A contra trade is the mirror image of an earlier deal — a sale that reverses a recent purchase, or a purchase that reverses a recent sale, executed within a short window. The SEBI (Prohibition of Insider Trading) Regulations, 2015 do not ban such trades outright for the market at large; instead they target a defined class of corporate functionaries — designated persons — who, sitting close to the flow of unpublished price sensitive information (UPSI), could otherwise lock in short-term gains by flipping positions around the rhythm of corporate announcements. The mechanism is found in clause 10 of Schedule B, read with Regulation 9, and its bite is twofold: a prophylactic bar on contra trades for at least six months, and a disgorgement consequence that strips away any profit made in breach. This chapter unpacks the source provision, its rationale, the computation of the six-month period, the carve-outs (trading plans, ESOP exercise, off-market transfers), and the enforcement and informal-guidance jurisprudence that has shaped how the restriction operates in practice.
What a Contra Trade Is
A contra trade is an opposite transaction in the same security executed within a short interval of an earlier transaction. If a designated person buys shares of her company, a sale of those (or other) shares of the same company within the restricted window is a contra trade; conversely, if she sells, a purchase within the window is a contra trade. The concept is functionally close to the ‘short-swing’ idea in United States securities law — the assumption that round-trip trading by an insider within a brief span is presumptively suspect because the insider is best placed to time the round trip against the company’s information cycle.
It is important to be precise about what the PIT Regulations actually prohibit. The core prohibitions in Regulation 4 bar an insider from trading while in possession of UPSI. The contra trade restriction is different and additional: it is a conduct rule imposed through the code of conduct, and it applies whether or not the designated person actually possessed UPSI at the time of the reversing trade. It is a structural, prophylactic restraint — a bright line designed to remove the temptation and the appearance of information-led short-term flipping, rather than a fact-specific charge that the person traded ‘on the basis of’ UPSI. Understanding this distinction is the key to the whole topic.
The Source Provision — Schedule B, Clause 10
The restriction lives in the Minimum Standards for Code of Conduct in Schedule B (for listed companies), made applicable through Regulation 9(1), which obliges the board of directors of every listed company to formulate and publish a code of conduct to regulate, monitor and report trading by designated persons and their immediate relatives. Clause 10 of Schedule B is the operative text. It provides that the code of conduct shall specify the period — which in any event shall not be less than six months — within which a designated person who is permitted to trade shall not execute a contra trade.
The same clause builds in a relaxation valve and an enforcement consequence. The compliance officer may be empowered to grant relaxation from strict application of the restriction for reasons to be recorded in writing, provided that such relaxation does not violate the Regulations. And, critically: should a contra trade be executed, inadvertently or otherwise, in violation of such a restriction, the profits from such trade shall be liable to be disgorged for remittance to the Board for credit to the Investor Protection and Education Fund administered by the Board under the Act. Two features of this language repay attention. First, the six months is a floor, not a ceiling — a company may, and many do, specify a longer period in its own code. Second, the words “inadvertently or otherwise” make disgorgement a near-automatic, fault-neutral consequence: there is no defence of innocent intention to the disgorgement itself.
Rationale — Why a Bright-Line Bar
SEBI’s own justification, echoed in its FAQs and informal guidance, is that the restriction on contra trades by insiders is intended to prevent misuse of UPSI in the possession of an insider and to disallow them from taking an opposite view within a short span of time. The premise is that there is no genuine, legitimate need for an insider to plan two opposite trades in the same scrip within six months of one another; where such round-tripping occurs, the likeliest explanation is that the insider is positioning around the company’s information flow.
The design choice is deliberately over-inclusive. Rather than require SEBI to prove, transaction by transaction, that a reversing trade was informed by UPSI — an evidentiary burden that proved difficult under the 1992 regime, as the case law on ‘trading on the basis of’ UPSI illustrates — the contra trade rule simply forbids the round trip and disgorges any profit if it happens. This shifts the regime from ex-post adjudication of motive towards ex-ante structural prevention, complementing the trading-window mechanism and the communication and procurement prohibitions. The evolution of this preventive philosophy from the older code is traced in our chapter on the evolution from the 1992 Regulations.
Who Is Bound — Designated Persons and Immediate Relatives
The contra trade restriction does not apply to the investing public, nor even to every insider. It binds designated persons — a category each listed company must identify in its code based on role and access to UPSI — and, crucially, their immediate relatives. The defined boundaries of these categories are examined in our chapter on key definitions; for present purposes the salient point is that the net extends beyond the individual functionary.
