Insider trading code of conduct

Preventing insider trading is not left to individual conscience. SEBI requires every listed company, every registered intermediary, and every fiduciary that assists a listed company to run a written, comprehensive code of conduct whose job is to stop it before it happens — not just punish it after.

The code is not optional paperwork. It comes with a named owner, disclosure duties, and a reporting chain that runs all the way to the stock exchange and to SEBI.

Under the SEBI (Prohibition of Insider Trading) Regulations, 2015, listed companies, registered intermediaries and fiduciaries must maintain a code of conduct that:

• appoints a compliance officer to enforce it;
• ensures periodic disclosure of holdings by everyone treated as an insider;
• ensures data confidentiality and adherence to the listing agreement's requirements on the flow of price sensitive information.

On top of maintaining the code, these same three groups must promptly inform the stock exchange(s) where the company's securities are traded of any violation of the code of conduct, in the format SEBI prescribes. Any amount collected from such a violation must be remitted to SEBI, for credit to the Investor Protection and Education Fund (IPEF), which SEBI administers. Both of those duties come from SEBI's circular dated 23 July 2020, cited in the chapter's own footnote.

The chapter gives no other number for the code itself — no trading-window length, no minimum holding period, no rupee or share-count disclosure threshold. The examinable figures here are the two dates: the 2015 regulations and the 23 July 2020 circular.

The scope has widened over time: SEBI has extended the PIT Regulations to cover units of mutual funds as well as listed company shares, specifically to strengthen the framework against insider trading in fund units.

The rupee amounts and share counts below are illustrative. II-B's passage on the code of conduct gives no trading-window days, no minimum holding period and no rupee or share-count disclosure threshold — the only dated facts in it are the SEBI (Prohibition of Insider Trading) Regulations, 2015 and SEBI's circular dated 23 July 2020, which is the source of the exchange-reporting and IPEF-remittance duties. Do not carry any figure below into an exam answer.

An AMC's fund manager learns, ahead of the public announcement, that a company whose shares one of his schemes holds is about to post a sharp earnings miss — unpublished price sensitive information he came across through his role, not through the scheme's own research.

He sells 5,000 shares from his own personal account at Rs 412, four days before the results:

That Rs 3,15,000 is the whole problem. Under the AMC's own code of conduct — required because the AMC is a registered intermediary — he could not deal on that information at all, and his personal dealings were in any case subject to periodic disclosure to the AMC's compliance officer, which is how the trade surfaces.

What follows is not discretionary. The compliance officer promptly informs the stock exchange(s) where the company's shares are traded, in SEBI's prescribed format. The AMC recovers the Rs 3,15,000 from him under its code, and that recovery must be remitted to SEBI for credit to the Investor Protection and Education Fund — the AMC keeps none of it, and none of it goes to the company whose information was misused. Whatever SEBI later does about the insider trading charge itself — penalty, prosecution, a ban from the market — runs separately from this.

The same code applies one level up. If the company's own auditor — a fiduciary under these regulations — had the same information and made the same Rs 3,15,000 saving, the auditor's firm owes the identical reporting and remittance duties, even though it is neither a listed company nor a SEBI-registered intermediary.

Chapter 5 (SEBI — Role and Regulations), section 5.2.1, sets out the code-of-conduct requirement, the violation-reporting duty and the IPEF remittance rule, immediately after defining unpublished price sensitive information and fiduciaries. Expect a question on who the code binds (companies, intermediaries and fiduciaries together) and where a violation must be reported (the relevant stock exchange).

• The code binds three groups together — listed companies, registered intermediaries, and fiduciaries — not just the company itself.
• Violations are reported to the stock exchange(s) where the securities trade, not directly to SEBI in the first instance, though SEBI ultimately receives any amount collected.
• Money collected from a violation goes to the IPEF, not to the company or the intermediary that reported it.
• Mutual fund units are now covered by the same PIT framework, not just listed shares — a relatively recent extension the workbook flags.
• Do not confuse this with the general penalties for insider trading (monetary penalties, prosecution, voided transactions) — those follow a proven charge; the code of conduct is the preventive layer that sits before any charge is made.