SEBI throws another Googly on Insider Trading

By Vaneesa Agrawal

The SEBI (Prohibition of Insider Trading) Regulations, 2015 (“PIT Regulations”) have led to a lot of confusion in the market.

SEBI has released yet another Informal Guidance made public today, which is bound to have far reaching consequences as far as interpretation of the PIT Regulation is concerned. The facts and queries of the Applicant Prabhudas Liladher Pvt. Ltd. can be seen here.

This short post is limited to two important legal issues.

Applicability of Code of Conduct

The first issue that is important to be highlighted is about applicability of the Code of Conduct under the PIT Regulations. Clause 3 of Schedule B to the PIT Regulations states that “Employees and connected persons designated on the basis of their functional role (“designated persons”) in the organization shall be governed by an internal code of conduct governing dealing in securities.” One of the queries raised by the applicant was whether a senior professional who does not have access to UPSI can request the compliance officer for exclusion as “designated person” under the Code of Conduct specified in Schedule B.

In response, SEBI has stated that “the code of conduct applies to all connected persons and not only to designated persons.” This interpretation has the effect of rewriting the PIT Regulations since the Regulations very clearly provide that the code will be applicable only to those connected persons who are designated on the basis of their functional role, and implies that it will not be applicable to all connected persons. This was done so while keeping the companies which have large number of employees across the jurisdiction in mind. The guidance issued now is especially puzzling since the definition of connected person is quite broad. Perhaps SEBI’s intention is not to go against the express provisions of the PIT Regulations, but the way this guidance is drafted, it could lead to more confusion than the clarity.

Exclusion from the definition of “immediate relative”

The second important issue dealt with under this Informal Guidance is on exclusion of spouse from the definition of immediate relative. The applicant asked whether the rebut by a spouse of an employee/designated person through a written declaration is sufficient for a market intermediary to exclude such spouse from the purview of code of conduct for employee trading. In response to the same, SEBI has stated that whether a written declaration is sufficient or not is a hypothetical question and the validity of the same can only be ascertained on case to case basis.

Since the PIT Regulations were consciously framed as principle based regulations, there are many areas where the applicability depends on the facts and circumstances of each case. While this approach gives a lot of flexibility to companies, it also places the onus on them to take a call on various issues. A bona fide call taken by compliance officer along with board of directors of a company may be questioned by SEBI later, and that is worrisome. Needless to say, such consequences are not desirable since it leads to reputation damage and financial losses.

Vaneesa Agrawal is a Partner, Suvan Law Advisors (

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