Most aspirants picture insider trading as someone buying shares before good news breaks. But the architecture of the SEBI (Prohibition of Insider Trading) Regulations, 2015 begins one step earlier — at the moment information moves. Regulation 3 makes the communication and procurement of unpublished price sensitive information (UPSI) a free-standing wrong, independent of any trade. A director who whispers a merger to a friend who never buys a single share has still breached Regulation 3(1). This chapter unpacks the prohibition, its narrow carve-outs for “legitimate purposes”, the institutional plumbing the 2018 amendments bolted on (the need-to-know rule, deemed-insider status and the Structured Digital Database), and the evidentiary war over how SEBI must prove a leak that, by its nature, leaves no paper trail.
Why communication is policed before any trade
The intuition that insider trading is fundamentally about a profitable trade is correct but incomplete. The Indian framework attacks the chain at its first link — the flow of information — because by the time a trade settles the harm to market integrity is already done and the tipper is often invisible. Regulation 3 of the SEBI (Prohibition of Insider Trading) Regulations, 2015 therefore creates two distinct prohibitions that do not depend on anyone dealing in securities at all: a bar on communicating UPSI (Regulation 3(1)) and a bar on procuring it (Regulation 3(2)). The complementary prohibition on trading while in possession of UPSI lives separately in Regulation 4, which we treat in Trading When in Possession of UPSI.
This separation is deliberate. A “tipper” who passes a leak but never trades, and a “tippee” who solicits the leak, both fall within Regulation 3 even if no transaction follows. The offence is the breach of confidence and the asymmetry it creates, not the eventual gain. As the legislative scheme makes clear, controlling the spread of UPSI is the most efficient point of intervention — it is far easier to forbid a leak than to unwind its downstream consequences across an anonymous order book.
For the conceptual building blocks — who is an “insider”, who is a “connected person”, and what counts as “unpublished price sensitive information” — see Definitions: Insider, Connected Person and UPSI. The present chapter assumes those definitions and focuses squarely on the conduct of communicating and procuring.
The prohibition: Regulation 3(1) and its proviso
Regulation 3(1) provides that no insider shall communicate, provide, or allow access to any unpublished price sensitive information, relating to a company or securities listed or proposed to be listed, to any person including other insiders except where such communication is in furtherance of legitimate purposes, performance of duties or discharge of legal obligations. Three features deserve emphasis. First, the verbs are broad: “communicate, provide, or allow access to” reach passive leakage (leaving a deal file on a shared drive) as much as an active tip. Second, the prohibition expressly extends to communication “to any person including other insiders” — being an insider is not a licence to receive UPSI. Third, the exception is purpose-driven, not status-driven.
The proviso to Regulation 3(1) carves out communications that the law positively requires or contemplates — notably, situations covered by an open offer under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 where the board of the target company believes sharing is in the interests of the company, and disclosures that are required to be made under Regulation 30 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. The architecture is thus a strict prohibition softened by narrowly drawn, justification-based exceptions rather than blanket immunities.
Procurement: the tippee's mirror-image liability under 3(2)
Regulation 3(2) is the symmetrical counterpart to 3(1). It provides that no person shall procure from or cause the communication by any insider of UPSI, relating to a company or securities listed or proposed to be listed, except in furtherance of legitimate purposes, performance of duties or discharge of legal obligations. The drafting closes an obvious loophole: if only the tipper were liable, a determined recipient could safely solicit information and plead innocence. By independently prohibiting procurement, Regulation 3(2) fixes liability on the person who pulls information out of an insider — the analyst who badgers a CFO, the relative who extracts a result before its announcement.
Crucially, the same “legitimate purposes” gateway applies on both sides. A merchant banker who asks a target’s management for diligence data is procuring UPSI — but lawfully, because the procurement is in furtherance of a legitimate purpose. The wrong is procurement outside that gateway. This is examined in greater depth in the companion chapter Communication or Procurement of UPSI, which dissects the actus reus of each limb.