SEBI has clarified, in FAQ 42 of its comprehensive PIT FAQs and reaffirmed in informal guidance, that contra trade restrictions apply to a designated person and their immediate relatives collectively. The practical consequence is significant: a buy by a designated person and a sale by his spouse within six months can together constitute a contra trade, even though they hold securities under different PANs. Compliance functions therefore cannot monitor the designated person’s trades in isolation; they must aggregate the trading activity of the designated person and immediate relatives when testing for a contra position. This collective reading materially widens the operational footprint of clause 10.
Computing the Six-Month Period
The six-month clock runs from the completion of the first transaction, not from the date the parties merely agreed to deal. SEBI has confirmed through informal guidance that, for the purpose of computing the six-month contra trade period, the relevant date is the date on which the acquisition or purchase of the shares was completed. A sale before the expiry of six months from that completion date attracts the restriction.
This completion-based test surfaces sharply where an acquisition is itself staged. In its informal guidance to Share India Securities Limited, SEBI dealt with warrants that were later converted into equity shares. It treated the conversion of warrants into equity as a voluntary acquisition — a fresh buy trade — so that any sale within six months of the conversion date would attract contra trade restrictions, even if six months had already elapsed since the original warrant allotment. The lesson for candidates is that each discrete acquisition event resets the clock; one cannot ‘back-date’ the six months to an earlier, dormant entitlement. The same completion-date logic governs rights issues, conversions and similar layered transactions.
The Disgorgement Consequence
The defining remedy for a contra trade is not damages to a counterparty but disgorgement — a restitutionary stripping of the profit. Under clause 10 of Schedule B, the profits from an offending contra trade are liable to be disgorged and remitted to the Board for credit to the Investor Protection and Education Fund (IPEF) administered by SEBI under the SEBI Act, 1992. Because the clause operates “inadvertently or otherwise”, the designated person cannot escape disgorgement by pleading that the reversal was an oversight or a clerical error; intention is irrelevant to the restitutionary consequence.
Disgorgement is conceptually distinct from penalty. SEBI’s power to claw back ill-gotten gains is anchored in its equitable, restorative jurisdiction — the principle, recognised by the regulator and the tribunals, that no person should be allowed to retain the fruits of a transaction made in breach of the regulatory scheme. Separately, a breach of the code of conduct can attract a monetary penalty. Where the PIT framework provides no specific penalty for a particular default, SEBI’s adjudicating officers have levied penalties under the residuary Section 15HB of the SEBI Act, which prescribes a penalty of not less than one lakh rupees extending up to one crore rupees for contraventions for which no separate penalty is provided. In adjudication practice, SEBI has both directed disgorgement of the gross profit from the contra trades and imposed a Section 15HB penalty for the underlying code-of-conduct violation — the two operate cumulatively, not as alternatives.
The Trading Plan Carve-Out
The single most important exemption is for trades executed under an approved trading plan. Regulation 5 permits an insider to formulate a trading plan, have it approved by the compliance officer and disclosed publicly, and then trade in accordance with it even while in possession of UPSI. Regulation 5 expressly provides that the trading window norms and the restrictions on contra trade shall not be applicable for trades carried out in accordance with an approved trading plan.
The logic dovetails with the rationale for the contra trade bar itself. A trading plan must be set well in advance — Regulation 5 requires that it not entail commencement of trading earlier than the prescribed cooling-off period following public disclosure of the plan — and, once approved, the plan is irrevocable and must mandatorily be implemented. Because the insider commits to the trades before any opportunity to exploit subsequent UPSI, the structural concern that animates the contra trade restriction falls away. SEBI has, however, cautioned that the exemption operates within a single approved plan: contra trade restrictions can still apply as between trades executed under two separate trading plans, so an insider cannot use back-to-back plans to manufacture an exempt round trip.
ESOP Exercise and Other Exempt Transactions
Beyond trading plans, SEBI’s clarifications and informal guidance have carved out several categories where a transaction will not be treated as a contra trade. The exercise of stock options (ESOPs) is the leading example: SEBI clarified that the exercise of ESOPs is not to be treated as a contra trade, although the subsequent sale of shares so acquired may be subject to, and may trigger, contra trade restrictions in the ordinary way. The exercise event itself is treated as an acquisition pursuant to a pre-existing entitlement rather than a discretionary market trade.
