The Securities and Exchange Board of India (SEBI), as the principal regulator of the securities market, is entrusted with the responsibility of protecting investor interests and ensuring market integrity. Among its many regulatory frameworks, the SEBI (Prohibition of Insider Trading) Regulations, 2015 (PIT Regulations) stand out as a critical tool to curb fraudulent and manipulative practices, particularly insider trading. These regulations prohibit insiders  — defined broadly to include directors, officers, and connected persons — from trading in securities while in possession of Unpublished Price Sensitive Information (UPSI).

To operationalise this, every listed company is mandated to formulate an Insider Trading Policy, enforced by a compliance officer, to monitor and regulate the conduct of designated persons. This internal compliance mechanism was envisioned as a safeguard to bridge regulatory gaps and ensure accountability. However, the delegation of significant discretionary powers to company officials, particularly the compliance officer, has raised concerns. These powers, if unchecked, can be misused to suppress dissenting voices within the promoter group and manipulate trading opportunities, thereby undermining the very objectives of the PIT Regulations.

Under the PIT Regulations, the compliance officer operates under the supervision of the Board of Directors or the head of the organisation. Their responsibilities include monitoring trading activities, approving pre-clearance requests, enforcing trading window closures, and ensuring adherence to the company’s Insider Trading Code. The intent behind these powers is to prevent insiders from exploiting privileged information and to maintain a level playing field.

However, the absence of statutory limitations, procedural safeguards, and oversight mechanisms has led to a concentration of unchecked authority within companies. This creates a regulatory vacuum that can be exploited, particularly in scenarios involving internal conflicts among promoters. The compliance officer’s role, while crucial, lacks uniformity in implementation across companies, leading to inconsistent enforcement of the regulations.

One of the most contentious aspects of the PIT Regulations is the provision for trading window closures. The compliance officer is empowered to close the trading window when it is reasonably expected that designated persons may possess UPSI. However, the regulations do not prescribe a maximum duration for such closures, nor do they require detailed justification. This ambiguity allows for prolonged and consecutive closures, which can effectively block dissenting promoters from executing trades.

In some cases, the window may be reopened only when shares can be acquired by aligned promoters, thereby facilitating strategic accumulation and suppressing fair exit opportunities. Additionally, the PIT Regulations require designated persons to seek pre-clearance before executing trades or pledging shares. While this is intended to prevent violations during sensitive periods, the absence of standardised formats, timelines, and statutory checklists results in inconsistent enforcement. Compliance officers may approve or reject applications at their discretion, leading to potential bias and selective activism.

1. Ambiguity in Trading Window Closures

The PIT Regulations do not prescribe a maximum duration for trading window closures. This allows compliance officers to impose prolonged or consecutive closures, potentially targeting dissenting promoters and restricting their ability to trade. In practice, such closures have extended beyond a quarter, creating a de facto freeze on trading rights without transparent justification. This lack of clarity can be exploited to delay or deny legitimate trades, especially when internal conflicts exist among promoters.

2. Discretionary Pre-Clearance Powers

The requirement for pre-clearance before executing trades or pledging shares is a critical safeguard. However, the absence of standardised formats, timelines, or statutory checklists results in inconsistent enforcement. Compliance officers may exercise discretion without accountability, leading to potential bias. This is particularly problematic when the officer is influenced by the Board or management, especially in cases involving internal disputes. The lack of transparency in approvals can discourage fair participation in the market.

3. Potential for Bias and Oppression

Promoters who dissent from the controlling group may face arbitrary restrictions, delayed approvals, or outright denials. In extreme cases, companies may engineer non-compliance with listing obligations, triggering SEBI’s penal provisions that freeze promoter holdings. This tactic can be used to suppress dissent and consolidate control, undermining the principles of fair governance. The freezing of demat accounts, while legally sanctioned, can become a tool of coercion when misused.

4. Lack of Oversight and Redressal Mechanisms

SEBI has not issued binding principles to regulate the conduct of compliance officers. There is no swift or defined redressal mechanism for affected parties, leaving them to pursue time-consuming legal remedies. The ambiguity surrounding whether such inaction constitutes a regulatory breach or internal mismanagement further complicates resolution. This gap in oversight creates a grey area where accountability is diluted.

5. Selective Enforcement and Governance Risks

Delegated powers may be exercised in favour of promoters aligned with management, raising concerns of favouritism and undue influence. This perceived selective activism erodes trust in the regulatory framework and compromises the integrity of the securities market. Without clear checks and balances, the system risks becoming a tool for internal power struggles rather than a mechanism for investor protection.

While SEBI’s PIT Regulations are designed to prevent insider trading and promote transparency, the unchecked discretionary powers granted to company officials pose significant risks. The absence of procedural safeguards and oversight mechanisms enables arbitrary decision-making, undermining the spirit of the regulations.

To uphold the integrity of the securities market and protect investor rights, SEBI must introduce:

• Clear guidelines on the duration and justification for trading window closures;

• Standardised procedures and timelines for pre-clearance approvals;

• Oversight mechanisms to monitor the conduct of compliance officers;

• Effective and accessible redressal frameworks for aggrieved parties;

• Clarification on the regulatory treatment of internal misuse of delegated powers.

Only through such reforms can the regulatory framework truly reflect the principles of fairness, transparency, and accountability that SEBI seeks to uphold. A robust compliance structure must not only prevent insider trading but also ensure that the mechanisms designed to enforce it are not themselves vulnerable to misuse. The role of the compliance officer must be re-evaluated to ensure that it is exercised with integrity, transparency, and accountability, supported by clear statutory guidance.

About the authors: Nirali Mehta is a Partner and Mihir Man Singh is an Associate at Mindspright Legal.

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