading regulations in India it was not
possible to investigate the case. It may be noted that SEBI insider trading regulations
were issued on November 19, 1992.
 1992 Regulations
• The Securities and Exchange Board of India (Prohibition of Insider
Trading) Regulations 1992, does not directly define the term Insider
Trading. But it defines the term "Insider", "Connected Person" and
"Price Sensitive Information".
• The main objective of these Regulations is to prohibit an insider from
making any personal gain from unpublished price sensitive
information.
• Insider trading Regulations came into force w.e.f 19th November,
1992 and are applicable to all listed companies which are required to
disseminate price sensitive information such as the financial results,
dividend/bonus declarations, mergers/amalgamations and other
material developments, which has an impact on the share prices of
the company.
 2002 and 2008 Amendments
Major amendments were made in 2002 and 2008. 

2002-
• Required the companies to frame a model code of conduct for its directors/officers to
monitor and prevent insider trading. 
• Unpublished price sensitive information was defined

2008-
• Definition of insider was widened to include any one (need not necessarily be
connected with the company) who has access to the unpublished price sensitive
information.
• Officers/directors/designated employees have to disclose their holdings in the company
and dependants within 2 days in prescribed form.
• They can not carry out reverse trade within 6 months i.e.  if one sells shares, he can not
buy vice versa and no derivative positions can be taken.
 Sodhi Committee
• SEBI in order to revise the law on insider trading and
ensure that it is in consonance with the global best
practices, constituted a committee under the
chairmanship of Justice N.K Sodhi- drafted the
Prohibition of Insider Trading Regulations, 2015
• The Sodhi committee has made a wide range of
recommendations for prohibition of insider trading in
India and concentrated on making this area of regulation
more predictable, precise and clear by suggesting a
combination of principle based regulations.
Key Definitions
 Comparison
“connected person”
• 1992- “connected person” means any
person who— (i) is a director, as
defined in clause (13) of section 2 of
the Companies Act, 1956 (1 of 1956),
of a company, or is deemed to be a
director of that company by virtue of
sub-clause (10) of section 307 of that
Act or (ii) occupies the position as an
officer or an employee of the company
or holds a position involving a
professional or business relationship
between himself and the company,
whether temporary or permanent and
who may reasonably be expected to
have an access to unpublished price
sensitive information in relation to
that company
• 2015- any person who is or has during
the six months prior to the concerned
act been associated with a company,
directly or indirectly, in any capacity
including by reason of frequent
communication with its officers or by
being in any contractual, fiduciary or
employment relationship or by being a
director , officer or an employee of
the company or holds any position
including a professional or business
relationship between himself and the
company whether temporary or
permanent, that allows such person,
directly or indirectly, access to
unpublished price sensitive
information or is reasonably expected
to allow such access.
Who can be connected person?2(d)(i)
Frequent
communic
ation with
officers

Direct or
Contractua Indirect Director/
Access to
l unpublished Officer/
relationship price sensitive Employee
information

Fiduciary
relationship
 What’s different?
• Definition- expanded and clarified.
• Included within the ambit are persons who don’t occupy a
position in the company, but are involved in a contractual
capacity with the company and are in touch with the company
and its officers.
• They are in a position wherein they are aware of the
operations of the company. Such a relationship (whether
temporary or permanent) must allow (or reasonably expect to
allow) access to unpublished price sensitive information.
People deemed to be Connected Person
Holding/
associate/
Person subsidiary
company Immediate
having
relative of
more than
connected
10% of
person
interest

Official of
Intermediary
self
/ employee/
regulatory
Regulation director
organization
2 (d) (ii)

