Insider
Anyone who is a connected person, or who simply possesses or has access to unpublished price sensitive information — possession alone is enough, with no relationship to the company required.
In plain language
The word suggests a director or an employee. The legal definition is far wider than that, and the width is the examinable point.
Under the SEBI (Prohibition of Insider Trading) Regulations, 2015 a person is an insider if they are a connected person, or if they are in possession of or have access to unpublished price sensitive information. The second limb needs no link to the company at all. It catches the analyst's friend, the printer who typeset the results, the driver who overheard the call.
How it works
The first limb, connected person, covers anyone associated with the company in any capacity in the six months before the act concerned, in a way that gave them access — directors, employees, bankers, advisers, and a list of deemed connected persons including immediate relatives.
The second limb attaches to the information rather than the person. The moment someone holds UPSI, two prohibitions bind: they may not trade in the security, and they may not pass the information on except for a legitimate purpose. Both apply whether or not any money is made.
A worked example
A research analyst meets the CFO of a mid-cap, who mentions in passing that the board will approve a demerger of the speciality business next week. It has not been announced.
From that moment the analyst is an insider. They may not buy the share, may not suggest colleagues buy it, and may not publish a report built on it; the firm should place the stock on a restricted list. If the analyst instead buys 5,000 shares at Rs 180 and the stock opens at Rs 234 on the announcement — a gain of Rs 2.7 lakh — that is insider trading, notwithstanding that the analyst has no formal connection with the company whatsoever.
Contrast the legitimate version. The same analyst notices a separate reporting segment in the last two annual reports, a dedicated CEO hire, and distributors saying the two businesses now sell to different customers — and concludes a demerger is likely. Every piece is public. That is the mosaic theory, and it is what research is.
Why NISM asks about it
Chapter 14 (Legal and Regulatory Environment) sets out the insider trading regime, and Chapter 1's ethics chapter leans on it. Expect definition questions whose options test the possession limb, and scenario questions that ask you to separate genuine research from trading on inside information.
Common exam traps
- Possession alone makes you an insider. Options that require a connection to the company are the classic wrong answer.
- The connected-person test looks back six months.
- It is not about profit. Trading while in possession of UPSI is the offence even if the trade loses money.
- Passing UPSI on is itself an offence, even if the tipper never trades.
- The mosaic theory is a defence. A conclusion assembled from public fragments is not UPSI, however valuable it turns out to be.
Check yourself
1.Unhealthy practice in the securities markets includes which of the following?
- a)Disclosure
- b)Transparency
- c)Insider trading
- d)Surveillance
Show the answer
Answer: (c) Insider trading
Insider trading. It is expressly prohibited — prohibit insider trading in securities is among the main functions of SEBI, and Regulation 4 of the SEBI (Prohibition of Insider Trading) Regulations, 2015 provides that no insider shall trade in securities that are listed or proposed to be listed on a stock exchange when in possession of unpublished price sensitive information.
The other three options are the market's defences against unhealthy practices, not examples of them.
Disclosure is the mechanism the Research Analyst Regulations rely on throughout — a research analyst or research entity shall disclose all material information about itself including its business activity, disciplinary history, the terms and conditions on which it offers research report, details of associates.
Transparency is the object of the whole framework: the regulations set forth requirements to foster objectivity and transparency in security research and provide investors with more reliable and useful information to make investment decisions.
Surveillance is how the market is policed — in order to enhance the integrity of the market and to protect investor interest, SEBI along with the exchanges implement several surveillance mechanisms, namely GSM and ASM.
And note the presumption that attaches to insider trading: when a person who has traded in securities has been in possession of unpublished price sensitive information, his trades would be presumed to have been motivated by the knowledge and awareness of such information in his possession.
2.A research analyst may not deal or trade in securities that he recommends or follows within:
- a)Five days before and thirty days after publication of the research report
- b)Thirty days before and five days after publication of the research report
- c)Fifteen days before and fifteen days after publication
- d)Sixty days before publication only
Show the answer
Answer: (b) Thirty days before and five days after publication of the research report
Regulation 16(2) — independent research analysts, part-time research analysts, individuals employed as research analyst by research entity or their associates shall not deal or trade in securities that the research analyst recommends or follows within thirty days before and five days after the publication of a research report.
