11 Investigation and Prohibition on Dealing, Counselling

Learning Objectives

By the end of this chapter, the reader will be able to:

Identify the investigative powers of the Securities and Exchange Board of India under Sections 11, 11A, 11B, 11C, and 11D of the SEBI Act, 1992 and the procedural framework through which they are exercised.
Apply the prohibitions on dealing in securities while in possession of UPSI under Regulation 4 of the PIT Regulations, 2015 and on the communication or procurement of UPSI under Regulation 3.
Explain the structure of tipper-tippee liability under Indian insider trading law, including the burden of proof, the rebuttable presumptions, and the defences available to a person charged with insider trading.
Identify the principal sanctions available against insider trading and related misconduct, including monetary penalty under Sections 15G and 15HA of the SEBI Act, criminal punishment under Section 24, disgorgement, and the bar from market.
Apply the procedural framework of investigation, show-cause notice, adjudication, settlement, and appeal as it operates in a typical insider trading investigation, and evaluate the leading enforcement cases of the past two decades.

11.1 Introduction

Chapter 10 set out the conceptual foundation, statutory architecture, and key definitions of the Indian insider trading regime. This chapter takes up the procedural and substantive operation of the regime: how the regulator detects suspected insider trading, how it investigates the suspicions, how it prohibits the conduct it finds, and how it imposes the sanctions the law authorises. The treatment is consciously detailed because, in insider trading enforcement perhaps more than in any other area of corporate law, the value of the substantive rules depends almost entirely on the rigour with which the procedural framework is operated.

The chapter is organised in five parts. The first part examines SEBI’s investigative powers under the SEBI Act, 1992. The second part examines the prohibitions on dealing and counselling under the PIT Regulations, 2015. The third part explores the substantive doctrines of insider trading liability, including tipper-tippee liability, the burden of proof, and the available defences. The fourth part examines the sanctions regime, including monetary penalty, criminal punishment, disgorgement, and the bar from market. The fifth part examines the procedural cycle from investigation through adjudication to appeal, and surveys the leading enforcement cases.

flowchart TD
    A[Suspected Insider Trading] --> B["Surveillance and <br> Preliminary Examination"]
    B --> C["Section 11C <br> Investigation"]
    C --> D[Investigation Report]
    D --> E{Outcome}
    E --> F[Show-Cause Notice]
    E --> G["Settlement <br> Section 15JB"]
    E --> H[No Action]
    F --> I[Reply and Personal Hearing]
    I --> J[Adjudication Order]
    J --> K["Penalty / Disgorgement / Bar"]
    J --> L["Appeal to SAT"]
    L --> M["Supreme Court <br> on Question of Law"]

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    classDef dark fill:#004466,color:#ffffff,stroke:#ffcc00,stroke-width:3px,rx:10px,ry:10px;
    class A,B,C,D,E,F,G,H,I,J,K,L,M dark;

11.2 SEBI’s Investigative Powers

The SEBI Act, 1992 confers on the Securities and Exchange Board of India a set of investigative powers that, read together, support a comprehensive enforcement architecture. The principal provisions are summarised below.

Section 11: Functions of the Board

Section 11 sets out the functions of SEBI, including the protection of the interests of investors in securities and the promotion of the development of the securities market. Section 11(2) lists specific measures the Board may take, including the regulation of stock exchanges, the registration and regulation of intermediaries, the prohibition of fraudulent and unfair trade practices, and the prohibition of insider trading.

Section 11(4) confers on the Board the power to issue directions, on its own motion or on the application of any person, in the interests of investors or the securities market. Section 11(4) directions may include the suspension of trading, the restraint of any person from accessing the securities market, the impounding and retention of proceeds, and the attachment of bank accounts.

Section 11A: Powers Relating to Issue of Capital

Section 11A confers on the Board the power to specify, by regulations, matters relating to the issue of capital, transfer of securities, and other matters incidental thereto. The provision is the source of authority for the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 and related rules.

Section 11B: Powers to Issue Directions and Levy Penalty

Section 11B empowers the Board to issue directions to any person where the Board, after enquiry, is satisfied that the direction is necessary in the interest of investors or for the orderly development of the securities market.

