Pre-clearance
Prior approval from the compliance officer before a designated person trades above a board-set threshold. A pre-cleared trade must be executed within at most seven trading days.
In plain language
People who work inside a portfolio manager see things the market does not. The insider trading code does not ban them from investing, but it makes them ask first.
That permission is pre-clearance. A designated person who wants to trade above a set value applies to the compliance officer, declares that they hold no unpublished price sensitive information, and trades only once approved — and only within a short window.
Pre-clearance is one of the minimum standards in Schedule C of the SEBI (Prohibition of Insider Trading) Regulations, 2015, which sets the code of conduct intermediaries and fiduciaries must follow to regulate, monitor and report trading by designated persons.
How it works
The workbook's steps (Chapter 12, section 12.2):
- Threshold. Trading by designated persons is subject to pre-clearance if the value of the proposed trades is above such thresholds as the board of directors or head(s) of the organisation may stipulate. The workbook gives no rupee figure — the organisation sets it.
- Restricted list. The compliance officer confidentially maintains a list of securities — the restricted list — used as the basis for approving or rejecting applications.
- Declaration. Before approving, the compliance officer seeks a declaration that the applicant is not in possession of any UPSI, and considers whether that declaration is reasonably capable of being rendered inaccurate.
- Execution window. The code specifies a timeframe, not more than seven trading days, within which a pre-cleared trade must be executed. Miss it and fresh pre-clearance is needed.
- Formats and reporting. The code prescribes formats for applying, reporting trades executed, reporting decisions not to trade after securing pre-clearance, and reporting holdings.
Two related rules sit alongside it. A designated person who is permitted to trade must not execute a contra trade within the restricted period — not less than six months for a listed company's securities, not less than two months for mutual fund units. Profits from a contra trade in violation are disgorged to SEBI for the Investor Protection and Education Fund, as are amounts collected as sanctions under the code.
A worked example
Illustrative: the threshold is chosen by the organisation, and the dates and amounts are invented. The seven-trading-day window is the workbook's maximum.
Priya is a designated person at a portfolio manager whose board has set the pre-clearance threshold at ₹5,00,000 per trade.
| Step | What happens |
|---|---|
| Monday, day 0 | Priya applies to buy shares worth ₹7,20,000. That is above ₹5 lakh, so pre-clearance is needed |
| Compliance check | The stock is not on the restricted list; Priya declares she holds no UPSI |
| Tuesday | Approval granted |
| Execution window | The firm's code allows 5 trading days — within the 7-day ceiling |
| Following Wednesday | Market has moved; Priya has not traded. The window has closed, so she needs fresh pre-clearance |
Suppose she re-applies, is cleared and buys. Four months later the price jumps and she sells. That sale is a contra trade within six months. Unless the compliance officer has granted a recorded relaxation, the profit is liable to be disgorged and remitted to SEBI for the Investor Protection and Education Fund.
If Priya had wanted to buy only ₹3,00,000 worth, she would be below this firm's threshold and would not need pre-clearance for that trade — though she is still bound by the rest of the code.
Why NISM asks about it
Chapter 12 (Regulatory, Governance and Ethical Aspects of Portfolio Managers) reproduces the Schedule C minimum standards clause by clause. Pre-clearance questions test the details: who grants it (compliance officer), what it is based on (restricted list), what the applicant declares (no UPSI), and the numbers — seven trading days, six months and two months for contra trades. It connects to Chapter 9's regulatory constraints, where trading on non-public information is given as an example of what investors are prohibited from doing.
Common exam traps
- "Seven calendar days." No — seven trading days, and it is a ceiling; the code may specify less.
- The threshold is set by the board or head(s) of the organisation, not by SEBI in the workbook.
- Pre-clearance does not cure possession of UPSI. The declaration of no UPSI is a condition of approval.
- Contra trade periods: not less than six months (listed company securities), not less than two months (mutual fund units). The restriction does not apply to trades pursuant to exercise of stock options.
- A decision not to trade after pre-clearance is itself reported.
- Disgorged profits and sanctions go to SEBI for the Investor Protection and Education Fund — not to the organisation.
Check yourself
1.Under Schedule C, trades that have been pre-cleared must be executed within a timeframe that shall not be more than:
- a)Three trading days
- b)Seven trading days
- c)Fifteen calendar days
- d)One month
Show the answer
Answer: (b) Seven trading days
The code must specify a reasonable timeframe, which in any event shall not be more than seven trading days. Otherwise fresh pre-clearance is needed.
2.Schedule C requires information to be handled within an intermediary on a need-to-know basis. Which of the following must the code of conduct also contain?
- a)Norms for appropriate Chinese Wall procedures, and processes for permitting any designated person to “cross the wall”
- b)A complete ban on designated persons trading in any security
- c)Sharing of unpublished price sensitive information with all employees, for transparency
- d)Pre-clearance of every trade by SEBI
Show the answer
Answer: (a) Norms for appropriate Chinese Wall procedures, and processes for permitting any designated person to “cross the wall”
Schedule C, point 2: “All information shall be handled within the organisation on a need-to-know basis and no unpublished price sensitive information shall be communicated to any person except in furtherance of legitimate purposes, performance of duties or discharge of legal obligations. The code of conduct shall contain norms for appropriate Chinese Wall procedures, and processes for permitting any designated person to ‘cross the wall’.”
- Designated persons may trade, subject to the regulations and, above board-set thresholds, pre-clearance by the compliance officer — not by SEBI. So options B and D are wrong.
- Option C is the opposite of need-to-know handling.
3.A designated person who is a connected person of a mutual fund's AMC buys units of that fund. The code must specify a contra-trade period of not less than:
- a)Seven trading days
- b)Two months
- c)Six months
- d)Twelve months
Show the answer
Answer: (b) Two months
For mutual fund units, the period is not less than two months. For shares of a listed company, it is not less than six months.
Seven trading days is the pre-clearance window — a different rule.
Where this is taught
Free preparation for NISM Series XXI-BRelated terms
- Chinese WallAn enforced separation inside a firm between departments holding confidential price-sensitive information and those dealing with clients, sales or public research.
- 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.
- Compliance OfficerThe separately appointed officer of a merchant banker, listed company or intermediary who monitors compliance with securities law, handles investor grievances, and reports non-compliance to SEBI independently.
- Contra trade restrictionThe cooling period of not less than six months — two months for mutual fund units — during which a designated person who has been permitted to trade may not take the opposite side of that trade.
- Designated personsThe people a listed company, intermediary or fiduciary formally names as subject to its insider trading code of conduct, chosen by the access their role gives to price sensitive information.
- Restricted listThe confidential list of securities an intermediary's compliance officer maintains, used as the basis for approving or rejecting applications for pre-clearance of trades by designated persons.
- Material financial relationshipA relationship where a person received payments such as loans or gifts from a designated person in the last 12 months worth at least 25% of that designated person's annual income, excluding arm's length deals.