NISM Series III A – SEBI (Prohibition of Insider Trading) Regulations and Fraudulent Trade Practices
Welcome to Part 6 of the NISM Series III A Short Notes series on PassNISM.in. This post covers Chapter VII: SEBI (Prohibition of Insider Trading) Regulations, 1992 and Chapter VIII: SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003.
These two chapters are extremely high-weightage areas in the NISM Series III A exam. Questions on insider trading definitions, prohibited activities, and the role of the Compliance Officer appear regularly in the exam.
SEBI (Prohibition of Insider Trading) Regulations – Overview
Any trading or dealing done by an insider based on information that is not available in the public domain gives an unfair advantage and directly harms market integrity. This violates the principle of fair and equitable markets.
To protect the integrity of the securities market, SEBI put in place the SEBI (Prohibition of Insider Trading) Regulations.
Who Is an "Insider"?
The regulations define an insider as any person who is:
- A connected person, or
- In possession of or having access to Unpublished Price Sensitive Information (UPSI)
What Is Prohibited Under the Insider Trading Regulations? Regulation 3(1) – Prohibition on Communication of UPSI
An insider must not communicate, provide, or allow access to any unpublished price sensitive information relating to a company or its listed/to-be-listed securities to any person — including other insiders — except where such communication is in furtherance of legitimate purposes, performance of duties, or discharge of legal obligations.
Regulation 3(2) – Prohibition on Procuring UPSI
No person shall procure from, or cause the communication by, any insider of unpublished price sensitive information — except in furtherance of legitimate purposes, performance of duties, or discharge of legal obligations.
Regulation 3(3) – Permitted Communication of UPSI
UPSI may be communicated, provided, or accessed in connection with certain transactions (for example, mergers, acquisitions, or other deal-related activities), subject to appropriate safeguards.
Regulation 3(4) – Confidentiality Agreements
The board of directors must ensure that parties receiving UPSI in connection with a transaction execute confidentiality and non-disclosure agreements. Such parties must:
- Keep the information confidential
- Not trade in the company's securities when in possession of UPSI
Regulation 3(5) – Structured Digital Database
The board of directors must maintain a structured digital database containing the names of persons or entities with whom UPSI is shared, along with their PAN numbers (or any other authorized identifier where PAN is unavailable).
Information to SEBI by Informants – Regulations 7A to 7K
An Informant is an individual who voluntarily submits to SEBI a Voluntary Information Disclosure Form regarding an alleged violation of insider trading laws — whether the violation has occurred, is occurring, or is reasonably believed to be about to occur.
The informant can submit this form regardless of whether they qualify for a reward under the regulations.
Code of Conduct Under the Insider Trading Regulations Regulation 9(1) – Code for Listed Companies and Intermediaries
The board of directors of every listed company, and the board or head of every intermediary, must ensure that the CEO or Managing Director formulates a Code of Conduct to:
- Regulate, monitor, and report trading by designated persons and their immediate relatives
- Adopt minimum standards set out in Schedule B (for listed companies) and Schedule C (for intermediaries)
Regulation 9(2)
Every other person required to handle UPSI in the course of business operations must formulate a Code of Conduct adopting the minimum standards of Schedule C.
Regulation 9(4)
The board, in consultation with the Compliance Officer, must specify designated persons covered by the Code of Conduct based on their role, function, access to UPSI, seniority, and professional designation.
Role of the Compliance Officer in Insider Trading Compliance
The Compliance Officer must:
- Maintain all documents required under the Insider Trading Regulations
- Frame a Code of Fair Disclosure and Conduct in line with the model code under Schedule A
- Administer the Code of Conduct and related requirements
- Oversee insider trading compliance across the organization
SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003 What Is Fraud Under These Regulations?
Regulation 2(1)(c) defines fraud as any act, expression, omission, or concealment committed to induce another person or their agent to deal in securities. There may or may not be a wrongful gain or avoidance of loss — this is irrelevant in determining whether fraud has been committed.
