Insider Trading: Connected Persons, UPSI and the Trading Window

Insider trading is dealing in a listed company's securities while holding unpublished price sensitive information about it, or passing that information to somebody else outside the reasons the rules allow. The prohibition catches connected persons and it catches anybody else who has the information, however it reached them. The definitions, the permitted exceptions and the duties it puts on a company sit in the insider trading regulations made by the Securities and Exchange Board of India (SEBI), read at sebi.gov.in.

Everything below is the Indian rule, and it is narrower than the word insider suggests. The prohibition forbids two acts, reaches well past the payroll, turns on three words inside one defined term, and puts a small set of written obligations on the company. Periods, notice intervals and thresholds are read at the source. Why somebody would trade on such information at all is set out under market conduct.

Start with something small enough to see whole. A housing society is about to accept an offer for the rights to its terrace. Three people on the committee know. By Saturday the watchman knows. He carried the surveyor upstairs and heard what was measured. The woman who runs the tea stall at the gate knows too, from the watchman, who said it while she was pouring. Not one of those five people did anything wrong. Nobody leaked anything, nobody was careless, and nobody would recognise their own conduct in the word leak. Something that started with three people is now with five, and two of the five are on no committee list anywhere.

The same picture, set inside a company whose shares trade, is what the insider trading prohibition governs. Insider tradingDealing in a company's securities while holding unpublished price sensitive information about it, or passing that information on improperly. is written around the information rather than around the people. Reaching the watchman and the tea stall is the design, not an accident of drafting. The prohibition reaches the two people nobody wrote down, on exactly the same terms as it reaches the three who were in the meeting.

Vindhya Ceramics Private Limited, an invented ceramics maker, listed a year ago. The equity portion of that issue was Rs 25,00,00,000/-, discovered at Rs 100/- a share, giving 25,00,000 shares, and 12,060 holders were on the register at allotment. Prerna Wadekar is its company secretary and compliance officer.

What does the insider trading prohibition actually forbid?

Two acts, and it is worth separating them because most readers arrive knowing only the first. The first is dealing: buying or selling the securities of a company while holding unpublished price sensitive information about that company. The second is communicating: passing that information to somebody else, or procuring somebody to pass it on, outside the reasons the regulations permit. The second act is complete the moment the information moves, whether or not anybody ever trades on it, and that is the half almost everybody underestimates.

Notice what is missing from both sentences. Neither one mentions profit. Neither one mentions whether the price moved afterwards, or whether the person turned out to be right. Neither one mentions a job title. The regulations set out defences and set out the circumstances in which such information may properly be shared, including where there is a legitimate purposeA permitted reason for sharing unpublished price sensitive information, such as sharing it with an adviser who needs it to do the work. for sharing it, and those are read in the regulations themselves. The shape of the prohibition is what a reader needs first. Its edges are settled in the regulations themselves.

Both acts sit on one word, and the word is possessionHaving the information. Not having been given it officially, not being senior enough to have it, simply having it.. Not access. Not entitlement. Not seniority. Having it.

Why does the prohibition turn on possession rather than position?

Because position is easy to check and answers the wrong question. A company can establish in an afternoon who its employees are, who its directors are and who signed a contract with it. No list can establish who currently holds a given fact. Holding the information, rather than appearing on the list, is what puts somebody in a position to act ahead of the market.

A rule written around position would be perfectly enforceable and would miss the person it most needed to reach. The watchman in the housing society is the whole argument in one figure. He is on no committee, he was told nothing officially, and he knows. If the rule followed the committee list he would be outside it, and he would be outside it while holding exactly the same information as the three people inside it.

So the test runs the other way round. The test starts from the information and asks who has it. The question has no natural boundary, and the discomfort of that is the correct response: unbounded reach is why companies keep records of who was told, why a compliance officer can close dealing for a group of people, and why how information spreads matters as much as who is connected.

Who counts as a Connected Person, and why is the term wider than employment?

A connected personSomebody the regulations treat as connected to the company. The defined term reaches well past the payroll. is a defined term in the regulations, and the definition is deliberately built to reach past the payroll. The definition picks up people associated with the company in a way that gives them access to such information, and it extends outward through relationships and dealings rather than stopping at a contract of employment. The definition also works in part by presumption. Certain people are treated as connected unless the position is shown to be otherwise, and that reverses the direction a reader expects.