Banker of Member
the of board
company of director

Investment
Official of
or asset
stock
manageme
exchange
nt company
 What’s different?
• The definition of ‘Connected Person’ under the 2015 Regulation also comprises of
persons deemed to be connected persons. This combines two different and
separate definitions of the 1992 Regulations.
• Deemed to include “immediate relatives”, which is defined. (Only those who
either depend financially or consult for trading in securities.) Under 1992
regulations, it deemed to include ‘relatives’.
• Deemed connected person no longer includes companies under the same
management or group as per MRTP Act, 1969. Now includes holding company,
subsidiary company and associate company.
• As regards capital market intermediaries as per section 12A of SEBI Act, under
1992 regulations only employees were treated as deemed to be connected
person. Now it covers directors as well.
• As regards mutual funds, under 1992 regulations only employees having fiduciary
relation with the company were treated as deemed to be connected. Now
condition of ‘fiduciary relation’ is dropped. Thus, all employees of mutual fund /
asset management company are deemed to be connected person.
 Who is an insider?
• Connected person; or
• Having possession of unpublished price sensitive information
 What’s different?
• simplification of the definition of an insider- this category of
“persons deemed to be connected persons” has been
eliminated. 
• Earlier, UPSI was restricted to information about the company.
Now it includes information about securities of the company
as well.
 HINDUSTAN LEVER LIMITED v. SEBI
• Facts:
Hindustan Lever Limited (HLL) and Brooke Bond Lipton India Limited (BBLIL) were subsidiaries of a
common parent company called Unilever Inc in UK and were under the same management. HLL
purchased 8 lacs shares of BBLIL from Unit Trust of India at the rate of Rs.350.35 per share. A merger
announcement was made 25 days after the purchase transaction had taken place. HLL announced its
merger with BBLIL and notified the same to the stock exchanges. BBLIL’s share price shot up by Rs. 50
per share after the merger.
SEBI had initiated investigations into the matter and found that HLL as an Insider had purchased the
securities of BBLIL from UTI on the basis of the Unpublished Price Sensitive Information (UPSI) about
the impending merger, thereby violating the provisions of the Insider Trading Regulations
• Question of Law:
The interpretation of the term “Insider” under Regulation 2 (e) of the Insider Trading Regulations was
one of the key issues under consideration, before the appellate authority in this case. In this regard,
the appellate authority observed that the definition of Insider should have three ingredients: 1. The
person should be a natural person or legal entity. 2. The person should be a connected person or a
deemed to be connected person. 3. Acquisition of UPSI should be by virtue of the connection.
• Ruling:
SEBI had concluded that if a connected person actually gains or receives such information
independently, notwithstanding his position in the company, such person will fall within the definition
of “Insider” and therefore SEBI regarded HLL as an Insider. This was upheld by the Appellate
Authority. However, Appellate Authority overruled the SEBI’s order on other grounds.
 Unpublished price sensitive information
Information relating to company about
the securities which is not generally
available and has potential to affect the
price of securities

Financial Change in Change in key Merger, demerger,

Dividends capital acquisition or Material
results managerial
structure personnel delisting events in
accordance
with the
listing
agreement.
 What’s different?
• The 2015 Regulations asserts on the fact that the list of
information given in the definition is only an illustrative
guidance and to see whether a piece of information is UPSI or
not.
• The examples in 2015 Regulations have two new entries as
compared to the 1992 Regulations, being change in key
managerial personnel and material events in accordance with
the listing agreement.
 Addition in 2015 Regulations
• Trading Plans: Trading Plans are new concepts introduced under
the 2015 Regulations, wherein insiders who are bound to possess UPSI
all-round the year are permitted to formulate trading plans with
proper safeguards.
• Such a trading plan has been found to be necessary to facilitate, on a
regular basis, trading and monetizing of securities by insiders who may
otherwise be unable to trade in securities of the company. The logic
appears to be that once a trading plan has been established by an
insider without being in possession of UPSI, then it does not matter if
such insider subsequently comes into possession of UPSI because the
decision to trade has already been taken prior to that.
• The company is entitled to set up a trading plan pursuant to which
insiders may buy and sell shares. There is a cooling-off period of six
months between the establishment of a trading plan and
commencement of trading under it.
• Code of Conduct and Code of Fair Disclosure: In the 1992 Regulation, Regulation-12
requires all listed companies; intermediaries correlated with the securities market and professional
firms to frame and adopt the code of internal proceedings and conduct. Similarly, the 2015
Regulation obligates that all listed companies, organisations, intermediaries, self-regulatory
organisations, clearing houses and public financial institutions should frame and adopt a “Code of
Conduct” prescribed in Schedule B of the new Regulation. In addition to this the 2015 Regulation
prescribes a “Code of Fair Disclosure”. Types of disclosures in the 2015 Regulation are as follows:

