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  • Adarsh Agarwal

‘Material Non-Public Information’ in SEBI’s Consultation Paper: Implications and Probable Outcomes

[Adarsh is a student at National Law University and Judicial Academy Assam.]

The Securities and Exchange Board of India (SEBI) came out with a consultation paper on 18 May 2023, inviting comments for the introduction of SEBI (Prohibition of Unexplained Suspicious Trading Activities in the Securities Market) Regulations 2023 (Draft Regulations) into the securities regime. The Draft Regulations seek to cover material non-public information (MNPI) under the veil of suspicious trading activity, thereby enabling the regulatory body to frame charges based on unexplained trading patterns. The Draft Regulations highlight SEBI’s endeavor to circumvent its liability of establishing guilt by way of direct evidence and has imposed a duty on the accused to disprove the charges – which merely qualify as ‘allegations’ – levelled against such person. This article is an attempt to delve into the concept of MNPI and its impact on the securities law if the Draft Regulations are brought into force.

Delineating the Interplay between UPSI and MNPI

SEBI introduced the SEBI (Prohibition of Insider Trading) Regulations 2015 (PIT Regulations) to curb the practice of insider trading and deal with the lacunae of the erstwhile regime. The regulations provide clarity with respect to qualification as an insider and what constitutes unpublished price sensitive information (UPSI).

Regulation 2(1)(n) of the PIT Regulations provides for UPSI as information, with respect to a company, which holds the power to materially affect the price of its securities in case such information becomes available to the general public. The nature of UPSI is in the form of information which does not form part of the public domain. In contrast to this, Regulation 2(1)(f) of the Draft Regulations provides for a similar but a wider definition of MNPI thereby blurring the distinguishing factor between the two definitions. MNPI includes such information which was not generally available to the public and the same information had an impact on the price of the securities once it was made available. It also includes information with respect to any impending order, in relation to a security, on a recognized stock exchange or any information imparted by an influencer in the form of recommendations for a security. To simplify this, the definition of MNPI entails that all UPSI is MNPI, but all MNPI cannot be UPSI.

The idea behind the Draft Regulations highlights the motive of the securities regulator to deal with the practice of insider trading by bringing it under the ambit of MNPI. The PIT Regulations encompass an elaborate procedure with respect to investigation, reporting and framing of charges – based on evidence – against the accused. Explanation to Regulation 2(1)(g) clearly lays down that ‘the onus of showing that a certain person was in possession of or had access to unpublished price sensitive information at the time of trading would, therefore, be on the person leveling the charge...’ Under the Draft Regulations, SEBI is empowered to assert its claim on the basis of certain identified circumstances. This opens a Pandora's box comprising allegations based on circumstantial evidence becoming the general notion for determining insider trading cases. In such a case, the burden of proving that the allegations put forward are false by its nature then rests with the accused.

Assessing the Current Framework

The PIT Regulations impose a liability on SEBI to establish the existence of trade based on UPSI. The burden of proof in cases pertaining to insider trading is on the regulatory body – SEBI. The case of Balram Garg v. Securities and Exchange Board of India acts as a precedent for determining the degree of reliance that can be placed on circumstantial evidence in contrast to direct evidence to establish the presence of UPSI and the burden of proof in such insider trading cases. In the given case, the alleged insiders belonged to the promoter family (PC Jeweller group) and were charged with trading of the company’s shares based on UPSI. The regulatory body concluded it to be a case of insider trading and the same was upheld by the Securities Appellate Tribunal.

The Supreme Court, overturning the decisions of the above-mentioned bodies, held that, under PIT Regulations, insiders cannot be identified on the basis of trading patterns and timing of trading – “The trading pattern…cannot be the circumstantial evidence to prove the communication of UPSI…”. The Hon’ble court also held that the onus to prove that the alleged insiders were in possession of UPSI lay on SEBI by virtue of the PIT Regulations. In such cases, reliance could not be placed on evidence inferred through the given circumstances and production of cogent materials becomes necessary to establish communication of UPSI.

In the above case, the Supreme Court has clearly reiterated its position with respect to insider trading and consequently, suspicious trading activity cannot be made use of to deal with trading based on UPSI – MNPI encompasses UPSI within itself. In insider trading cases, the regulatory body is not permitted to transfer the onus of proof on the person against whom the allegations have been made.

The introduction of the Draft Regulations is SEBI’s attempt to exonerate itself from adhering to the established procedure laid down under the PIT Regulations and arguably misuse its position by treating UPSI as MNPI, enabling it to deal with insider trading under suspicious trading activities. This would also put the burden of proof on the accused, unlike the PIT Regulations. Such an act would reduce the status of PIT Regulations to mere discretion in nature as the Draft Regulations would have an overriding effect over the former regulations. The Draft Regulations, if brought into operation, might result in SEBI taking an action exceeding its authority by dealing with UPSI under MNPI, thus violating the stand taken by the Supreme Court.


Insider trading has been a major concern for decades, highlighting the need for a much stronger securities regime. The Supreme Court has tried to limit the use of circumstantial evidence in cases pertaining to insider trading. But what remains to be seen is how MNPI would be interpreted to determine suspicious trading activity with the looming possibility of insider trading being dragged under it. The action taken by SEBI sheds light on certain considerations – whether there was really an urgent need for new Regulations to counter existing problems of insider trading and how PIT Regulations would be viewed through the eyes of SEBI if the Draft Regulations are brought into operation as discussed in this article.

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