The 2019 amendment to Section 11B introduced sub-sections (2) and (3), which empower the Board to impose monetary penalties for any violation of the SEBI Act, the regulations, or the rules. The penalty under Section 11B(2) is in addition to any penalty that may be imposed under Sections 15G to 15HB.

Section 11C: Investigation

Section 11C empowers the Board, where it has reasonable grounds to believe that any transactions in securities are being dealt with in a manner detrimental to the investors or the securities market, or that any person has violated the SEBI Act, the rules, or the regulations, to appoint an investigating authority to investigate the affairs of any intermediary or any other person associated with the securities market.

The investigating authority is empowered to require any person to produce books, registers, and other documents in the person’s custody or power, to examine on oath any officer, director, manager, or employee of the entity under investigation, and to seek any information from any person concerning the matter under investigation.

The principal procedural safeguards include the requirement of a written order of investigation, the right of the person under investigation to be heard before adverse findings, and the obligation of the investigating authority to record the proceedings.

Section 11D: Cease and Desist Proceedings

Section 11D empowers the Board, after such inquiry as it deems necessary, to direct any person to cease and desist from committing any act or practice that is in violation of the SEBI Act, the rules, or the regulations.

In addition to these statutory powers, SEBI exercises a continuing surveillance function through its Integrated Surveillance Department, which monitors trading activity across the exchanges for patterns indicative of insider trading or market manipulation. Suspected patterns are forwarded for preliminary examination, which may, if warranted, escalate to a formal Section 11C investigation.

11.3 Prohibitions on Dealing and Counselling

The substantive prohibitions of the PIT Regulations, 2015 are contained in Regulations 3 and 4. Each is examined in turn.

11.3.1 Regulation 3: Prohibition on Communication and Procurement

Regulation 3 addresses the flow of unpublished price sensitive information. It prohibits two categories of conduct: the communication of UPSI by an insider, and the procurement of UPSI from an insider. The regulation is structured to capture both ends of the tipper-tippee relationship.

Regulation 3(1): The Communication Prohibition

Regulation 3(1) provides:

“No insider shall communicate, provide, or allow access to any unpublished price sensitive information, relating to a company or securities listed or proposed to be listed, to any person including other insiders except where such communication is in furtherance of legitimate purposes, performance of duties or discharge of legal obligations.”

The exceptions, sometimes called the legitimate purposes exceptions, allow communication of UPSI in three circumstances: legitimate corporate purposes (such as communication to advisers in connection with a transaction), the performance of duties (such as communication to the audit committee in connection with the financial reporting cycle), and the discharge of legal obligations (such as communication to a regulatory authority).

Regulation 3(2): The Procurement Prohibition

Regulation 3(2) provides:

“No person shall procure from or cause the communication by any insider of unpublished price sensitive information, relating to a company or securities listed or proposed to be listed, except in furtherance of legitimate purposes, performance of duties or discharge of legal obligations.”

The procurement prohibition addresses the conduct of the tippee and any other person who actively seeks UPSI from an insider. It captures conduct that, in older formulations, would have escaped sanction because the tippee was not himself an insider.

Regulation 3(2A): The Legitimate Purposes Policy

Regulation 3(2A), introduced by the 2018 amendment, requires the board of directors of every listed company to formulate a policy on inquiry in case of leak of UPSI and to identify, on a case-by-case basis, the legitimate purposes for which UPSI may be communicated. The policy must be made available on the company’s website. The provision operationalises the legitimate-purposes exception by requiring it to be specified in advance.

Regulation 3(3) to 3(5): Notes to Connected Persons and Designated Persons

Regulation 3(3) requires that, where a person in receipt of UPSI is not himself an insider, the company communicating the UPSI must make him a connected person by entering into a confidentiality and non-disclosure agreement, and must add him to the structured digital database under Regulation 9A.

Regulation 3(4) and (5) require the company to maintain detailed records of communications of UPSI, with the dates, the persons concerned, and the nature of the information. The records support forensic investigation in the event of a suspected leak.

11.3.2 Regulation 4: Prohibition on Trading While in Possession of UPSI

Regulation 4 addresses the use of unpublished price sensitive information in trading. Where Regulation 3 governs the flow of information, Regulation 4 governs trading conduct.

