Exonerating circumstances
The circumstances listed in Regulation 4 of the PIT Regulations that an insider who traded while holding UPSI may demonstrate to rebut the presumption that the trade was motivated by that information.
In plain language
The PIT Regulations are deliberately tough on anyone who trades while holding unpublished price sensitive information (UPSI). Once it is shown that a person traded while in possession of UPSI, the law presumes the trade was motivated by that knowledge. The insider does not get to say "I would have bought anyway" and leave it there.
But some trades plainly have nothing to do with exploiting an information advantage — a pre-agreed trading plan, a stock option exercise at a price fixed long ago, a trade the law itself required. Exonerating circumstances are the defences the regulations recognise for those cases. The burden is on the insider to demonstrate them.
How it works
The presumption (Regulation 4). No insider shall trade in securities listed or proposed to be listed when in possession of UPSI. When a person who traded has been in possession of UPSI, the trades are presumed to have been motivated by knowledge and awareness of it. The onus of showing possession or access lies on the person levelling the charge; after that, the trader may demonstrate that he was not in possession, did not trade, could not access — or that the trade was squarely covered by an exonerating circumstance.
The circumstances.
| # | Circumstance | Conditions |
|---|---|---|
| (i) | Off-market inter-se transfer between insiders | Both held the same UPSI without breaching Regulation 3; both made a conscious and informed decision; UPSI not obtained under Regulation 3(3); reported by the insiders to the company within two working days, and by the company to the stock exchange within two trading days |
| (ii) | Block deal window transaction | Between persons holding the UPSI without breaching Regulation 3; both conscious and informed; UPSI not obtained under Regulation 3(3) |
| (iii) | Statutory or regulatory obligation | To carry out a bona fide transaction |
| (iv) | Exercise of stock options | Exercise price pre-determined in compliance with applicable regulations |
| (v) | Non-individual insiders | The individuals holding the UPSI were different from those taking the trading decision, who did not hold it; adequate arrangements (Chinese walls) were in place and there is no evidence of breach |
| (vi) | Trading plan | Trades pursuant to a plan set up under Regulation 5 |
The list is introduced with "including the following" — these are circumstances the insider may demonstrate, not a closed list.
Where they reappear. The trading window restrictions in Schedule B do not apply to transactions under clauses (i) to (iv) and (vi) — note (v) is not in that list — and to a pledge for a bona fide purpose such as raising funds, subject to pre-clearance by the compliance officer.
A worked example
Illustrative facts. Tungabhadra Steel Ltd will announce a large export order on 20 November. Four insiders traded between 1 and 19 November, while the order was UPSI. The stock rose from Rs 280 to Rs 335 on the announcement.
| Trader | What happened | Exonerating circumstance? |
|---|---|---|
| Director A sold 1,00,000 shares off-market to Director B; both sat in the board meeting that discussed the order; reported to the company the next working day; the company told the exchange two trading days later | Inter-se transfer between insiders with the same UPSI, conscious and informed, reported on time | Yes — clause (i) |
| The CEO exercised 2,00,000 ESOPs at a price fixed in 2022 | Pre-determined exercise price | Yes — clause (iv) |
| The company's treasury subsidiary bought 5,00,000 shares; its investment committee had no access to the order and the group's information barrier logs show no breach | Non-individual insider; decision-makers different from information-holders | Yes — clause (v) |
| The CFO bought 40,000 shares "because the valuation looked cheap" | No listed circumstance | No |
The CFO's position in rupees.
Notional gain = 40,000 × (335 − 280) = Rs 22,00,000
He is presumed to have traded on the order. Unless he can show he did not hold the information, Section 15G of the SEBI Act exposes him to a penalty of not less than Rs 10 lakh, up to Rs 25 crore or three times the profits, whichever is higher.
Why NISM asks about it
Chapter 7 (SEBI (Prohibition of Insider Trading) Regulations, 2015), 6% of the paper, lists the circumstances under Regulation 4 and uses them again in the Schedule B trading-window exceptions.
Expect an "insider may prove innocence by demonstrating which of the following" question, and conditions questions: two working days (insiders to company) versus two trading days (company to exchange), and the exclusion of UPSI obtained under Regulation 3(3).
Common exam traps
- The presumption is against the insider. Once possession is shown, the insider must demonstrate the exonerating circumstance.
- Two working days, then two trading days — insiders report the off-market inter-se transfer to the company within two working days; the company notifies the exchange within two trading days.
- Both parties must hold the same UPSI and have made a conscious and informed decision — a transfer to an insider who did not know the information is not covered.
- UPSI obtained under Regulation 3(3) (deal-related sharing) cannot support the inter-se or block-deal defences.
- The non-individual defence needs two things: different decision-makers without the UPSI, and adequate arrangements with no evidence of breach.
- Trading-window exceptions cover clauses (i)–(iv) and (vi) plus bona fide pledges with pre-clearance — clause (v) is not in that list.
- Stock options qualify only if the exercise price was pre-determined.
Check yourself
1.___________ means information that is accessible to the public on a non-discriminatory basis.
- a)Generally available information
- b)Price sensitive information
- c)Unpublished price sensitive information
- d)Non-price sensitive information
Show the answer
Answer: (a) Generally available information
Regulation 2(e) defines the term "generally available information" means information that is accessible to the public on a non-discriminatory basis and shall not include unverified event or information reported in print or electronic media.
Two elements — public access, and no discrimination between recipients.
Option C names its opposite. Unpublished price sensitive information is information that is not generally available which upon becoming generally available, is likely to materially affect the price of the securities.
The two definitions interlock, which the chapter says is deliberate: it is intended to define what constitutes generally available information so that it is easier to crystallize and appreciate what constitutes unpublished price sensitive information.
Note the exclusion. Information shall not include unverified event or information reported in print or electronic media — so a newspaper story is not automatically generally available. But information published on the website of a stock exchange would ordinarily be considered generally available.
Which is exactly the point on which Shruti Vora was decided. SAT observed that the definition of 'unpublished price sensitive information' and 'insider' would show that generally, available information would not be unpublished price sensitive information, and that the WhatsApp messages may have originated in a brokerage house or from platforms of Bloomberg which are in public domain.
SEBI could not bridge the gap: it failed to prove any preponderance of probabilities that the impugned messages were unpublished price sensitive information.
The burden is on the accuser first. The onus of showing that a certain person was in possession of or had access to unpublished price sensitive information at the time of trading would... be on the person leveling the charge, after which the trader may show he was not in possession, did not trade, could not access, or falls within the exonerating circumstances.
Where this is taught
Free preparation for NISM Series III-ARelated terms
- Chinese WallAn enforced separation inside a firm between departments holding confidential price-sensitive information and those dealing with clients, sales or public research.
- InsiderAnyone who is a connected person, or who simply possesses or has access to unpublished price sensitive information — possession alone is enough, with no relationship to the company required.
- Unpublished price sensitive informationInformation about a company or its securities that is not generally available and that would, on becoming available, be likely to materially affect the price of the security.
- Legitimate purposesSharing UPSI in the ordinary course of business with partners, lenders, advisers and similar parties — permitted under the PIT Regulations if not done to evade them; the recipient becomes an insider.
- Trading windowA notional window used to monitor trading by designated persons — closed by the compliance officer whenever they can reasonably be expected to possess unpublished price sensitive information.
- Trading plans — regulation 5A pre-announced, irrevocable schedule of trades an insider files with the compliance officer, which may not begin for 120 calendar days and then executes without pre-clearance or trading window limits.