SEBI clarifies on Insider Trading Regulations amendments of November 2008

SEBI had amended the Insider Trading Regulations 1992 vide a Notification dated November 19, 2008 which I had discussed it here and here. SEBI has now released a set of “Clarifications” on 24th July 2009 on certain issues arising out of the amendments made. I had opined on some of these issues in my earlier posts referred to above and hence me update on what are the clarifications so given.

Curiously, the “clarifications” have no formal standing or reference. It is neither a circular, nor a notification, nor even a press release. It is neither signed nor dated. But it seeks to “clarify” and giving meaning to the Regulations that have legal standing and where such “meaning” is quite contrary – as we will see – to the plain reading of the text. Having said that, the “clarifications” mostly relaxes the requirements and hence, being gift horses, one should not examine them in the mouth too closely!

Let us see the clarifications given.

Recollect that specified persons were banned from carrying out opposite transactions “(banned transactions”) for six months of original buy/sale (“original transactions”). The question was whether acquisition of shares under ESOPs scheme and sale of such shares would be considered as transactions that trigger off such ban and whether these themselves are banned.

It is clarified that exercise of ESOPs will neither be deemed to be “original transaction” nor “banned transaction”. Thus, by acquiring shares under ESOPs, you don’t trigger a ban and if you are banned for six months, you can still exercise ESOPs. The reasoning given is that the ban is only on transactions in secondary market.(Incidentally, I had felt that “However, taking all things into account, perhaps the intention is not to cover shares acquired under ESOPs Schemes. “).

But sale of shares acquired through ESOPs is covered but it will only be deemed to be a “original transaction” and not a “banned transaction”. In other words, even if you are under a ban, you can still sell shares acquired under ESOPs but once you sell such shares, you have triggered a ban of six months. On this aspect, I do not understand the basis of clarifying that the sale of shares acquired under ESOPs scheme will not be an “original transaction” – the logic of covering secondary market transactions should apply here also.

Then, it is clarified that every later transaction triggers a fresh six month ban. A purchase on 1st February results in ban till 1st August. However, if there is a fresh purchase on 15th March, there is a ban now till 15th September. Effectively, this means that the ban period is from 2nd Febuary till 15th September.

What about transactions before this amendment – will the amendment create ban in respect of them too – this is an academic issue now at least as the six month period is now complete. It is clarified though that the transactions before the amendment are not to be considered. On a similar note, unwinding of positions in derivatives held on the date of this amendment is possible.

A crucial clarification is that the ban on “sale” of shares for personal emergencies is permisible by waiver by the Compliance Officer. This is not evident from a plain reading of the provision and I had opined that “This bar on such transactions is total. There are no circumstances whether of urgent need or otherwise under which the bar can be lifted. There is also no provision under which even SEBI could grant exemption.”. But SEBI thinks it is so evident and hence let us accept this gift without creating legal niceties! Note that this clarification applies only to sales and there can be no purchases within these six month ban period – obviously there cannot be any personal emergency to purchase shares!

It is also clarified that the ban on derivatives does not apply to NIFTY/SENSEX futures.

– Jayant Thakur

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CA Jayant Thakur


  • Dear Jayant,

    Thanks for your post. I was just wondering what the rationale could be for placing a blanket ban on trading in stock futures/options. Grateful if you could give some views on this?

    In any case, this ban will not be of much help in case of a company like Reliance – which has the capacity to move the market in its direction; and, I can place my bet on nifty futures/options if I have UPSL pertaining to Reliance.


  • Hi Lawman,

    Regarding ban on futures/options, perhaps SEBI may be thinking that why would an employee/other insider at all need to deal in futures/options of his own company unless he had some insider information? Given also that such derivatives are of fairly short duration in India. It may sound as unfair as other blanket bans but at least they are consistent! Looking at it another way, in most cases, such derivatives are likely to square off – i.e., sold off if purchased and vice versa within a short period – which is precisely what is sought to be banned otherwise.

    – Jayant

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