Communication & Procurement of UPSI — Regulation 3

Topic 61 — PIT Regulation 3: Prohibition on UPSI Communication, Legitimate Purpose Test & SDD | SEBI Law Officer

Regulation 3 of the PIT Regulations, 2015 contains the prohibition on communication and procurement of UPSI — complementing the trading prohibition in Regulation 4. The communication prohibition prevents the flow of UPSI from insiders to outsiders who might then trade. The legitimate purpose exception (Regulation 3(3)) recognises that UPSI must sometimes be shared for business purposes — legal advisers, investment bankers, and due diligence consultants must receive UPSI. The Structured Digital Database (SDD) requirement ensures that such legitimate sharing is tracked and monitored.

1. Regulation 3(1) — Prohibition on Communication of UPSI

Regulation 3(1): No insider shall communicate, provide or allow access to any unpublished price sensitive information, relating to a company or securities listed or proposed to be listed, to any person including other insiders except where such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.

Three separate prohibitions in Regulation 3(1):

'Communicate': Actively passing on UPSI — verbally, in writing, electronically.
'Provide': Making UPSI available to another person — sharing documents, data, access to systems.
'Allow access': Permitting another person to access UPSI — leaving sensitive documents visible, sharing login credentials, not restricting access to confidential servers.

The prohibition covers communication even to 'other insiders' — an insider cannot communicate UPSI to another insider unless it is for a legitimate purpose. This prevents the creation of 'insider networks' where UPSI circulates freely among connected persons.

2. Regulation 3(2) — Prohibition on Procurement of UPSI

Regulation 3(2): No person shall procure from or cause the communication by any insider of unpublished price sensitive information, relating to a company or securities listed or proposed to be listed, except in furtherance of legitimate purposes, performance of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.

Regulation 3(2) mirrors Regulation 3(1) — it targets the RECIPIENT side of an improper UPSI communication:

'Procure from': Actively soliciting UPSI from an insider — seeking out non-public information for trading advantage.
'Cause the communication by': Inducing an insider to communicate UPSI — through bribery, pressure, deception, or other means.

Regulations 3(1) and 3(2) together create a complete prohibition on both sides of an improper UPSI communication — the tipper and the tippee both commit violations.

3. Regulation 3(3) — The Legitimate Purpose Exception

Regulation 3(3): Notwithstanding anything contained in sub-regulations (1) and (2), an insider may communicate, provide or allow access to any unpublished price sensitive information where such communication is in furtherance of legitimate purposes, performance of duties or discharge of legal obligations — if before such communication, the insider is satisfied that the recipient is aware that such information is unpublished price sensitive information.

The legitimate purpose exception is a critical safety valve — without it, companies could not function. When is communication of UPSI legitimate?

Legitimate Purpose	Example
Transaction due diligence	Sharing draft financial statements with M&A target's lawyers during due diligence
Legal advice	Disclosing impending litigation outcome to company's legal counsel for advice
Banker/investor presentations	Sharing non-public financial projections with potential lenders/investors under NDA
Board meeting preparation	CFO sharing preliminary financial results with board members before external announcement
Regulatory compliance	Sharing UPSI with SEBI in response to an inquiry
Employee performance management	Sharing company performance data with relevant employees for their work duties

⚠️ Key Condition for Legitimate Purpose Exception

Regulation 3(3) requires that BEFORE communicating UPSI for a legitimate purpose, the insider must be satisfied that the recipient is AWARE that the information is UPSI. The recipient is then also subject to the PIT Regulations' restrictions — they become an insider and cannot trade on the UPSI they received.

4. Need-to-Know Principle

Even where UPSI communication is for a legitimate purpose, the PIT Regulations and Code of Conduct require that UPSI is shared only on a 'need-to-know' basis:

UPSI should be shared only with persons who actually need it to perform their legitimate function — not to entire teams or departments.
The principle of minimum necessary disclosure applies — share only the UPSI that is actually needed for the purpose, not all available UPSI.
Information barriers (Chinese walls) within organisations prevent unnecessary flow of UPSI between departments.

5. Structured Digital Database (SDD) — Mandatory Requirement

Regulation 3(5): The board of directors of every listed company and every intermediary shall maintain a Structured Digital Database, with adequate internal controls and checks such as time stamping and audit trails to ensure non-tampering of the database, to preserve the information shared with such persons, along with the applicable restrictions on communication thereof.

The SDD is mandatory — every listed company and every SEBI-registered intermediary must maintain a digital database recording all UPSI communications. Key SDD requirements:

Who must be recorded: Every person to whom UPSI is shared (for legitimate purposes) — their name, PAN, nature of UPSI shared, date and time of sharing.
Time-stamping: Each entry must be time-stamped — providing an audit trail of when UPSI was shared.
Tamper-proof: The database must have adequate controls to prevent alteration or deletion of entries.
Retention: Records must be preserved for a minimum period as prescribed by SEBI.
SEBI access: The SDD must be available for SEBI inspection — enabling investigation of UPSI leakages.