"Legitimate purposes" and the need-to-know rule
Before 2019 the phrase “legitimate purposes” was undefined, leaving compliance officers to guess. The SEBI (Prohibition of Insider Trading) (Amendment) Regulations, 2018 — broadly tracking the Report of the Committee on Fair Market Conduct (the Kotak Committee, 8 August 2018) and effective from 1 April 2019 — inserted Regulation 3(2A) to plug the gap. Regulation 3(2A) directs that the board of directors shall make a policy for determination of “legitimate purposes” as part of the company’s Code of Fair Disclosure and Conduct.
The Explanation to Regulation 3(2A) supplies a non-exhaustive definition: “legitimate purpose” includes the sharing of UPSI in the ordinary course of business by an insider with partners, collaborators, lenders, customers, suppliers, merchant bankers, legal advisors, auditors, insolvency professionals or other advisors or consultants, provided such sharing has not been carried out to evade or circumvent the prohibitions of the Regulations. The anti-abuse proviso is the heart of the test: a label of “business purpose” will not save a sharing whose real object is to enable a trade.
Sitting alongside this is the operational discipline of the need-to-know principle imported from the definitions. UPSI is to be handled within an organisation strictly on a need-to-know basis — disclosed only to those whose roles require it, and only in furtherance of legitimate purposes, performance of duties or discharge of legal obligations. Together, “legitimate purposes” and “need-to-know” convert the abstract prohibition into a workable internal-controls standard.
The recipient becomes an insider: Regulation 3(2B)
A lawful sharing under the legitimate-purposes gateway does not set the recipient free. Regulation 3(2B), also introduced by the 2018 amendment, provides that any person in receipt of UPSI pursuant to a “legitimate purpose” under Regulation 3(2A) shall be considered an “insider” for the purposes of the Regulations, and due notice shall be given to such persons to maintain confidentiality of the UPSI in compliance with the Regulations.
The effect is elegant and severe. The auditor, banker or consultant who lawfully receives diligence material is thereby clothed with insider status and inherits the full suite of obligations — the bar on onward communication under Regulation 3(1), the trading restriction under Regulation 4, and exposure to the disclosure regime discussed in Disclosures: Initial and Continual. UPSI, once it leaves the company, drags its restrictions along with it. There is no “clean” recipient outside the perimeter; the perimeter expands to wherever the information travels.
The due-diligence and open-offer exceptions: 3(3) and 3(4)
Regulation 3(3) addresses the practical reality that genuine transactions — takeovers, strategic investments, fundraising — require the sharing of confidential information. It permits UPSI to be communicated, provided, or allowed access to for the purposes set out, in two situations: (i) where an open offer under the Takeover Regulations would be triggered and the board of directors of the listed company is of the informed opinion that sharing the information is in the best interests of the company; and (ii) in transactions not attracting an open offer, where the board forms an informed opinion that the sharing of such information (and not merely the proposed transaction) is in the best interests of the company, with the UPSI being disseminated at least two trading days prior to the proposed transaction being effected in the prescribed form.
The 2018 amendment sharpened the language of the second limb so that the board must opine on the wisdom of the sharing itself, not just the underlying deal — a subtle but important shift placing the act of disclosure under scrutiny. Regulation 3(4) then imposes a safeguard: where UPSI is shared under sub-regulation (3), the board shall require the parties to execute agreements binding them to confidentiality and non-disclosure, obliging them to keep the information confidential except for the permitted purpose and not to otherwise trade in the company’s securities while in possession of that UPSI. The exception is thus tightly fenced — permitted only on a reasoned board view and only behind contractual confidentiality.
The Structured Digital Database: Regulations 3(5) and 3(6)
If “need-to-know” is the policy, the Structured Digital Database (SDD) is its evidentiary backbone. Regulation 3(5), introduced by the 2018 amendment (with effect from 1 April 2019) and refined by the 2020 amendment, requires the board of directors or the head(s) of the organisation of every person required to handle UPSI to ensure that a structured digital database is maintained. The database must capture the nature of the UPSI, the names of persons who have shared the information, and the names of persons with whom it has been shared under Regulation 3, together with the Permanent Account Number or other legally authorised identifier. The database is required to be maintained with adequate internal controls and checks such as time stamping and audit trails, and — following later amendments — in a non-tamperable manner internally, without outsourcing.