Examples of fraud include:
- A willful misrepresentation of truth or concealment of material fact to cause another person to act to their detriment
- A suggestion about a fact that is not true, by a person who does not believe it to be true
- Active concealment of a fact by a person who knows or believes it
- A promise made without any intention of fulfilling it
- A representation — whether true or false — made in a reckless and careless manner
Prohibition of Certain Dealings in Securities – Chapter II
- Prohibition of Certain Dealings: Chapter II prohibits certain dealings covering the buying, selling, or issuance of securities. No person can directly or indirectly engage in the activities listed therein
- Prohibition of Manipulative, Fraudulent, and Unfair Trade Practices: Dealing in securities is deemed to be fraudulent or an unfair trade practice if it involves fraud
Investigation – Chapter III
Under Regulation 8(1), Chapter III provides that it is the duty of every person under investigation to cooperate fully with the investigating authority.
Quick Revision – Key Points on Insider Trading Regulations
| Term | Key Definition / Requirement |
|---|---|
| Insider | A connected person or someone with access to UPSI |
| UPSI | Unpublished Price Sensitive Information — not available in the public domain |
| Structured Digital Database | Must contain names and PAN of persons with whom UPSI is shared (Reg 3(5)) |
| Schedule A | Model Code of Fair Disclosure and Conduct |
| Schedule B | Minimum standards for Code of Conduct for listed companies (own securities) |
| Schedule C | Minimum standards for Code of Conduct for intermediaries and other entities |
| Informant | Person who voluntarily discloses alleged insider trading violations to SEBI |
Frequently Asked Questions (FAQs) What is insider trading?
Insider trading refers to buying or selling securities based on material information that is not available to the general public. It is prohibited under the SEBI (Prohibition of Insider Trading) Regulations because it gives an unfair advantage to those with access to non-public information.
Who is required to maintain a structured digital database?
Every listed company's board of directors must maintain a structured digital database of persons or entities with whom UPSI is shared, along with their PAN numbers or other identifiers.
Is wrongful gain necessary to prove fraud under SEBI regulations?
No. Under Regulation 2(1)(c) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003, fraud is established regardless of whether there is wrongful gain or avoidance of loss.
Continue to Part 7: Prevention of Money Laundering Act, 2002 and KYC Regulations.
NISM Series III A – Prevention of Money Laundering Act 2002 and KYC Registration Agency Regulations
Welcome to Part 7 of the NISM Series III A Short Notes series on PassNISM.in. This post covers two critical compliance chapters: the Prevention of Money Laundering Act, 2002 (PMLA) and the SEBI (KYC Registration Agency) Regulations, 2011.
These chapters form the backbone of the Anti-Money Laundering (AML) and Know Your Client (KYC) compliance framework for all SEBI-registered intermediaries. Exam questions from this chapter focus heavily on timelines, procedures, and record-keeping requirements.
Prevention of Money Laundering Act, 2002 (PMLA)
PMLA forms the core of India's legal framework to combat money laundering. The provisions of PMLA came into force on July 1, 2005.
The objective of PMLA is: "to prevent money laundering and to provide for confiscation of property derived from, or involved in, money laundering and for matters connected therewith or incidental thereto."
What Is Money Laundering?
Under Chapter II, Section 3 of PMLA, money laundering is committed by whoever directly or indirectly:
- Attempts to indulge in,
- Knowingly assists or is a party to, or
- Is actually involved in any process or activity connected with the proceeds of crime — and projects it as untainted property
Obligations of Banking Companies, Financial Institutions, and Intermediaries
Every banking company, financial institution, and intermediary is required to:
- Maintain records of all transactions — whether single transactions or a series of connected transactions within a month
- Furnish information on transactions to the relevant authority
- Verify and maintain records of the identity of all clients
These records must be maintained for a period of 10 years from the date of cessation of transactions between the client and the intermediary.
Obligation to Establish Policies and Procedures
Senior management of every registered intermediary must be fully committed to establishing policies and procedures for:
- Prevention of money laundering and terrorist financing
- Ensuring effectiveness and compliance with all legal and regulatory requirements
AML Policies Must Cover:
- Communication of group policies to all management and relevant staff handling account information and client records
- Client acceptance policy and due diligence measures, including proper identification
- Maintenance of records
- Compliance with relevant statutory and regulatory requirements
- Cooperation with law enforcement authorities, including timely disclosure of information
- Role of internal audit or compliance function in ensuring adherence to AML policies
Written Anti-Money Laundering Procedures
Every registered intermediary must adopt written AML procedures. These procedures must include three specific parameters related to the Customer Due Diligence (CDD) process:
- Client Identification Procedure (CIP)
- Record Keeping
- Monitoring of Transactions
Client Identification Procedure (CIP) – Know Your Client (KYC)
The Know Your Client (KYC) policy must clearly spell out the client identification procedure at different stages:
- When establishing the intermediary–client relationship
- When carrying out transactions for the client
- When the intermediary has doubts about the veracity or adequacy of previously obtained client identification data
Record Keeping and Retention of Records Record Keeping
Intermediaries must maintain records sufficient to permit reconstruction of individual transactions, including the amounts and types of currencies involved. These records can serve as evidence for prosecution of criminal behavior.