6. Tipper-Tippee Liability Framework

The communication and procurement prohibitions in Regulation 3 create a tipper-tippee liability framework:

Person	Violation	Penalty
Tipper (insider who communicates UPSI)	Violation of Regulation 3(1) — communicating UPSI without legitimate purpose	Section 15G SEBI Act: ₹25 crore or 3× profit of the tippee (whichever higher)
Tippee (person who receives and trades on UPSI)	Violation of Regulation 4 (trading on UPSI)	Section 15G SEBI Act: ₹25 crore or 3× own profit (whichever higher)
Person who procures UPSI for trading	Violation of Regulation 3(2) — procuring UPSI	Section 15G SEBI Act + possible criminal prosecution

7. Landmark Cases on UPSI Communication

📖 SEBI v. Prashant Jayantilal Patel (Benchmark AMC Case) SEBI Order, 2010

Facts: A fund manager at Benchmark Mutual Fund communicated pending large fund trades to his relative — who then traded ahead of the fund's transactions. The fund manager was charged under both PFUTP Regulation 4(2)(q) (front running) and PIT Regulations (communicating UPSI/order flow information).

Held: SEBI held both the fund manager (tipper) and his relative (tippee) liable. The tipper violated Regulation 3 (communication of UPSI/order flow information without legitimate purpose); the tippee violated Regulation 4 (trading on the basis of the communicated information). Both were debarred and ordered to disgorge profits.

Ratio: Tipper liability under Regulation 3 and tippee liability under Regulation 4 are separate and cumulative — both can be penalised. The tipper's penalty can be based on the tippee's profit even if the tipper personally made no profit.

8. Model Examination Questions

Q1. What is prohibited under Regulation 3 of the PIT Regulations? What is the 'legitimate purpose' exception and what is a Structured Digital Database?

Regulation 3 — Communication Prohibition, Legitimate Purpose & SDD

Model Answer — REGULATION 3(1): No insider shall communicate, provide, or allow access to UPSI — except for legitimate purposes, duties, or legal obligations. REGULATION 3(2): No person shall procure UPSI or cause its communication except for legitimate purposes. Together, Regulations 3(1) and 3(2) create complete tipper-tippee liability — the tipper violates 3(1); the person who procures UPSI violates 3(2). LEGITIMATE PURPOSE EXCEPTION (Regulation 3(3)): UPSI may be communicated for M&A due diligence, legal advice, banker/investor presentations, board preparation, regulatory compliance — but only on a NEED-TO-KNOW basis and ONLY if the recipient is informed that the information is UPSI. The recipient then becomes an insider restricted from trading. STRUCTURED DIGITAL DATABASE (Regulation 3(5)): Every listed company and intermediary must maintain an SDD recording every person to whom UPSI is shared — name, PAN, UPSI description, date-time stamp. Must be tamper-proof, time-stamped, and available for SEBI inspection. Mandatory from 2018-19 onwards. SDD enables SEBI to trace UPSI leakages — if a person traded on UPSI, SEBI checks the SDD to identify who shared that UPSI with them. In SEBI v. Prashant Patel (2010), both tipper and tippee were held liable — tipper's penalty based on tippee's profit. This illustrates that Regulation 3 violations are independent of whether the tipper personally profited.

🎯 EXAM POINTERS — Topic 61: Communication of UPSI [Regulation 3]

Regulation 3(1): No insider shall COMMUNICATE, PROVIDE, or ALLOW ACCESS to UPSI — covers all forms of disclosure.
Regulation 3(2): No person shall PROCURE UPSI or CAUSE its communication — prohibits the tippee side.
Regulation 3(1) + 3(2): Complete tipper-tippee prohibition. Both tipper and tippee can be penalised.
Regulation 3(3): LEGITIMATE PURPOSE EXCEPTION — UPSI may be shared for M&A due diligence, legal advice, banker presentations, duties, legal obligations.
KEY CONDITION for legitimate purpose: recipient must be AWARE the information is UPSI before communication.
NEED-TO-KNOW principle: UPSI shared only to persons who actually need it; minimum necessary disclosure.
Regulation 3(5): MANDATORY SDD — name + PAN + UPSI description + date-time stamp for every recipient.
SDD must be tamper-proof; time-stamped; audit trail; available for SEBI inspection.
SEBI v. Prashant Patel (2010): tipper liable under Reg 3; tippee liable under Reg 4. Tipper's penalty = tippee's profit.
Tipper who makes NO personal profit can still be penalised — Regulation 3 violation is independent of personal gain.

← Topic 60: Prohibition on Trading [Regulation 4] | Next → Topic 62: Code of Conduct for Insiders

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