Regulation 3(6) mandates preservation: the SDD shall be preserved for a period of not less than eight years after completion of the relevant transactions, and where SEBI initiates any investigation or enforcement proceedings, the relevant information shall be preserved until the completion of those proceedings. The SDD reverses the practical difficulty SEBI faces in tipping cases: instead of reconstructing who knew what, the regulator can demand a contemporaneous, time-stamped record of every authorised flow of UPSI. A gap or a backdated entry in the SDD is, in itself, powerful circumstantial evidence of an unauthorised leak.
The foundational dispute: Hindustan Lever Ltd v. SEBI
The first great Indian insider-trading controversy, Hindustan Lever Ltd v. SEBI, arose under the predecessor SEBI (Insider Trading) Regulations, 1992 but its reasoning continues to inform the meaning of UPSI — the very subject-matter that Regulation 3 forbids communicating. HLL purchased 8 lakh shares of Brooke Bond Lipton India Ltd (BBLIL) from the Unit Trust of India in March 1996, roughly two weeks before the public announcement of a proposed HLL–BBLIL merger. Both companies were under the common control of Unilever. SEBI’s order of 11 March 1998 held HLL to be an insider in possession of UPSI about the merger.
On appeal, the Appellate Authority (the appellate forum under the Ministry of Finance before the Securities Appellate Tribunal regime) accepted that HLL was an insider and that the merger information was price sensitive, yet held the charge could not stand because the impending merger was generally known — it had been the subject of extensive press coverage and market expectation — and therefore was not “unpublished” in the operative sense. The decision drew the enduring distinction between information formally “published by the company” and information “generally known” to the market, holding that the latter defeats the “unpublished” element. For Regulation 3, the lesson is direct: there can be no unlawful communication of UPSI if the information had already entered the public domain, because it had ceased to be UPSI. The evolution from the 1992 regime to the current one is traced in Introduction and Evolution from the 1992 Regulations.
Proving the leak: Balram Garg v. SEBI
The defining modern authority on how communication of UPSI must be proved is the Supreme Court’s decision in Balram Garg v. Securities and Exchange Board of India (decided 19 April 2022; reported as 2022 INSC 441). SEBI had found Balram Garg, the Managing Director of PC Jeweller Ltd, and certain relatives liable for trading on UPSI relating to a buy-back and its later withdrawal, inferring that the promoter must have tipped his family. The Securities Appellate Tribunal had largely affirmed, reasoning that the closeness of the relationships and the trading pattern made communication probable on a preponderance of probabilities.
The Supreme Court set aside both orders. It held that the communication of UPSI cannot be presumed merely from a familial or close relationship; the burden lies on SEBI to establish, through cogent materials — such as letters, e-mails, call records or witness testimony — that UPSI was actually communicated. Critically, the Court held that a trading pattern alone “cannot be the circumstantial evidence to prove the communication of the UPSI”, and it distinguished its earlier decision in SEBI v. Kishore R. Ajmera, (2016) 6 SCC 368, which had endorsed inferring facts from attending circumstances on a preponderance standard. Where the relatives were shown to be financially independent of, and even estranged from, the promoter, no presumption of communication could survive.
For aspirants, Balram Garg is the indispensable case on the evidentiary burden under Regulation 3(1)/(2): the offence is real but it must be proved as a fact of communication, not assembled out of proximity and suspicious timing. It is also a powerful argument for the Structured Digital Database — the contemporaneous record the SDD compels is precisely the kind of “cogent material” the Court demanded.