Retention of Records – Key Timelines
- Transaction records must be maintained and preserved for 5 years from the date of transactions
- Records of client identity must be maintained for 5 years from the date of cessation of transactions between the client and intermediary
- Under PMLA: records must be maintained for 10 years from cessation of transactions
Monitoring of Transactions
Regular monitoring of transactions is vital for AML effectiveness. Intermediaries must:
- Understand the normal activity of each client to identify deviations
- Pay special attention to complex, unusually large transactions, or unusual patterns with no apparent economic purpose
- Specify internal threshold limits for each class of client accounts
- Pay special attention to transactions exceeding these limits
Suspicious Transaction Monitoring and Reporting
Intermediaries must recognize suspicious transactions and have appropriate reporting procedures. The following timelines apply:
| Report Type | Submission Deadline | Submitted To |
|---|---|---|
| Cash Transaction Report (CTR) | By 15th of the following month | FIU-IND |
| Suspicious Transaction Report (STR) | Within 7 days of arriving at the conclusion that the transaction is suspicious | FIU-IND |
The Principal Officer is responsible for timely submission of CTR and STR. These reports must be maintained with utmost secrecy.
SEBI (KYC Registration Agency) Regulations, 2011
The Prevention of Money Laundering Act, 2002 made KYC compliance mandatory for all intermediaries dealing with investors in the securities market.
KYC means the procedure prescribed by SEBI for identifying and verifying proof of address and identity, in compliance with rules, regulations, and guidelines for Prevention of Money Laundering.
What Is a KYC Registration Agency (KRA)?
A KRA is a centralized agency registered with SEBI that:
- Maintains and makes available KYC information provided by a client to an intermediary
- Ensures KYC documents obtained from the intermediary are as prescribed by SEBI and per relevant money laundering prevention guidelines
Registration as a KRA
SEBI will grant registration as a KRA to an applicant who is a fit and proper person and belongs to an eligible category, provided no conflict of interest exists between the KRA's role and its other commercial activities, associates, or group companies.
Functions and Obligations of KRA
- Obtain KYC documents from intermediaries as prescribed by SEBI
- Make KYC information available to other intermediaries so clients do not need to repeat the KYC process
- Comply with code of conduct and guidelines as prescribed
Quick Revision – Key AML and KYC Numbers
| Fact | Detail |
|---|---|
| PMLA effective date | July 1, 2005 |
| Record retention under PMLA | 10 years from cessation of transactions |
| Transaction record retention (intermediaries) | 5 years from date of transaction |
| Client identity record retention | 5 years from cessation of transactions |
| CTR submission deadline | 15th of the succeeding month |
| STR submission deadline | Within 7 days of arriving at conclusion of suspicious nature |
Frequently Asked Questions (FAQs) When did PMLA come into force?
The provisions of the Prevention of Money Laundering Act, 2002 came into force on July 1, 2005.
What is a Suspicious Transaction Report (STR)?
An STR is a report that must be filed by intermediaries with FIU-IND within 7 days of concluding that a transaction is suspicious in nature. The Principal Officer is responsible for timely submission.
What is the purpose of a KYC Registration Agency (KRA)?
A KRA is a centralized agency that maintains and makes KYC data available across intermediaries, so investors do not need to repeat the KYC process with every intermediary they deal with.
How long must intermediaries retain client identity records?
Client identity records must be maintained for 5 years from the date of cessation of transactions. Under PMLA, transaction records must be maintained for 10 years.
Continue to Part 8: SEBI (Foreign Portfolio Investors) Regulations and SEBI (Stock Brokers) Regulations.