SEBI
Topic60 PIT Prohibition Trading Regulation 4 Window
Prohibition on Trading — Regulation 4, Trading Window & Pre-clearance
Topic 60 — PIT Regulation 4: When Insiders Cannot Trade, Closure Events & Pre-clearance Mechanism | SEBI Law Officer
Regulation 4 of the PIT Regulations, 2015 contains the core trading prohibition — no insider shall trade in securities while in possession of UPSI. The trading window mechanism operationalises this prohibition for listed companies' insiders, prescribing periods when trading is permitted (open window) and periods when it is prohibited (closed window / blackout period). The pre-clearance requirement adds an additional layer of oversight for designated persons. Together, these mechanisms constitute the primary compliance framework for insider trading prevention in Indian listed companies.
1. Regulation 4(1) — The Core Trading Prohibition
Regulation 4(1): No insider shall trade in securities that are listed or proposed to be listed on a stock exchange when in possession of unpublished price sensitive information. Provided that the insider may prove that (a) the transaction is an off-market inter-se transfer between insiders who were in possession of the same UPSI without either of them being in possession of UPSI that the other was not; (b) the transaction was carried out through a block deal where both parties had the same UPSI; (c) the transaction was pursuant to a statutory or regulatory obligation; (d) the exercise of stock options where the exercise price was pre-determined. |
Regulation 4(1) creates an absolute prohibition with limited carved-out exceptions:
- Absolute prohibition: No insider can trade in listed/proposed-to-be-listed securities while in possession of UPSI — regardless of whether the trade is motivated by UPSI or not (subject to the reversal of burden discussed in Topic 58).
- 'Proposed to be listed': The prohibition extends to securities that are about to list (IPO stage) — preventing pre-listing insider trading.
2. The Trading Window Mechanism
Schedule B, Clause 4 of PIT 2015 (Code of Conduct): The trading window shall be closed when the compliance officer determines that a designated person or class of designated persons can reasonably be expected to have possession of unpublished price sensitive information. The trading window shall be opened after a reasonable period following the information becoming generally available. |
The trading window is a compliance mechanism — not a statutory provision in the regulations themselves but a requirement under the Code of Conduct (Schedule B):
State | Definition | Who is affected |
|---|---|---|
Open Window | Period when designated persons are permitted to trade (subject to pre-clearance for large trades) | All designated persons |
Closed Window (Blackout Period) | Period when UPSI is expected to be generated and in circulation — designated persons cannot trade | All designated persons — not just those who actually possess UPSI |
3. Events Triggering Trading Window Closure
SEBI has prescribed specific events that MUST trigger closure of the trading window:
Event | Typical Window Closure Period |
|---|---|
Preparation of quarterly/annual financial results | From end of quarter/year until 48 hours after results are filed with exchanges (or earlier as per company policy) |
Consideration of dividend by the board | From date board agenda is set (including dividend agenda) until 48 hours after announcement |
Merger/acquisition/demerger board discussion | From initiation of discussion until 48 hours after announcement to exchanges |
Capital structure changes (rights, bonus, buyback) | From initiation of planning until 48 hours after LODR disclosure |
KMP changes | From initiation of search/negotiation until 48 hours after exchange filing |
Any other material UPSI event | From time of generation of UPSI until 48 hours after its public disclosure |
⚠️ SEBI Circular on Trading Window — 45-Day Closure SEBI issued a circular (2020) mandating that the trading window must remain CLOSED from the end of every quarter until 48 hours after the declaration of financial results. This effectively creates a ~45-60 day blackout period each quarter. Some companies had very brief closures previously; the 2020 circular standardised minimum closure. |
4. Pre-clearance Mechanism
Schedule B, Clause 5 (Code of Conduct): Pre-clearance of trades shall be required where: (a) the trade value exceeds the minimum threshold prescribed by the company; or (b) the compliance officer considers pre-clearance necessary for any reason. |
Pre-clearance is a procedural safeguard — before a designated person executes a trade (during an open window), they must obtain clearance from the compliance officer:
- Who must pre-clear: Designated persons whose trades exceed the prescribed threshold (typically ₹10 lakh per transaction or as set by company policy).
