Regulation 4 is the operative heart of the SEBI (Prohibition of Insider Trading) Regulations, 2015. It states a deceptively short command — no insider shall trade in listed (or to-be-listed) securities when in possession of unpublished price sensitive information (UPSI). That single preposition, “when in possession of” rather than the older “on the basis of,” shifts the entire architecture of liability: SEBI need only show that the insider held UPSI while trading, and a statutory NOTE then presumes the trade was motivated by that information. The burden flips to the insider to bring the trade within one of six carefully drafted provisos. This chapter unpacks the prohibition, the presumption, the proof-of-innocence provisos, the special onus on connected persons under Regulation 4(2), and the way the Supreme Court in SEBI v. Abhijit Rajan and Balram Garg v. SEBI has tempered SEBI's reach.
The core prohibition: Regulation 4(1)
Regulation 4(1) provides that “no insider shall trade in securities that are listed or proposed to be listed on a stock exchange when in possession of unpublished price sensitive information.” Every word is load-bearing. The actor must be an insider — a connected person, or any person in possession of or having access to UPSI — as defined in Regulation 2(1)(g). The subject-matter is securities that are listed or proposed to be listed, which sweeps in derivatives and pre-listing trades. The mischief is trading, defined in Regulation 2(1)(l) to include subscribing, buying, selling, dealing or agreeing to do any of these, so even a contract to deal is caught.
The decisive phrase is “when in possession of” UPSI. The 1992 Regulations had penalised dealing “on the basis of” UPSI, which invited endless disputes about causation — did the information actually drive the trade? The 2015 framework, born of the Justice N.K. Sodhi Committee Report (2013), consciously abandoned causation in favour of a possession standard. The drafting note to the Regulations explains that the words “in possession of or having access to” are intended to be a strict liability trigger, leaving the question of motive to the proviso and to the NOTE that follows. For the genesis of this shift, see our chapter on the evolution from the 1992 Regulations.
“In possession” versus “on the basis of”
The distinction is not academic. Under a “on the basis of” test, an insider could defend a trade by showing it was prompted by an entirely independent reason — a margin call, a pre-existing commitment, a portfolio rebalancing — even though he happened to hold UPSI. Under the “possession” test, that defence is unavailable as a matter of definition; it survives only if the insider can fit the facts into a proviso to Regulation 4(1). The possession standard therefore front-loads liability and converts the insider's innocent-explanation arguments into affirmative defences with a reversed burden.
The NOTE appended to Regulation 4(1) makes the presumption explicit: when a person who has traded in securities has been in possession of UPSI, his trades “would be presumed to have been motivated by the knowledge and awareness of such information in his possession.” Possession is thus both the actus reus and the springboard for a rebuttable presumption of wrongful motive. The reason the proviso exists — the NOTE continues — is to give a genuine and bona fide trader a route to demonstrate innocence. The drafters were candid that possession alone, without the proviso safety-valves, would be unfair to legitimate transactions. For how UPSI itself is identified, read the chapter on definitions of insider, connected person and UPSI.
The NOTE: a presumption of motivation
The NOTE to Regulation 4(1) is the analytical bridge between a strict possession rule and a fair adjudication. It records that the prohibition is intended to capture trading that exploits informational asymmetry, and that proof of possession plus a trade gives rise to a presumption that the trade was motivated by the information. Critically, the presumption is rebuttable — the proviso enumerates the circumstances in which the insider “may demonstrate that he was not in such possession of UPSI, or where the trade was carried out in accordance with the listed circumstances.”
This structure mirrors the criminal-law device of a reverse onus once a foundational fact (possession + trade) is shown. It is precisely the kind of provision the Supreme Court scrutinised in Balram Garg v. SEBI, where the Court insisted that SEBI must first establish the foundational facts — actual possession or communication of UPSI — on cogent material before any presumption can bite. A presumption cannot be built on a presumption; SEBI cannot assume communication of UPSI merely from a close relationship between the parties.
