Why in the news
A detailed explainer on UPSI, the core concept behind insider trading rules in India, was in focus for investors and compliance teams.
What is UPSI
- Information about a listed company or its securities that is not public and could materially move the price once released.
- It stops being UPSI once disclosed through proper channels such as stock exchanges.
- Typical examples: quarterly results, mergers and acquisitions, dividends, bonus or split, top management changes, big contracts, litigation, buyback or delisting.
Legal framework
| Provision | What it does |
|---|
| Regulation 2(1)(n) | Defines UPSI |
| Regulation 3 | Bars sharing UPSI except for legitimate purposes |
| Regulation 4 | Bars trading while holding UPSI |
| Regulation 5 | Sets the process for sharing UPSI for due diligence, such as M&A |
Who can access UPSI
- Insiders: directors, KMPs, employees, auditors, consultants, legal advisors, investment bankers and analysts.
- Designated persons: those authorised by their role, such as the CFO or Compliance Officer.
- Connected persons: indirectly linked people like relatives, friends or business partners.
- Legitimate purposes for sharing: due diligence, statutory obligations, business transactions and legal proceedings.
Safeguards
- Trading window: closed during sensitive periods such as before quarterly results.
- Chinese Wall: physical and virtual barriers between departments.
- Structured Digital Database (SDD): records names, PAN and purpose of access.
- Code of conduct, whistleblower policy, pre-clearance of trades from the Compliance Officer and regular staff training.
Penalties under the SEBI Act, 1992
| Violation | Penalty |
|---|
| Trading on UPSI | ₹25 crore or 3 times profit, whichever is higher |
| Disclosing UPSI to third parties | ₹1 crore |
| Not maintaining the SDD | ₹10 lakh |
Cases cited
- Reliance Industries (2007): fined ₹447 crore for price manipulation using insider information.
- Infosys (2018) and Axis Bank (2020): leaks of results or financial data before disclosure.
Exam angle
- Insider trading is trading while in possession of UPSI.
- Governing rules: SEBI (PIT) Regulations, 2015.
- Tools: trading window, Chinese Wall, SDD.