Immediate relatives and the architecture of inference
Balram Garg must be read against the definitional scaffolding. Under Regulation 2(1)(f), an “immediate relative” means a spouse of a person, and includes parent, sibling and child of such person or of the spouse, any of whom is either dependent financially on such person or consults such person in taking decisions relating to trading in securities. Under Regulation 2(1)(d), an immediate relative of a connected person is deemed a connected person unless the contrary is established.
These deeming provisions create a rebuttable presumption of connection — but, as the Supreme Court underlined, a presumption of connection is not a presumption of communication. A relative may be presumed connected and thus an insider, yet SEBI must still prove that UPSI in fact passed before a tipping charge under Regulation 3 can succeed. The financial-dependence-or-consultation test in 2(1)(f) is itself factual: where a relative is genuinely independent and estranged, even the connection presumption may be rebutted, as the PC Jeweller facts illustrated. The interplay of these definitions with the substantive prohibitions is developed further in Definitions: Insider, Connected Person and UPSI.
Motive, possession and the limits of strict liability
Although primarily a trading-side decision, the Supreme Court’s ruling in SEBI v. Abhijit Rajan (2022) bears on the communication regime because it clarifies what makes information genuinely “price sensitive” and the role of motive. Abhijit Rajan, Chairman of Gammon Infrastructure Projects Ltd, had sold shares after the board approved terminating certain project agreements but before public disclosure. The Court accepted the Tribunal’s exoneration, holding that the actual gain or loss is immaterial but that the motive to make an unfair gain is a relevant consideration, and that on the facts the termination of loss-making contracts was favourable, not adverse, information, sold under a compelling necessity to fund another acquisition.
The decision tempers any reading of the Regulations as imposing automatic liability the instant information moves or a trade occurs. Read with Balram Garg, the contemporary jurisprudence insists that SEBI prove the constituent facts — that the information was genuinely unpublished and price sensitive, and that it was actually communicated or used — rather than relying on status and timing alone. The trading-side consequences of this reasoning are explored in Trading When in Possession of UPSI.
Selective disclosure and the Regulation 30 interface
Regulation 3 does not operate in isolation from the broader disclosure regime. The proviso to Regulation 3(1) expressly preserves communications required under Regulation 30 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 — the provision compelling prompt disclosure of material events to the stock exchanges. The policy logic is that the cure for selectively held UPSI is prompt, even-handed public disclosure: the moment material information is disclosed to the exchanges, it ceases to be UPSI and the Regulation 3 bar falls away.
The enforcement consequence of failing to disclose promptly was illustrated when SEBI penalised Reliance Industries Ltd for not promptly disclosing UPSI relating to its potential investment deal with Facebook in Jio Platforms — a penalty upheld on appeal — treating the delay as a violation of the disclosure-of-UPSI obligations under the PIT framework read with Principle 4 of the Code of Fair Disclosure. The case underscores that the obverse of restricting communication is mandating timely public dissemination; a company cannot sit on UPSI selectively. The mechanics of the disclosure obligations are set out in Disclosures: Initial and Continual.
Consequences of breaching Regulation 3
A contravention of Regulation 3 attracts the enforcement and penal machinery of the SEBI Act, 1992. Communication or procurement of UPSI is an insider-trading violation exposing the contravener to penalty under Section 15G of the SEBI Act — which prescribes a penalty for insider trading — and to remedial directions under Section 11 and Section 11B, including disgorgement of wrongful gains, restraint from the securities market and debarment. Prosecution under Section 24 is also available for serious contraventions.
Because Regulation 3 is trade-independent, a tipper can be sanctioned even though he personally gained nothing and traded nothing — the breach of confidentiality is the actionable wrong. Equally, a tippee who procured UPSI is liable under Regulation 3(2) regardless of whether the eventual trade fell to him or to a third party. The takeaway for examinees is to keep the three offences analytically distinct: communicating UPSI (3(1)), procuring UPSI (3(2)), and trading while in possession of UPSI (Regulation 4) are separate contraventions, each independently punishable, and a single fact-pattern can engage all three at once.