Regulation 4(1): The Trading Prohibition

Regulation 4(1) provides:

“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 prohibition is triggered by possession of UPSI, not by use of UPSI. An insider who trades while possessing UPSI is presumed to have traded on the basis of that UPSI, and the burden falls on the insider to show that the trade was based on publicly available information or otherwise falls within a recognised defence.

The Defences to Trading While in Possession of UPSI

Regulation 4(1) lists several defences to the trading prohibition. The principal defences include:

the transaction was carried out under a trading plan set up in accordance with Regulation 5;
the transaction was an off-market inter-se transfer between insiders who possessed the same UPSI without breaching the prohibition on communication;
the transaction was carried out in non-individual capacity, where the individuals taking the trading decisions did not have access to the UPSI;
the trades were carried out pursuant to statutory or regulatory obligations;
the trades were carried out by a person who can demonstrate that the decision to trade was not influenced by UPSI and was made on the basis of generally available information.

The defences are exhaustive in form but not in substance: the regulation continues to evolve with the addition of further specified defences for circumstances that the regulator considers warrants protection.

11.3.3 The Tipper-Tippee Structure of Liability

Indian insider trading law recognises a distinction between two categories of insider liability. The tipper is the insider who communicates UPSI in breach of Regulation 3(1). The tippee is the person who receives the UPSI and trades on it. The framework of the regulations attaches liability to both.

Mrs. Chandrakala v. SEBI (2012): The Burden in Tipper-Tippee Cases

The Securities Appellate Tribunal in Mrs. Chandrakala v. SEBI clarified the burden of proof in tipper-tippee cases. The Tribunal held that the regulator must establish:

the existence of UPSI at the relevant time;
the access of the tipper to the UPSI;
the trading by the tippee in the relevant securities; and
a reasonable circumstantial connection between the tipper and the tippee, sufficient to support an inference of communication.

Once the regulator has established these elements, the burden shifts to the tippee to demonstrate that the trade was not the result of communication of UPSI by the tipper.

Circumstantial Evidence Is Sufficient — A Common Misunderstanding

A persistent misunderstanding in insider trading practice is that the regulator must prove the actual communication of specific UPSI from a specific tipper to a specific tippee at a specific time. This is not the standard. The regulator’s burden is to establish a reasonable inference of communication on the totality of the circumstances, including patterns of communication, family or business relationships, and the temporal proximity of the trades to the UPSI events. Once that inference is established, the burden shifts to the accused to rebut it. Insider trading enforcement operates substantially on circumstantial evidence, and the absence of a smoking gun is not in itself a defence.

11.4 Front-Running and Adjacent Misconduct

The PIT Regulations, 2015 are part of a wider architecture of Indian securities market regulation that addresses several adjacent forms of misconduct. Three are worth identifying.

11.4.1 Front-Running

Front-running occurs when an intermediary, having received information about an impending substantial trade by a client, places its own trade in the same security ahead of the client’s trade in order to benefit from the price movement that the client’s trade is expected to produce. Front-running is captured by Regulation 4(2) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 and is also pursued under the broader insider trading framework where the intermediary is an insider.

The leading Indian front-running case is the HDFC Asset Management matter (2010), in which an employee of an HDFC fund had used knowledge of impending fund trades to position personal trades in advance. SEBI imposed a substantial penalty and disgorgement, and the case has shaped the internal control architecture of Indian asset managers.

11.4.2 Market Manipulation

Market manipulation, the artificial inflation or depression of securities prices through false trades, false rumours, or coordinated trading patterns, is captured by Regulation 4(2) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003. The provisions overlap with the insider trading prohibitions in cases where the manipulation is supported by access to UPSI.

11.4.3 Disclosure Failures

Disclosure failures, the non-disclosure or misleading disclosure of material information to the market, are captured by the SEBI LODR Regulations and the SEBI Issue of Capital and Disclosure Requirements Regulations. The disclosure failures may themselves trigger insider trading liability if persons within the company have traded while in possession of the undisclosed information.

11.5 Sanctions for Insider Trading

The SEBI Act, 1992 provides a comprehensive sanctions architecture for insider trading and adjacent misconduct.