Option A reverses the two, which is the trap. The long window sits before publication because that is where the abuse lies — accumulating quietly, then publishing a recommendation that moves the price.
A parallel rule appears in the insider trading context: the Analysts who prepare research report of listed company shall not trade in securities of that company for thirty days from preparation of such report.
Two further prohibitions in Regulation 16:
Shall not deal or trade directly or indirectly in securities that he reviews in a manner contrary to his given recommendation.
Shall not purchase or receive securities of the issuer before the issuer's initial public offering, if the issuer is principally engaged in the same types of business as companies that the research analyst follows or recommends.
The narrow exception: restrictions may not apply in case of significant news or event concerning the subject company or based upon an unanticipated significant change in the personal financial circumstances of the research analyst, subject to prior written approval as per the terms specified in the approved internal policies and procedures.
And everything is watched: personal trading activities of the individuals employed as research analyst by research entity shall be monitored, recorded and wherever necessary, shall be subject to a formal approval process.
3.According to the workbook, investment in the context of the securities market involves thorough analysis of the underlying security in terms of which three dimensions?
- a)Liquidity, taxation and convenience
- b)Safety/risk, income and growth potential
- c)Price, volume and time span
- d)Source, impact and certainty
Show the answer
Answer: (b) Safety/risk, income and growth potential
The workbook's definition is precise: investment involves an upfront commitment of money to earn returns over an investment horizon, and it involves thorough analysis of the underlying security in terms of safety/risk, income, and growth potential.
Option A lists factors used to judge an investment avenue in other syllabi, not this definition. Option C is the three essential elements of price behaviour in technical analysis — price history, volume and time span. Option D is the three-part test for whether information is insider information. All three wrong options are real lists from elsewhere, which is exactly how NISM builds distractors: learn each list attached to its own heading.
Where this is taught
- Series III-C · Chapter 7: SEBI (Prohibition of Insider Trading) Regulations, 2019introduced here
- Series XV · Chapter 14: Legal and Regulatory Environmentintroduced here
- Series X-A · Chapter 18: Key Regulationsintroduced here
- Series III-A · Chapter 7: SEBI (Prohibition of Insider Trading) Regulations, 2015introduced here
Related terms
- Chinese WallAn enforced separation inside a firm between departments holding confidential price-sensitive information and those dealing with clients, sales or public research.
- Conflict of interestAny interest of the analyst's own — a shareholding, a fee, a relationship — that could bias the research, and which the regulations require to be disclosed rather than merely avoided.
- Insider informationMaterial non-public information which, when published, would immediately affect an investor's decision to buy or sell the security.
- 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.
- Securities Appellate TribunalThe statutory tribunal established under the SEBI Act that hears appeals from orders of SEBI and of its adjudicating officers, which must be filed within 45 days of receipt of the order.
- Structured digital databaseThe tamper-evident internal register every handler of unpublished price sensitive information must maintain, recording the nature of the information and the PAN of everyone who shared it and received it.
- Deemed connected personsCategories of people the insider trading rules treat as connected automatically — relatives, group companies, trustees, bankers, auditors — unless the person proves the contrary.
- Generally available informationInformation accessible to the public on a non-discriminatory basis — the opposite pole of unpublished price sensitive information, and expressly not including unverified media reports.
- Immediate relativeA spouse, plus any parent, sibling or child of the person or of the spouse who is either financially dependent on them or consults them on securities trading decisions.
- 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.
- InformantAn individual who voluntarily files a Voluntary Information Disclosure Form with SEBI about an alleged insider trading violation — protected from retaliation, and an informant whether or not any reward follows.
- Connected personA person whose association with a company in the six months before the act put them, or could reasonably be expected to put them, in a position to access unpublished price sensitive information.
- Stewardship codeSEBI's mandatory code requiring all AIFs and mutual funds to monitor, engage with and vote in the listed companies they invest in — and to publish the policies by which they do it.