Exam synthesis: how to structure an answer on Regulation 3
A high-scoring answer on the restrictions on communication of UPSI should move in a disciplined sequence. Open by isolating the offence: communication under Regulation 3(1) and procurement under Regulation 3(2) are free-standing wrongs that do not require a trade, distinct from the Regulation 4 trading bar. State the prohibition and its proviso (open offers under the Takeover Regulations; disclosures under Regulation 30 of LODR). Then deploy the gateway: communication or procurement is permitted only “in furtherance of legitimate purposes, performance of duties or discharge of legal obligations”, with “legitimate purposes” defined by the Explanation to Regulation 3(2A) subject to the anti-circumvention proviso, and disciplined by the need-to-know principle.
Next, show the institutional plumbing — deemed-insider status for recipients under Regulation 3(2B), the board-opinion-and-confidentiality conditions for diligence sharing under Regulations 3(3) and 3(4), and the Structured Digital Database with its eight-year preservation rule under Regulations 3(5) and 3(6). Close with the case law spine: Hindustan Lever Ltd v. SEBI on what makes information “unpublished”; Balram Garg v. SEBI (2022 INSC 441) on the burden to prove actual communication with cogent material and the rejection of trading-pattern inference, distinguishing SEBI v. Kishore R. Ajmera, (2016) 6 SCC 368; and SEBI v. Abhijit Rajan (2022) on the relevance of motive. For the wider map of the regime, anchor your answer to the subject hub at SEBI Insider Trading Regulations notes.
Frequently asked questions
Can a person be penalised for communicating UPSI even if they never traded?
Yes. Regulation 3(1) of the SEBI (PIT) Regulations, 2015 makes the communication of UPSI a free-standing offence independent of any trade. A tipper who passes UPSI in breach of the need-to-know and legitimate-purpose limits is liable even if he personally gained nothing and dealt in no securities. Trading while in possession of UPSI is separately prohibited under Regulation 4.
What does "legitimate purposes" mean under Regulation 3?
The Explanation to Regulation 3(2A), inserted by the 2018 amendment effective 1 April 2019, defines it non-exhaustively as sharing UPSI in the ordinary course of business with partners, collaborators, lenders, customers, suppliers, merchant bankers, legal advisors, auditors, insolvency professionals or other advisors/consultants, provided the sharing is not to evade or circumvent the Regulations. The board must also frame a legitimate-purposes policy in its Code of Fair Disclosure and Conduct.
How did Balram Garg v. SEBI change the proof standard for tipping?
In Balram Garg v. SEBI (2022 INSC 441), the Supreme Court held that communication of UPSI cannot be presumed from a close or familial relationship; SEBI must prove actual communication through cogent material such as letters, e-mails, call records or witnesses. A trading pattern alone cannot be circumstantial evidence of communication, and the Court distinguished SEBI v. Kishore R. Ajmera, (2016) 6 SCC 368.
Does a person who lawfully receives UPSI escape the Regulations?
No. Under Regulation 3(2B), anyone who receives UPSI pursuant to a legitimate purpose is deemed an "insider" and must be given notice to maintain confidentiality. The recipient inherits the full obligations — the bar on onward communication under Regulation 3(1) and the trading restriction under Regulation 4. UPSI carries its restrictions wherever it travels.
What is the Structured Digital Database and how long must it be kept?
Introduced by the 2018 amendment (effective 1 April 2019), Regulation 3(5) requires the board or organisation head to maintain a structured digital database recording the nature of UPSI and the persons who shared and received it, with PAN, time stamping and audit trails, in a non-tamperable manner. Regulation 3(6) requires it to be preserved for at least eight years after the relevant transactions, and longer if SEBI initiates proceedings.
When does information stop being UPSI so that sharing it is lawful?
Once the information is generally available or has been disclosed to the public, it ceases to be UPSI and Regulation 3 no longer bars its communication. In Hindustan Lever Ltd v. SEBI, the Appellate Authority held that an impending merger which was widely reported and generally known to the market was not "unpublished", distinguishing information "generally known" from information formally "published by the company".