Section 15G: Penalty for Insider Trading

Section 15G provides that any person who is an insider and who deals in securities of a body corporate listed on any stock exchange on the basis of any UPSI, or communicates any UPSI, or counsels any person to deal in securities on the basis of UPSI, shall be liable to a penalty which shall not be less than ten lakh rupees but which may extend to twenty-five crore rupees, or three times the amount of profits made out of insider trading, whichever is higher.

The penalty is monetary and civil in character. It is imposed by an adjudicating officer appointed under Section 15-I of the Act, on completion of an inquiry under the SEBI (Procedure for Holding Inquiry and Imposing Penalties) Rules, 1995.

Section 15HA: Penalty for Fraudulent and Unfair Trade Practices

Section 15HA provides that any person who indulges in fraudulent and unfair trade practices relating to securities shall be liable to a penalty which shall not be less than five lakh rupees but which may extend to twenty-five crore rupees, or three times the amount of profits, whichever is higher. The provision captures front-running and market manipulation, in addition to overlapping with Section 15G in some insider trading fact patterns.

Section 24: Criminal Punishment

Section 24(1) provides that any person who contravenes the provisions of the SEBI Act, or any rules or regulations made under the Act for which no separate punishment has been provided, shall be punishable with imprisonment for a term which may extend to ten years, or with fine which may extend to twenty-five crore rupees, or with both.

Section 24(2) provides that any person who fails to pay the penalty imposed by the adjudicating officer or fails to comply with any of the directions or orders made under the Act, shall be punishable with imprisonment for a term which shall not be less than one month but which may extend to ten years, or with a fine which may extend to twenty-five crore rupees, or with both.

Criminal proceedings under Section 24 are instituted in the Special Court constituted under Section 26A. They are distinct from, and may run in parallel with, the civil adjudication under Sections 15G and 15HA.

11.5.1 Disgorgement

In addition to monetary penalty, SEBI has consistently sought disgorgement of the profits made from insider trading. Disgorgement is restitutionary in character: it requires the wrongdoer to surrender the gains attributable to the misconduct, on the rationale that no person should profit from a violation of the law. The Securities Appellate Tribunal has repeatedly upheld the disgorgement remedy, although the precise legal basis (whether under Section 11B or as an equitable remedy of the regulator) has been contested.

11.5.2 Bar from Market

SEBI may also direct that the wrongdoer be barred from accessing the securities market for a specified period. The bar may extend to the prohibition of trading, the holding of any office in a listed company, the registration as an intermediary, and any other access to the market. The bar is a substantial sanction in its commercial effect, particularly for persons whose livelihood depends on access to the market.

11.6 Settlement, Adjudication, and Appeal

The procedural cycle from investigation to final order moves through several stages. The principal stages are summarised below.

11.6.1 Settlement: Section 15JB and the Settlement Regulations

Section 15JB of the SEBI Act and the SEBI (Settlement Proceedings) Regulations, 2018 provide for the settlement of proceedings on payment of a settlement amount and the acceptance of specified non-monetary directions, without any admission or denial of liability. The settlement framework is the principal alternative to contested adjudication and accounts for a substantial proportion of SEBI’s case disposition.

Settlement Has Become the Dominant Disposition Mode

A practitioner observation worth noting is that the settlement regime under Section 15JB has, in the years since the 2018 Regulations, become the dominant mode of disposition for SEBI proceedings. The substantial procedural and economic benefits to settling parties, including the avoidance of contested findings, the predictability of the financial outcome, and the speed of disposition, have made settlement the rational default in many fact patterns. The trade-off is that the substantive case law on insider trading is developing more slowly than it would if more cases were contested through to final order.

11.6.2 Adjudication: Section 15-I and the Inquiry Rules

Where the matter is not settled, an adjudicating officer appointed under Section 15-I conducts an inquiry under the SEBI (Procedure for Holding Inquiry and Imposing Penalties) Rules, 1995. The adjudicating officer issues a show-cause notice, considers the reply, conducts a personal hearing, and passes an order imposing penalty (or, where appropriate, dropping proceedings).

11.6.3 Appeal: Section 15T and the Securities Appellate Tribunal

Section 15T provides for an appeal from any order of SEBI or of an adjudicating officer to the Securities Appellate Tribunal. The Tribunal is a specialised judicial body established under Section 15K, comprising a presiding officer (who must be a sitting or retired judge of the Supreme Court or Chief Justice of a High Court) and members. Further appeal lies to the Supreme Court of India under Section 15Z, but only on a substantial question of law.