- Declaration required: The designated person must declare to the compliance officer that they are NOT in possession of UPSI as of the date of the pre-clearance application.
- Compliance officer's role: The CO must verify that the window is open, the person is not on a restricted list, and the declaration is made. CO cannot grant pre-clearance if they know the person is in possession of UPSI.
- Trade execution deadline: Pre-cleared trade must typically be executed within 7 trading days — if not executed within this period, fresh pre-clearance is required.
5. Trading Plan — Regulation 5
Regulation 5(1): An insider shall be entitled to formulate a trading plan and present it to the compliance officer for approval and public disclosure pursuant to which trades may be carried out on his behalf in accordance with such plan. |
A trading plan allows an insider to pre-disclose their intended future trades — thereby separating the trading decision from any future UPSI possession:
- Must be irrevocable: Once approved and disclosed, the trading plan cannot be modified or withdrawn — ensuring it was genuinely made without UPSI motivation.
- Cooling-off period: A minimum 6-month gap between plan approval/disclosure and the first trade under the plan.
- Cannot cover UPSI periods: Trading under the plan cannot commence during a trading window closure period.
- Disclosure: The trading plan must be publicly disclosed on the stock exchange — providing transparency.
6. Regulation 4 Exceptions — Permitted Trades
Regulation 4 provides certain carve-outs — trades that are not prohibited even if the insider is in possession of UPSI:
- Inter-se transfer between insiders: Off-market transfer between two insiders who both possess the SAME UPSI and neither has UPSI the other doesn't — level playing field between them.
- Block deals with same UPSI: Block deal where both parties possess the same UPSI.
- Statutory/regulatory obligation: Trade mandated by law (e.g., court order requiring divestiture).
- Exercise of pre-determined ESOP: Exercise of stock options where exercise price was pre-determined and the option was granted before the UPSI was generated.
7. Model Examination Questions
Q1. Explain the trading window mechanism and pre-clearance requirement under the PIT Regulations 2015.
Trading Window & Pre-clearance — PIT 2015 Compliance Framework Model Answer — TRADING WINDOW (Schedule B, Code of Conduct): The trading window is the period during which designated persons are permitted to trade in company securities. When UPSI is expected to be in circulation — from end of quarter until 48 hours after financial results are filed; during board discussions on dividends, M&A, capital structure; during any material UPSI event — the window is CLOSED and designated persons cannot trade. SEBI's 2020 circular mandated that the window remains closed from quarter-end until 48 hours after financial results declaration — standardising the minimum closure period. The compliance officer is responsible for announcing window openings and closures. PRE-CLEARANCE (Schedule B, Clause 5): Designated persons whose trades exceed prescribed thresholds must obtain pre-clearance from the compliance officer before trading. Requirements: (i) trading window must be open; (ii) designated person must declare they are not in possession of UPSI; (iii) trade must be executed within 7 trading days or fresh pre-clearance required. TRADING PLAN (Regulation 5): An alternative mechanism — insider pre-discloses an irrevocable future trading plan (minimum 6-month cooling-off period) — separating the trading decision from any future UPSI. Plan publicly disclosed on exchange. Once in plan, trades are executed under the plan even if window is subsequently closed. REGULATION 4(1): Absolute prohibition on trading while in possession of UPSI — with limited exceptions (inter-se transfers between insiders possessing same UPSI; block deals; statutory obligations; pre-determined ESOP exercise). |
🎯 EXAM POINTERS — Topic 60: Prohibition on Trading [Regulation 4]
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← Topic 59: UPSI — What Qualifies & What Does Not | Next → Topic 61: Communication & Procurement of UPSI [Regulation 3]
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