Fiduciaries
Professional firms — auditors, law firms, consultants, banks and similar — that assist or advise a listed company, and whom SEBI's insider trading rules therefore treat the same way as the company's own intermediaries.
In plain language
A listed company does not work in isolation. It leans on outside professionals — its auditor, its lawyers, the bank that arranges its debt, the consultants who advise on a merger — and every one of them can end up holding unpublished price sensitive information in the course of that work.
SEBI's insider trading rules give this group a name: fiduciaries. The word does the same job here that 'intermediary' does for brokers and RTAs — it draws a line around everyone who owes the company's information the same duty of care, whether or not they are formally an employee.
This is a narrower, borrowed use of the word, and it is worth keeping apart from the other one. A fiduciary in the adviser sense is someone who must put a client's interest above their own. A fiduciary here is a firm advising a listed company, and what it owes is the company's price sensitive information, not a duty of best interest to the company. Same word, two different rulebooks.
How it works
The workbook's own footnote to the SEBI (Prohibition of Insider Trading) Regulations, 2015 spells out who counts: professional firms such as auditors, accountancy firms, law firms, analysts, insolvency professional entities, consultants, banks and similar entities assisting or advising listed companies are collectively referred to as fiduciaries for the purpose of those regulations.
Being named a fiduciary comes with the same obligations SEBI places on listed companies and registered intermediaries:
- maintaining a comprehensive code of conduct to prevent insider trading, with an appointed compliance officer;
- ensuring periodic disclosure of holdings by everyone treated as an insider;
- promptly informing the stock exchange(s) where the company's securities trade of any code-of-conduct violation, in the prescribed format;
- remitting any amount collected on account of a code-of-conduct violation to SEBI, for credit to the Investor Protection and Education Fund (IPEF).
The reach is deliberately wide: it does not matter that the auditor or the law firm is not the company's employee — if the work brings unpublished price sensitive information within reach, the same rules apply.
A worked example
Konark & Associates, a chartered accountancy firm, is engaged to audit a listed company's books ahead of its results announcement. During the engagement its partners see the quarterly profit figures three weeks before they are made public — squarely unpublished price sensitive information.
Because Konark & Associates is assisting the listed company, it is a fiduciary under the PIT Regulations, not merely an outside vendor. It must run its own code of conduct preventing its partners and staff from trading in the company's shares on the strength of what they have seen, appoint a compliance officer to police that, and report any breach to the stock exchange where the company is listed.
Suppose a partner nonetheless buys Rs 8,00,000 of the company's shares two weeks before the results, anticipating a strong number. If SEBI investigates and confirms the trade was made on the unpublished information, the amount collected in any settlement is remitted to SEBI for the Investor Protection and Education Fund — not kept by the firm or paid to the company.
Why NISM asks about it
Chapter 5 (SEBI — Role and Regulations), section 5.2.1, defines fiduciaries in a footnote to the SEBI (Prohibition of Insider Trading) Regulations, 2015, immediately after listing who else the code of conduct binds — listed companies and registered intermediaries. Expect a question asking which category a company's outside auditor or law firm falls into when it possesses unpublished price sensitive information.
Common exam traps
- A fiduciary need not be an employee. Auditors, lawyers, consultants and banks assisting the company all qualify.
- The definition is specific to the PIT Regulations, not a general accounting or legal term — do not read it as meaning any professional relationship.
- Do not answer this from the adviser papers. In Series X-A a fiduciary is a person bound to act in a client's best interest under the uberrimae fidei principle. Here it is a class of firms advising a listed company, defined by a footnote to the PIT Regulations, with code-of-conduct and reporting duties rather than a best-interest standard. The two pages are deliberately separate.
- Fiduciaries carry the same code-of-conduct and reporting duties as listed companies and intermediaries — not a lighter version of them.
- Amounts collected for code-of-conduct violations go to the IPEF, administered by SEBI, not to the listed company itself.
Check yourself
1.Insider trading is controlled by the regulations prescribed by __________.
- a)Securities and Exchange Board of India (SEBI)
- b)Reserve Bank of India (RBI)
- c)Association of Mutual Funds in India (AMFI)
- d)Ministry of Corporate Affairs (MCA)
Show the answer
Answer: (a) Securities and Exchange Board of India (SEBI)
The SEBI (Prohibition of Insider Trading) Regulations, 2015 seeks to prevent insider trading which erodes the confidence of the common investors in the securities markets.
The regulations bear SEBI's name, and they sit among the chapter's SEBI Regulations specifically aimed at Investor Protection, alongside the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Market) Regulations, 2003.
What they forbid. Insider trading refers to the dealing in securities by persons connected with a company having unpublished price sensitive information that is not available to the public — such persons including the directors and employees of the company, associates such as bankers and tax consultants or employees of the stock exchanges.