The proof-of-innocence provisos
The proviso to Regulation 4(1) lists circumstances in which an insider “may prove his innocence,” i.e. rebut the presumption. As amended, these are: (i) an off-market inter-se transfer between insiders who were in possession of the same UPSI, without being in breach of Regulation 3, where both parties made a conscious and informed trade decision; (ii) a transaction carried out through the block-deal window mechanism between persons in possession of the same UPSI, again without breach of Regulation 3 and on a conscious and informed basis; (iii) a transaction undertaken pursuant to a statutory or regulatory obligation to carry out a bona fide transaction; (iv) a transaction undertaken pursuant to the exercise of stock options where the exercise price was pre-determined in compliance with applicable regulations; (v) in the case of non-individual insiders, where the individuals who took the trading decision were not in possession of the UPSI and arrangements (information barriers / Chinese walls) existed to ensure the information was not communicated, and the decision was not influenced by the UPSI; and (vi) where the trades were pursuant to a trading plan set up in accordance with Regulation 5.
Each proviso is a complete affirmative defence — the insider must establish its ingredients, not merely assert good faith. The provisos are deliberately narrow: a trade that does not fit one of them cannot escape liability simply because the insider had a plausible alternative reason for trading.
Proviso (i): off-market inter-se transfers
Proviso (i) is the most litigated and most amended of the six. As originally notified, it protected only an off-market inter-se transfer between two promoters in possession of the same UPSI. The logic is symmetry of information: if both sides know the same non-public fact, neither is exploiting the other, and there is no informational asymmetry to police. The 2015 drafters confined the relief to promoters, but the SEBI (Prohibition of Insider Trading) (Amendment) Regulations, 2018 — notified on 31 December 2018 and effective from 1 April 2019 — substituted the word “promoters” with “insiders.” The amendment implemented a recommendation of the Committee on Fair Market Conduct (chaired by T.K. Viswanathan) that parity-of-information trades should be permitted among all insiders, not just promoters.
The widened proviso (i) now covers any off-market inter-se transfer between insiders — connected persons or persons in possession of the same UPSI — provided neither is in breach of Regulation 3 (which governs communication or procurement of UPSI) and both made a conscious and informed decision. The condition that there be “no breach of Regulation 3” is essential: the defence is unavailable if one party illegitimately tipped the other.
Proviso (ii): the block-deal window
Proviso (ii) extends the parity-of-information rationale to transactions executed through the block-deal window mechanism specified by SEBI. The conditions mirror proviso (i): both counterparties must be in possession of the same UPSI, there must be no breach of Regulation 3, and both must have taken a conscious and informed trade decision. The block-deal route differs from the off-market transfer in that it is routed through the stock exchange's special window, giving SEBI a transparent audit trail of price and quantity.
The common thread across provisos (i) and (ii) is that the regulator is unconcerned with trades where both sides share the identical informational position — there is no victim and no abuse. The danger the proviso guards against is a counterparty who is not equally informed; hence the repeated insistence on “the same” UPSI and absence of any Regulation 3 violation.
Provisos (iii) and (iv): statutory obligations and ESOPs
Proviso (iii) shields a transaction undertaken pursuant to a statutory or regulatory obligation to carry out a bona fide transaction. The classic illustration is a mandatory open offer under the SEBI Takeover Regulations, or a transfer compelled by a court or statutory authority — the insider has no volition to time the trade around the UPSI, so the presumption of exploitative motive is rebutted.
Proviso (iv) protects the exercise of stock options where the exercise price was pre-determined in compliance with applicable regulations. This defence was expressly incorporated by the 2018 amendment effective 1 April 2019. The rationale is that the price at which an ESOP is exercised is fixed at the time of grant, long before any UPSI arises; the employee cannot game the strike price using inside knowledge. Note, however, that the sale of shares acquired on ESOP exercise enjoys no such automatic protection and remains subject to Regulation 4(1) and to trading-window restrictions under Schedule B.