SEBI has similarly indicated that certain corporate actions and exit mechanisms stand outside the contra trade net — for instance, tendering shares in an exit offer made under SEBI’s delisting framework has been treated as exempt, on the footing that the shareholder is responding to a corporate event rather than executing a discretionary contra position. The unifying thread across these carve-outs is that the transaction is either non-discretionary, pre-committed, or driven by a corporate event rather than by the insider’s opportunistic timing — precisely the situations where the prophylactic concern behind clause 10 does not arise.
Gifts and Off-Market Transfers
A recurring question is whether a gratuitous transfer — a gift of shares — counts as a trade at all, and therefore whether it can constitute a contra trade. SEBI addressed this in its informal guidance to Century Plyboards (India) Limited (May 2025). It took the view that an inter se off-market gift of shares amounts to ‘dealing in’ or ‘trading in’ securities for the purposes of the PIT Regulations, and accordingly such a gift can attract contra trade restrictions — potentially on both the donor and the donee — within the six-month window. The breadth of the defined term ‘trading’ (which expressly includes subscribing, buying, selling, dealing or agreeing to do so) is what brings a no-consideration transfer within the perimeter.
The same guidance reinforced two further points already noted: that contra trade restrictions apply to the designated person and immediate relatives collectively, by reference to FAQ 42; and that the compliance officer, where empowered by the board, may grant a recorded-in-writing relaxation provided it does not violate the Regulations. For exam purposes, the takeaway is that off-market and gratuitous transactions cannot be assumed to be outside the contra trade regime — they must be tested against the same six-month and collective-application principles as ordinary market trades.
Interaction with the Trading Window
The contra trade restriction operates alongside, but independently of, the trading window mechanism. The trading window is a periodic closure — typically around the determination and announcement of financial results and other UPSI events — during which designated persons may not trade at all. The contra trade bar, by contrast, is a six-month restraint on reversing a trade, and it runs regardless of whether the trading window is open or shut.
The two can therefore stack. A designated person who buys during an open window is still locked out of selling for six months by clause 10; and even within that six-month period the window may close again, adding a separate, overlapping prohibition. Both restraints are switched off for trades under an approved trading plan, which is why Regulation 5 disapplies the trading window norms and the contra trade restrictions together. The disclosure architecture that underpins this monitoring — the trades that must be reported so that the compliance officer can detect a contra position — is examined in our chapter on initial and continual disclosures.
Enforcement and Judicial Context
Direct, reported judicial pronouncements on the contra trade clause itself are relatively few, because most contra trade defaults are resolved at the level of SEBI adjudication orders and informal guidance rather than appellate litigation. In adjudication, SEBI has repeatedly found designated persons to have breached clause 10 of Schedule B by executing a buy and a reversing sell within six months, directed disgorgement of the gross profit (for instance, profits of the order of a lakh of rupees in individual scrips), and layered a Section 15HB penalty on top for the code-of-conduct violation.
The broader insider-trading jurisprudence supplies the doctrinal backdrop against which the contra trade bar must be understood. In Rajiv B. Gandhi v. SEBI (SAT, 2008) — concerning the company secretary and CFO of Wockhardt Ltd, his wife and his sister — the tribunal upheld findings of insider trading under the 1992 Regulations where insiders sold shares ahead of negative results while privy to UPSI. In Mrs. Chandrakala v. Adjudicating Officer, SEBI (SAT, 2012), the tribunal emphasised that the 1992 prohibition bit only where an insider traded ‘on the basis of’ UPSI, and on the facts set aside the finding because the trading pattern was inconsistent with UPSI-led dealing. These cases illustrate precisely the evidentiary difficulty — proving that a particular trade was UPSI-driven — that the prophylactic, fault-neutral contra trade rule in the 2015 Regulations is designed to side-step. The contra trade restriction does not require any such proof of motive; the round trip within six months is itself the actionable conduct.
The Compliance Officer’s Relaxation Power
Clause 10 vests the board with discretion to empower the compliance officer to relax the strict application of the contra trade restriction. The power is hedged by two express conditions: the relaxation must be for reasons recorded in writing, and it must not violate the Regulations. The recorded-reasons requirement imposes a discipline of transparency and reviewability — a relaxation that cannot be justified on the file is vulnerable; the ‘not in violation’ proviso ensures the officer cannot use the relaxation to sanction what would otherwise be substantive insider trading under Regulation 4.
In practice, a relaxation might be granted where a designated person faces a genuine financial exigency, or where a transaction is non-discretionary, but it cannot be deployed to bless a profit-motivated reversal around an information event. The relaxation power is therefore a narrow safety valve, not a routine waiver, and it does not displace the disgorgement consequence where a contra trade is in fact executed in breach. Candidates should note that the existence of the relaxation power does not dilute the ‘inadvertently or otherwise’ standard: absent a properly recorded prior relaxation, the disgorgement consequence attaches automatically.