Whether a particular person is a connected person is a legal characterisation applied to a particular set of facts, made by people with the facts in front of them. No worked answer stands in place of the definition itself, and one set of facts read as a rule about who counts is how people get this wrong. The shape of the term carries across matters, and the test is at sebi.gov.in.

Two things about the shape are worth holding. The first is that the set is wider than employment, and wider again than the group a company would name if asked who its insiders are. The second matters more. Even for somebody comfortably outside the definition, being unconnected settles nothing. Possession alone is enough. Connection is one route in, and it is not the door.

What makes something Unpublished Price Sensitive Information?

Each of the three words is doing separate work, and the definition only becomes usable when the words come apart. Read the term one word at a time. Unpublished price sensitive informationInformation relating to a company that is not generally available and that would be likely to affect the price of its securities if it were. is the whole phrase. Its three parts follow, one at a time.

Unpublished means not generally available, and generally available has a specific meaning that is nothing like well known. Generally availableAccessible to the public on a non discriminatory basis, rather than merely known to a lot of people. means accessible to the public on a non discriminatory basis. Information that half the office knows, that a supplier knows, that a group on a messaging application has been discussing for a week, is not generally available at all. Such information is merely widely held, and widely held is not a category the rule recognises.

Price sensitive means it would be likely to affect the price of the securities if it were made available. Price sensitivity is a judgement about likely effect, not a claim about what the price actually did afterwards. The rules also identify categories of company information that are ordinarily of this character, and those categories are set out in the regulations themselves.

Information is the widest of the three words and the one that gets read past. Information does not have to be a document, a filing, a number or a decision that has been taken. A sentence spoken in a corridor is information. An instruction to prepare something is information. At Vindhya Ceramics Private Limited the material event of the invented year was that a customer contract ended, and the ending of that contract was information before a single line of it was ever written down.

How far does information spread beyond the people who first knew?

One count runs through everything that follows. Before the hardest material event of the invented year reached the market at Vindhya Ceramics Private Limited, 9 people inside the company knew about it. The count of 9 is where everything that follows starts.

Now stop treating 9 as a boundary and treat it as a starting point. Each of those 9 has colleagues, advisers, a person who does their filing, somebody at home who asks how the week went. Nothing improper has to happen for the count in possession to rise: a question asked in a corridor, a document left open on a screen, an adviser properly instructed because the work genuinely needs doing. The number of people in possession grows far faster than an organisational chart suggests, and it does so without anybody at any step doing anything they would recognise as wrong.

Suppose each person in possession could pass it to 3 others. The figure of 3 is a device for the arithmetic rather than a measurement, and no company has been observed to spread information at that rate. The arithmetic is what shows why a rule written around a list of names cannot hold. Starting from 9, one step out gives 27 more, for 36 in all. The steps count separation between people, not time.

What is a Trading Window, and who administers it?

A trading windowThe period a company sets during which its designated people may deal in its securities, closed and reopened by the company itself. is the mechanism a company uses to keep its own people from dealing at the times when they are most likely to be holding something the market does not have. When the window is closed, the people the company has designated may not deal in its securities. When it is open, ordinary dealing rules apply and the prohibition itself still applies underneath, every hour of every day, window or no window.

The prohibition running underneath an open window is the part to underline. An open window is not permission to deal on unpublished price sensitive information, and a closed window is not the prohibition. The window is a blunt instrument sitting on top of a sharp rule. The window exists because a company cannot inspect what is in anybody's head, so it restricts the times instead.

Who decides? A person. At Vindhya Ceramics Private Limited it is Prerna Wadekar, the compliance officer, working to the company's own code of conduct. She closes the window when something is happening that makes it likely that designated personsThe people a company identifies in its own code as subject to its dealing restrictions, by role and by access rather than by seniority alone. are in possession, and she reopens it once the information has been made generally available. The categories of people covered, the closure and the reopening are all governed by the regulations and by the code the company adopts under them.