Proviso (v): non-individual insiders and Chinese walls
Proviso (v) addresses the practical reality that an entity — a fund, bank or company — may “possess” UPSI in one department while a wholly separate desk executes trades. The defence applies where the individuals who took the trading decision were not in possession of the UPSI, and where the entity had put in place and demonstrably enforced arrangements to ensure the information was not communicated to the decision-makers — the so-called information barriers or Chinese walls. The insider must show both the absence of possession in the relevant minds and the existence and observance of the firewalls; a paper policy that was not actually followed will not suffice.
This proviso dovetails with the institutional-trading mechanisms in Schedule C and the code of conduct and fair disclosure obligations. SEBI's adjudication practice treats the adequacy of the firewall as a question of fact, requiring contemporaneous evidence — access logs, restricted-list controls and need-to-know documentation — rather than after-the-fact assertions.
Proviso (vi): trades under a trading plan
Proviso (vi) protects trades carried out pursuant to a trading plan set up in accordance with Regulation 5. The trading-plan mechanism is the 2015 Regulations' bespoke answer to the perpetual-insider problem: a person such as a CEO or CFO who is almost always in possession of some UPSI would otherwise be permanently frozen out of the market. By committing in advance — through an irrevocable, pre-cleared plan disclosed to the stock exchanges — to trade at future dates or on formulae fixed before any UPSI arises, the insider severs the link between current possession and the trade.
Regulation 5 surrounds the plan with safeguards: a minimum cool-off before commencement, a black-out window around results, a minimum coverage period, and irrevocability so the insider cannot abandon the plan if the market moves against him. Once those conditions are met, Regulation 5(3) provides that pre-clearance of trades and trading-window restrictions do not apply to plan trades, and proviso (vi) supplies the substantive defence under Regulation 4(1).
Regulation 4(2): the special onus on connected persons
Regulation 4(2) allocates the burden of proof in a manner that bites hardest on insiders closest to the source. It provides that in the case of connected persons, the onus of establishing that they were not in possession of UPSI shall be on such connected persons; and in the case of others, the onus of establishing possession of UPSI shall be on SEBI. In other words, for a connected person the law presumes possession and requires him to disprove it; for an unconnected person, SEBI carries the burden of proving possession.
This bifurcated onus is the statutory partner of the NOTE's presumption of motivation. Together they create a two-stage reversal for connected persons: first they must show they did not possess UPSI (Reg 4(2)), and if possession is established, they must then bring the trade within a proviso to rebut the presumption of motive (the NOTE to Reg 4(1)). The provision must, however, be read with the Supreme Court's caution in Balram Garg that the reversal of onus presupposes that SEBI has first laid a foundation of cogent material; the regulator cannot invoke Regulation 4(2) on conjecture about familial closeness alone.
Profit motive: SEBI v. Abhijit Rajan
The most consequential gloss on Regulation 4 came in Securities and Exchange Board of India v. Abhijit Rajan, Civil Appeal No. 563 of 2020, decided by the Supreme Court on 19 September 2022. Abhijit Rajan was Chairman and Managing Director of Gammon Infrastructure Projects Ltd (GIPL). GIPL's board approved the termination of two shareholders' agreements with Simplex Infrastructure relating to NHAI road-project SPVs; while that information was unpublished, Rajan sold a large block of GIPL shares, and the termination was disclosed shortly thereafter.
Although the case arose under Regulation 3 of the 1992 Regulations (“on the basis of”), the Court's reasoning reverberates through the 2015 “possession” regime. The Supreme Court held that the actual gain or loss is immaterial, but the motive to make a gain — the intention to exploit the information — is essential to a charge of insider trading. On the facts, the termination of the agreements was prejudicial to GIPL and would have depressed its price, yet Rajan sold before the news broke; his sale was driven by an urgent need to fund a Corporate Debt Restructuring package for the parent company, not by any attempt to profit from the UPSI. SEBI's appeal was dismissed and the SAT's exoneration upheld. The decision is read as a reminder that the possession-based presumption is rebuttable and that the direction and rationale of the trade remain relevant.