What they require. SEBI's guidelines require all listed companies, registered intermediaries and fiduciaries to have comprehensive code of conduct to prevent such activity. This includes appointing a compliance officer to enforce it, ensuring periodic disclosure of holding by all persons considered as insiders and ensuring data confidentiality.
And where violations are reported: listed companies, intermediaries and fiduciaries must promptly inform the respective Stock Exchange(s) where the concerned securities are traded, with amounts collected remitted to SEBI for credit to the Investor Protection and Education Fund (IPEF), administered by SEBI.
The penalties are SEBI's too: if an insider trading charge is proved through SEBI's investigations, the penalties include monetary penalties, criminal prosecution, prohibiting persons from transacting in the securities markets and declaring transactions as void.
Options B and D name bodies with other mandates, and option C an industry association.
The reach has recently widened: mutual fund units have been included in the SEBI (PIT) Regulations.
2.The Investor Education and Protection Fund (IEPF) is funded by unpaid dividends remaining unclaimed for at least _________.
- a)Seven years
- b)Five years
- c)Eight years
- d)Ten years
Show the answer
Answer: (a) Seven years
Unpaid dividends, matured debentures and deposits, application and call money due for refund and interest on them shall form part of the fund provided such money has remained unpaid and unclaimed for a period of 7 years from the date they were due for payment.
Seven years, measured from the date the money was due — not from any later date.
Note how much more than dividends is covered: matured debentures and deposits, application and call money due for refund and interest on them. An IPO refund never encashed travels the same road.
The fund has a second source too. The fund is created out of contributions from the central government, state government, companies and institutions.
Who created it and who runs it. The IEPF is a fund created by the Ministry of Corporate Affairs for promoting investors' awareness and protecting their interests, and for administration of Investor Education and Protection Fund, Government of India has on 7th September, 2016 established Investor Education and Protection Fund Authority.
What that Authority does: administration of the Investor Education Protection Fund (IEPF), make refunds of shares, unclaimed dividends, matured deposits/debentures etc. to investors and to promote awareness among investors.
Nothing is forfeited. The fund is utilised for making refunds in respect of unclaimed dividends, matured deposits/debentures etc. to investors and to promote investors' education, awareness and protection through various investor awareness programs and other initiatives.
Do not confuse it with SEBI's own fund. The Investor Protection and Education Fund (IPEF) is administered by SEBI and receives any amount collected by the listed companies, intermediaries and fiduciaries on account of violations of code of conduct under the insider trading rules.
IEPF — MCA, seven-year-old unclaimed money. IPEF — SEBI, code-of-conduct penalties.
3.What two conditions must information satisfy to be unpublished price sensitive information?
- a)It must be written down and approved by the board
- b)It must be not generally available to the public, and on becoming generally available be likely to materially affect the price of the securities
- c)It must relate to financial results only
- d)It must be known to at least two directors
Show the answer
Answer: (b) It must be not generally available to the public, and on becoming generally available be likely to materially affect the price of the securities
Unpublished price sensitive information is any information relating to a company or its securities, directly or indirectly, that is not generally available to the public and which upon becoming generally available, is likely to materially affect the price of the securities.
Two limbs, and both must be present. Secret but trivial information is not price sensitive; important but already public information is not unpublished.
Option C is far too narrow. The examples given run much wider: financial results, dividends, change in capital structure, changes in key managerial personnel, mergers, de-mergers, acquisitions, de-listings, disposals and expansion of business and such other transactions.
"And such other transactions" shows the list is illustrative, not exhaustive.
Options A and D invent formalities. The definition turns on the character of the information, not on how many people know it or whether it has been minuted. Indeed the words directly or indirectly widen it further.
Who is caught by possessing it. Such persons include the directors and employees of the company, associates such as bankers and tax consultants or employees of the stock exchanges etc. who possess unpublished price sensitive information.
And a whole class of advisers: professional firms such as auditors, accountancy firms, law firms, analysts, insolvency professional entities, consultants, banks etc., assisting or advising listed companies shall be collectively referred to as fiduciaries.
What each such body must maintain: a comprehensive code of conduct, appointing a compliance officer to enforce it, ensuring periodic disclosure of holding by all persons considered as insiders and ensuring data confidentiality and adherence to the requirements of the listing agreement on flow of price sensitive information.
Why any of this matters: insider trading erodes the confidence of the common investors in the securities markets.
Where this is taught
Free preparation for NISM Series II-BRelated terms
- Insider trading code of conductThe comprehensive code SEBI requires listed companies, intermediaries and fiduciaries to maintain under the PIT Regulations, 2015 — a compliance officer, insider disclosures and mandatory reporting of violations.
- Securities and Exchange Board of IndiaThe statutory regulator of India's securities market, set up under the SEBI Act, 1992, to protect investors and to develop and regulate the market. It registers brokers, DPs and mutual funds.
- FiduciaryA person who acts on behalf of another and is bound to put that other person's interest above their own — the standing SEBI regulation places every Investment Adviser in toward their clients.