The Securities Appellate Tribunal has, over its three decades of operation, built a substantial jurisprudence on insider trading. The Tribunal’s decisions are the principal source of doctrinal development, particularly on the burden of proof, the circumstantial evidence standard, the legitimate-purposes exceptions, and the calibration of penalties.

11.7 Case Studies

11.7.1 Case Study 1: Rakesh Agrawal v. SEBI (2003): The Burden of Proof

Rakesh Agrawal, the managing director of ABS Industries Limited, had communicated information about the impending acquisition of ABS by Bayer A.G. to his brother-in-law, who had then traded in the shares of ABS in advance of the public announcement. SEBI proceeded against both Mr. Agrawal and his brother-in-law for insider trading. The matter went to the Securities Appellate Tribunal, which delivered a foundational decision on the burden of proof in insider trading cases.

The Tribunal held that the regulator must establish, on the balance of probabilities, that the trades were undertaken on the basis of UPSI rather than on the basis of generally available information. The Tribunal accepted that direct evidence of communication is rarely available and that circumstantial evidence is sufficient, but emphasised that the circumstances must support a reasonable inference of communication and use of UPSI. The decision continues to be cited in tipper-tippee cases.

Discussion Questions

To what extent should the burden in insider trading cases be calibrated to reflect the difficulty of obtaining direct evidence of communication of UPSI?
How should the standard of proof in SEBI’s civil adjudication relate to the standard of proof in any parallel criminal proceeding under Section 24?
What features of the post-2015 PIT framework, including the structured digital database under Regulation 9A, would have changed the analysis or outcome in Rakesh Agrawal if the same facts had arisen in the present day?

11.7.2 Case Study 2: The HDFC Asset Management Front-Running Matter (2010)

A dealer at HDFC Asset Management Company Limited was found to have used advance information about the company’s mutual fund trades to position personal trades through a related party. SEBI proceeded against the dealer and the company under the FUTP Regulations, 2003 and imposed a penalty along with directions for the strengthening of internal controls. The matter has continued to influence the design of internal control frameworks at Indian asset managers and the integration of insider-trading-style disclosures with broader fund governance.

The case is the leading Indian authority on front-running and illustrates the overlap between the insider trading framework, the FUTP framework, and the fund governance regime under the SEBI Mutual Fund Regulations.

Discussion Questions

How does the HDFC matter illustrate the interaction between the insider trading framework and the fund governance framework, and what implications does the interaction have for the design of internal controls?
To what extent should the front-running prohibition in the FUTP Regulations be subsumed within a broader insider trading framework that captures all use of confidential information for personal gain?
What features of the 2018 amendments to the PIT Regulations, particularly the structured digital database under Regulation 9A, are most likely to support the detection and prosecution of front-running in asset management firms?

11.7.3 Case Study 3: The Recent Settlement Era

A pattern observable in SEBI’s enforcement record over the past five years is the substantial growth of the settlement docket. Cases that, a decade ago, would have proceeded to contested adjudication and appeal are now substantially resolved by settlement under Section 15JB. The phenomenon has both benefits and costs.

On the benefit side, the settlement regime has accelerated the disposition of cases, reduced the cost of enforcement, and provided certainty to settling parties. On the cost side, the substantive case law on insider trading is developing more slowly than it would if more cases were contested to final order, and the deterrent effect of public adjudication is correspondingly attenuated. The optimal balance between settlement and adjudication is a continuing question for the regulator and for the broader policy community.

Discussion Questions

To what extent does the growth of the settlement docket reflect the maturation of the Indian insider trading regime, and to what extent does it reflect the limits of the contested adjudication mechanism?
What features of the settlement regime, including the disclosure of settlement orders, the publication of summaries of facts, and the application of consistent settlement amounts, support the deterrent effect of the regime in the absence of contested findings?
How should the regulator and the appellate tribunal calibrate the priority of contested adjudication for cases that raise novel doctrinal issues, even where settlement is otherwise appropriate?

