Stop it before it happens: companies ping law firms to prevent insider trading

Bombay: Publicly traded companies are increasingly seeking legal help not to defend against insider trading investigations, but to prevent them in the first place. Securities lawyers said the nature of client inquiries has changed dramatically over the past few years after the regulator tightened India’s insider trading framework using technology.

Clients now want to know what qualifies as Unpublished Price Sensitive Information (UPSI), when confidential information should be recorded first, who should have access to it internally, how it should be shared with auditors, consultants and legal firms, and what action the governing body should take if it detects suspicious employee trading. Lawyers said many companies are also seeking advice on conducting internal investigations before the regulator takes action and strengthening compliance systems to avoid lapses and avoid regulatory scrutiny.

UPSI includes upcoming financial results, mergers or major business decisions that could move the company’s stock price. The Securities and Exchange Board of India (Sebi) has proposed strict rules for UPSI to prevent insider trading and protect ordinary investors from market manipulation. In 2018, the regulator ordered listed companies to create their own Structured Digital Databases (SDDs) to track each instance shared by UPSI. This digital log records who accessed the information, when and with whom it was shared, creating an audit trail.

Read also | Margin relief on the buy side on cards as Sebi looks to increase turnover in the cash market

According to Sudhir Bassi, managing director of Khaitan & Co., companies often seek guidance on when information becomes UPSI, the timing of the first SDD entry, subsequent updates to the database, legitimate ways to share confidential information and what action should be taken if an employee is suspected of insider trading.

Queries sent to Sebi remained unanswered.

“Our recommendation is to move from tick-box compliance to proactive, documented management by adopting a broad approach to UPSI identification, automating SDD records and maintaining robust internal controls. A well-documented record of compliance is as important as preventing the leak itself,” said Gaurav Mistry, partner at DSK Legal.

Read also | Sebi’s plan to allow celebrity ads for MFs makes the industry nervous

The shift reflects a regulatory approach to insider trading while tracking unusual price movements and trading activity. Investigations are now increasingly based on digital evidence, company records and internal management rather than relying on circumstantial evidence.

Boards are also seeking guidance on whether business windows should be closed for mergers, fund-raising and restructuring plans and who should be classified as a “designated person” and whether deals by related promoters could attract scrutiny, said Milind Jha, partner at Dentons Link Legal.

“The SDD has changed the game…Sebi no longer creates the evidence; companies are required to create it for them,” said Pulkit Sukhramani, partner at JSA Advocates & Solicitors.

In 2018, Sebi mandated SDD under its insider trading rules, which came into force on 1 April 2019. In July 2020, the regulator expanded the framework by adding intermediaries such as law firms, consultants, merchant bankers to the list of persons to be monitored using SSD as they also process UPSI of companies.

Instead of restricting deals in insider trading cases, boards have now moved to invest in stronger governance systems.

“There has been a shift in the corporate psyche from reactive compliance to proactive governance infrastructure. Companies are investing heavily in compliance infrastructure, internal oversight, access control and training to prevent breaches and demonstrate the adequacy of their internal processes in the event of regulatory scrutiny,” said Rutu Gandhi, Partner at Cyril Amarchand Mangaldas.

Pulkit Sukhramani, partner at JSA Advocates and Solicitors, said companies commission internal investigations when they detect unusual trading, as early action demonstrates a strong compliance culture and can help reduce exposure to regulators.

Read also | Sebi eyes market making for commodity derivatives to improve liquidity

An inaccurate or incomplete SDD is also considered an independent violation under Sebi’s insider trading regulations and failure to set up an SDD is considered a violation of the rules.

“The SDD often serves as the primary evidentiary record to trace the spread of UPSI. While not conclusive evidence of insider trading, it constitutes significant corroborating evidence when read with trade data, communication records and other material,” said Yogesh Chande, partner at Shardul Amarchand Mangaldas & Co.

Mint reported in December that the market regulator’s investigations department, which gathers evidence and identifies wrongdoers for enforcement, has grown rapidly. In 2023, Sebi largely operated with a single investigation vertical comprising about five or six investigation divisions. By 2025, this had expanded to three investigative verticals with 23 divisions headed by senior officers.

Sebi’s latest annual report said it handled 287 insider trading cases and completed 192 investigations in FY25, while 175 cases were picked up and 130 investigations completed in FY24.