How long any of that lasts, how much notice is given and what the reopening turns on are set out in the regulations and in the company's own code. Each of those periods is read in the current text, on the day it is needed, rather than taken from any description of it.

What must a company keep to show that it complied?

Possession is invisible from outside. Nobody can look at a person and see what they hold, and no supervisor can reconstruct a corridor conversation two years later. The invisibility of possession is why the obligations are so heavily about writing things down. The record is the only way an invisible thing becomes checkable at all.

Three artefacts do most of the work. The company adopts a code of conduct. The code names its designated persons and sets its own dealing rules. The company also maintains a structured digital databaseThe record a company keeps of the people with whom unpublished price sensitive information was shared, kept in a form that cannot be quietly rewritten later.. The database records the people with whom such information was shared, in a form that cannot be quietly rewritten afterwards. And the company keeps the trail of disclosures and dealings that the code and the regulations require. The contents of each artefact, and how long each must be kept, are set out in the regulations.

Read the database the right way round and it stops looking like paperwork: the database is the only artefact that can say who held what, at a point when everybody has forgotten the week. The database also turns an accusation into something examinable. Without it, the argument is one person's recollection against another's.

What is not insider trading, despite looking like it?

Three situations get called insider trading in ordinary conversation and are a different act entirely. Knowing them matters in both directions: it stops a false alarm, and it stops the false comfort of assuming that anything clever must have been improper.

The first is a well founded guess. Somebody watches a company closely, reasons about a supplier, and turns out to be right. Being right is not possession. The second is public information that most people have not bothered to look at. A filing everybody could open and nobody did is generally available, whatever share of the market read it. Neither of those is the same act as dealing on something the dealer was told, and the difference is what was held, not how it turned out.

The third is the one with real machinery behind it. Where a plan to deal was made before the person came into possession, and executed under conditions set out in advance, the regulations provide for that situation on terms they set. The terms of such a plan are exacting, and the exceptions, the defences and the conditions attached to them are read in the regulations rather than assumed from a description.

What does a firm do when it finds the information has spread?

Something has gone further than intended. Somebody mentioned a matter to a colleague who had no need of it, or an adviser turned out to have briefed their own team. The instinct in the room is to find out who did it, and that instinct is the one to hold down. Naming the source produces nothing anybody needs first.

The sequence is procedural. Establish who now knows. Record it, in the database, as it actually is rather than as it should have been. Close the window if it is open. The population that must not deal has just changed. Then reach the step most people never take: whether the information now has to be made generally available. Disclosure of that kind is decided under the listing obligations rather than under this rule. Every step in that sequence protects somebody who does not know yet, and not one of them is about blame.

How does a compliance officer use any of this in an ordinary week?

Almost none of the work is dramatic, and that is the useful thing to know about it. Prerna Wadekar at Vindhya Ceramics Private Limited spends her week on four small activities. She keeps the list of designated persons current. People join, leave and change roles, and a stale list is the commonest quiet failure. She logs sharing as it happens. A database written up later from memory is a reconstruction rather than a record. She watches for the events that make a closure necessary, which means sitting close enough to the business to hear about them early. And she answers questions, the part of the work that gets undervalued.

At Bhadra Securities Private Limited, the invented broker and depository participant, Yashodhan Pai does a version of the same work for a firm that is an intermediary rather than a listed company. Intermediaries handle other people's unpublished price sensitive information all day long, so they carry their own code and identify their own designated persons. The most valuable thing either of them can produce is a culture in which somebody asks before dealing rather than explains afterwards, and that culture is built by how the first question of the year is answered. An analyst, an investor or a journalist reading a company from outside can see none of this. The record exists for exactly that reason.

Where are the definitions and the exceptions actually read?

At the source, on the day they are needed. Every one of these boundaries is drawn precisely in the regulations, and precision is the first thing a description loses. The prohibition, the definition of a connected person, the definition of unpublished price sensitive information, the treatment of trading windows, the permitted communications and the plans made before possession all sit in the same set of regulations, and those regulations have been amended more than once.

Vindhya Ceramics Private Limited, Prerna Wadekar, Bhadra Securities Private Limited and Yashodhan Pai are invented.
Educational material. Not advice on any investment, tax, budget or market position.