Initial Disclosure- Required by every promoter, key managerial personnel and director of each and
every company whose securities are listed on any of the recognised stock exchange to mandatorily
disclose his holding of securities of the company as on the time of these regulations taking effect, to
the company within thirty days of these regulations coming into force.
Continuous Disclosure- Required by every promoter, employee and director of every company to
mandatorily disclose to the company the number of such securities acquired or disposed of within
two trading days of such transactions if the value of securities traded, whether in one transaction or a
series of transactions over any calendar quarter, which aggregates to a traded value in excess of ten
lakh rupees or such other value as may be specified.
Additional Disclosure- also required for all holdings in securities of that company held by any other
connected person or class of connected persons. Such disclosures shall be made at the periodic
frequency as determined by the company with the purpose of monitoring compliance with the
present 2015 Regulation.
• Notional Trading : Another important development in
relation to notional trading windows which are used as an
instrument to monitor compliant trading by designated
persons within the company. The trading window shall be
closed when the compliance officer determines that a
designated person or class of designated persons can
reasonably be expected to have possession of unpublished
price sensitive information.
Designated persons and their immediate relatives shall not trade
in securities when the trading window is closed.
The time period for such re- opening of trading windows has
been set to 48 hours after the UPSI becomes generally available.
ANALYSIS OF 2015
REGULATIONS
Too Wide Definition?
• A comparison of 1992 vis-à-vis 2015 Regulations would reflect that definition of
connected person and consequently, insider has been widened to a large extent.
• However, this has created an air of vagueness and there is no clarity as to who can
fall within the ambit of the definition.
Facebook Likes- Evidence Of Being Connected Person?
• In Deep Industries, it was alleged that the person was a connected person and had
access to UPSI
• An insider can be by way of their association in any capacity or it can be by way of
frequent communication with its officers, which can also be in their social capacity
as evident in this case by frequent interactions, including on social media 
Factorial Master Fund v SEBI
• Mere fact that the accused had participated in the market gauging exercise could
not be a ground to hold that the appellant was privy to the UPSI that L&T would
sell shares of LTFH through OFS imminently.
• The Tribunal refused to rely on indirect circumstantial evidence and held that
insider trading is a serious offence and needs concrete proof.
• Contrast with Deep Industries case
FALLACY IN DEFINITION OF INSIDER?
• Insider has been defined as someone who is a connected person or someone with
possession of UPSI. The definition was in sync with 1992 Regulations wherein the
term connected person was defined in a narrow sense and included limited
persons.
• However, with the widened definition, the definition of connected person includes
all such person who has access to UPSI and therefore, creates an air of uncertainty.
Whatsapp Group Case Study
• In November, 2017, owing to report by Reuters  that the second quarter earnings of
12 companies, including popular blue chips such as Dr. Reddy’s, Cipla, Tata Steel
etc., were being circulated on private WhatsApp groups, SEBI conducted one of its
largest investigations and demanded user specific information from Whatsapp.
CLASH WITH RIGHT TO PRIVACY
• The most cumbersome task would be to establish the messages as Whatsapp had
denied to share user specific information and the messages are encrypted.
• It has direct clash with right to privacy of individuals and though in the case of
Investors v Union of India, the power to seize the chats was allowed, K Puttuswamy
case recognizing right to privacy as fundamental right will have different
ramifications.
 Insider Trading and Due Diligence
•UPSI made an offence for the first time in the PIT
2015.
•Allows communication of UPSI for ‘legitimate purposes’.
• It includes sharing UPSI in case of a merger/ acquisition – lauded by many scholars and experts.
 DRAWBACKS
• Even if the deal is unsuccessful, the communication of UPSI remains a
legal act.
• Requires the opinion of ‘Board’ and not ‘Boards’ meaning only target
company is allowed to decide whether the UPSI is in their best interest or
not.
• The disclosure is required to be made by listed companies as well as
companies ‘proposed to be listed’. However, no definition of the same has
been provided by Sodhi Committee or in 2015 Regulations.
Fair Market Conduct Committee Report on Insider Trading
1. Two separate code of conduct for (i) public companies, & (ii) market intermediaries and other people
who are required to handle UPSI.
2. Mandating disclosures by designated persons of names of immediate relatives, persons with whom
such designated person(s) share a material financial relationship, and persons residing at the same
address for more than one year.
• Such information may be maintained by the company in a searchable electronic format and may be shared
with SEBI when sought on case to case basis.
3. SEBI may seek direct power to intercept calls to aid in investigation with proper
checks and balances.
4. A mechanism to facilitate whistleblowers to come forward and for SEBI to have the
power to grant provide immunity or levy lesser penalty on such persons
PROPOSED AMENDMENTS
• Provide for illustrations as to who shall not be connected person so as to exclude
unnecessary people from the ambit of Regulations
• Formulation of a committee and making it mandatory for social media apps to
provide information once SEBI is able to satisfy its apprehensions regarding insider