Application to Intermediaries and Fiduciaries
Schedule B is the code template for listed companies. A parallel template — Schedule C — governs the codes of conduct that market intermediaries and fiduciaries (such as stock exchanges, clearing corporations, depositories, asset management companies, banks and law firms handling UPSI) must adopt under Regulation 9(2) and (3). The contra trade discipline runs through Schedule C in substantially the same terms: a designated person of an intermediary or fiduciary is likewise barred from executing a contra trade for a period not less than six months, subject to the same compliance-officer relaxation and the same disgorgement-to-IPEF consequence.
This parallelism reflects the architecture of the 2015 Regulations, which extends the preventive code-of-conduct regime beyond issuers to the wider ecosystem of entities that routinely handle UPSI. For a complete view of how designated persons in these entities are identified and regulated, the SEBI PIT hub sets out the full scheme of Regulation 9 and the two schedules. The practical upshot is that the six-month contra trade bar is not confined to company insiders; it is a standard feature of every PIT code of conduct, whether framed under Schedule B or Schedule C.
Exam Takeaways and Common Traps
Several points recur in examination questions and deserve crisp recall. First, the contra trade restriction is a code-of-conduct rule in clause 10 of Schedule B (and Schedule C), made through Regulation 9 — it is not the substantive trading prohibition in Regulation 4, and it applies irrespective of whether the person possessed UPSI. Second, the period is “not less than six months” — six months is the statutory floor, and a company code may prescribe longer. Third, the consequence is disgorgement to the IPEF, triggered “inadvertently or otherwise”, with a Section 15HB penalty available in addition.
The common traps: (a) assuming the six months runs from the agreement date rather than the completion date of the first trade; (b) forgetting that the restriction applies to the designated person and immediate relatives collectively, across different PANs; (c) overlooking that an approved trading plan disapplies both the trading window and contra trade restrictions, while ESOP exercise is exempt but the subsequent sale is not; and (d) assuming a gift or off-market transfer is outside the regime — SEBI’s Century Plyboards guidance treats it as ‘dealing in’ securities and therefore capable of being a contra trade. Mastering these four distinctions answers the overwhelming majority of questions on this topic.
Frequently asked questions
What exactly is a contra trade under the SEBI PIT Regulations?
It is an opposite transaction in a security — a sale reversing a recent purchase, or a purchase reversing a recent sale — executed by a designated person within a restricted window of at least six months. It is regulated under clause 10 of Schedule B, read with Regulation 9, as a code-of-conduct rule, distinct from the substantive prohibition on trading while in possession of UPSI under Regulation 4.
How long is the contra trade restriction period?
Clause 10 of Schedule B requires the code of conduct to specify a period “which in any event shall not be less than six months”. Six months is therefore the minimum floor; a company is free to prescribe a longer period in its own code, but it cannot prescribe a shorter one.
From what date is the six-month period computed?
From the date the first transaction was completed, not the date it was merely agreed. SEBI confirmed this in informal guidance and, in the Share India Securities guidance, treated the conversion of warrants into equity as a fresh acquisition that restarts the six-month clock — so a sale within six months of conversion attracts the restriction even if six months had passed since the original warrant allotment.
What happens if a designated person executes a contra trade in breach?
The profits from the contra trade are liable to be disgorged and remitted to SEBI for credit to the Investor Protection and Education Fund (IPEF). This applies “inadvertently or otherwise”, so intention is irrelevant. In addition, SEBI may impose a monetary penalty for the code-of-conduct breach, often under the residuary Section 15HB of the SEBI Act (one lakh to one crore rupees).
Are trades under a trading plan subject to contra trade restrictions?
No. Regulation 5 expressly provides that the trading window norms and the contra trade restrictions do not apply to trades carried out under an approved trading plan, which must be set well in advance and is irrevocable once approved. However, SEBI has cautioned that contra trade restrictions can still apply as between trades under two separate trading plans.
Do contra trade restrictions apply to a designated person's family members?
Yes. Per FAQ 42 of SEBI's PIT FAQs and reaffirmed in the Century Plyboards informal guidance, the restriction applies to a designated person and their immediate relatives collectively — even where they hold securities under different PANs. A buy by the designated person and a sale by a spouse within six months can together amount to a contra trade. SEBI has also treated an off-market gift of shares as ‘dealing in’ securities capable of being a contra trade.