Summary

Concept	Description
SEBI's Investigative Powers
Section 11 SEBI Act	Confers on SEBI the functions of investor protection and market development, with specific measures including the prohibition of insider trading and fraudulent trade practices
Section 11(4) Directions	Empowers SEBI to issue directions, including suspension of trading, market access bar, impounding of proceeds, and attachment of bank accounts
Section 11A SEBI Act	Confers rule-making power on SEBI in matters relating to issue of capital, transfer of securities, and other matters incidental thereto
Section 11B SEBI Act	Empowers SEBI to issue directions and, post-2019 amendment, to impose monetary penalties for any violation of the SEBI Act, rules, or regulations
Section 11C Investigation	The principal investigative power, empowering SEBI to appoint an investigating authority with powers to require production of books, examine officers on oath, and seek information from any person
Section 11D Cease and Desist	Empowers SEBI, after such inquiry as it deems necessary, to direct any person to cease and desist from any act in violation of the Act, rules, or regulations
Integrated Surveillance	SEBI's continuing surveillance function through which trading patterns are monitored across the exchanges for indicators of insider trading or market manipulation
Prohibitions on Dealing and Counselling
Regulation 3(1) Communication Prohibition	Prohibits insiders from communicating, providing, or allowing access to UPSI except in furtherance of legitimate purposes, performance of duties, or discharge of legal obligations
Regulation 3(2) Procurement Prohibition	Prohibits any person from procuring or causing communication of UPSI from an insider, except for the same legitimate purposes, capturing the conduct of tippees
Regulation 3(2A) Legitimate Purposes Policy	Mandatory written policy of every listed company, identifying on a case-by-case basis the legitimate purposes for which UPSI may be communicated
Regulation 4(1) Trading Prohibition	Prohibits insiders from trading in listed securities while in possession of UPSI, with possession giving rise to a presumption of trading on UPSI
Defences to Trading Prohibition	Defences include trading plan, off-market inter-se transfer between insiders with same UPSI, non-individual capacity decision, statutory obligation, and trading without use of UPSI
Tipper-Tippee Liability	The structure of liability that attaches to both the communicator (tipper) and the recipient and trader (tippee) of UPSI
Burden of Proof and Adjacent Offences
Mrs. Chandrakala v. SEBI (2012)	SAT decision clarifying that the regulator must establish UPSI, tipper access, tippee trading, and a reasonable inference of communication, after which the burden shifts
Rakesh Agrawal v. SEBI (2003)	SAT decision establishing that circumstantial evidence is sufficient in insider trading cases and that the regulator's burden is on the balance of probabilities
Front-Running	Use by an intermediary of advance information about a client's impending trades to position personal trades for benefit, captured by FUTP Regulations and overlapping with insider trading
Market Manipulation	Artificial inflation or depression of securities prices through false trades, rumours, or coordinated patterns, captured by Regulation 4(2) of FUTP Regulations, 2003
Sanctions Architecture
Section 15G Penalty	Monetary penalty for insider trading and counselling, ranging from a minimum of ₹10 lakh to ₹25 crore or three times profits, whichever is higher
Section 15HA Penalty	Monetary penalty for fraudulent and unfair trade practices, ranging from a minimum of ₹5 lakh to ₹25 crore or three times profits, whichever is higher
Section 24 Criminal Punishment	Criminal punishment for contravention of the SEBI Act with imprisonment up to ten years and fine up to ₹25 crore, instituted in Special Courts under Section 26A
Disgorgement	Restitutionary remedy requiring the wrongdoer to surrender profits attributable to the misconduct, repeatedly upheld by the Tribunal
Bar from Market	Direction prohibiting access to the securities market for a specified period, including trading, holding office in a listed company, or registration as an intermediary
Procedural Cycle and Appellate Forum
Section 15JB Settlement	Settlement framework allowing resolution of proceedings on payment of a settlement amount without admission or denial of liability, dominant disposition mode in recent years
Adjudicating Officer (Section 15-I)	Officer appointed under Section 15-I to conduct inquiry, issue show-cause notice, hear personally, and impose penalty under the 1995 Inquiry Rules
Securities Appellate Tribunal	Specialised judicial body established under Section 15K hearing appeals from SEBI orders, principal source of doctrinal development on insider trading