Communication and burden: Balram Garg v. SEBI
Balram Garg v. Securities and Exchange Board of India, Civil Appeal No. 7590 of 2021, decided on 19 April 2022 by Justices Vineet Saran and J.K. Maheshwari, is the leading authority on the evidentiary burden in insider-trading proceedings. SEBI and the SAT had held that Balram Garg, the managing director of PC Jeweller Ltd, had communicated UPSI (relating to a buyback proposal that was later withdrawn) to relatives who traded ahead of the announcement, inferring communication from the closeness of the family relationship and the timing of trades.
The Supreme Court set aside the findings. It held that the relatives had ceased to be “immediate relatives” and were financially independent, so the deeming fiction of connection did not apply; and that SEBI could not establish communication of UPSI by mere assumption drawn from relationship and proximity. Foundational facts must be proved by cogent material before any presumption operates — a presumption cannot rest on another presumption. The Court thereby curtailed SEBI's reliance on circumstantial inference and reaffirmed that, while the standard of proof is preponderance of probabilities, that standard still requires a positive evidentiary foundation. Balram Garg is therefore the principal check on the otherwise expansive Regulation 4(2) onus and the NOTE presumption.
What counts as possession: the Factorial order
Whether an insider was “in possession” at all is itself a contested question, illustrated by Factorial Master Fund v. SEBI before the Securities Appellate Tribunal (order dated 8 May 2015). SEBI alleged that Factorial, a Cayman Islands hedge fund, had shorted L&T Finance Holdings shares in the derivatives segment while in possession of UPSI about the floor price of L&T Finance's offer-for-sale. SAT set aside SEBI's order, reasoning that the OFS floor price could not have been fixed in advance — it had to be determined with reference to the prevailing price near the close of the prior trading day — so SEBI's premise that Factorial possessed advance knowledge of the floor price was unsustainable.
The lesson is that the possession standard, strict as it is, still requires SEBI to prove that the specific information existed as UPSI and was actually in the trader's possession at the time of the trade. Speculation that a sophisticated trader “must have” known will not do. This dovetails with the Balram Garg insistence on a cogent evidentiary foundation and with the definitional question of what information is “generally available” versus unpublished and price-sensitive.
Regulation 4 in the wider scheme
Regulation 4 does not operate in isolation. It is the trading limb; Regulation 3 is the communication limb, prohibiting an insider from communicating, providing or allowing access to UPSI, and prohibiting any person from procuring it, except for legitimate purposes. Several provisos to Regulation 4(1) are expressly conditioned on there being “no breach of Regulation 3,” tying the two together — a trade between equally informed insiders is protected only if the information was not illegitimately passed. The detail of that limb is covered in the chapter on communication or procurement of UPSI.
Regulation 4 also interlocks with the disclosure regime. The defence in proviso (i) for off-market inter-se transfers is accompanied by a reporting requirement, and trading plans under proviso (vi) must be disclosed to the stock exchanges. These feed into the broader framework explained in the chapter on initial and continual disclosures. For the full map of the Regulations, see the SEBI PIT notes hub.
Exam takeaways
For judiciary and CLAT-PG purposes, fix the following in memory. First, the 2015 standard is possession, not the 1992 “on the basis of” standard; this is the single most tested distinction. Second, the NOTE to Regulation 4(1) creates a rebuttable presumption that a trade made while in possession of UPSI was motivated by it. Third, there are six provisos serving as affirmative defences — off-market inter-se transfer, block-deal window, statutory obligation, ESOP exercise, non-individual Chinese-wall situations, and trading plans — and proviso (i) was widened from “promoters” to “insiders” with effect from 1 April 2019.
Fourth, Regulation 4(2) reverses the onus onto connected persons to disprove possession, while SEBI bears the onus for others. Fifth, the controlling Supreme Court authorities are SEBI v. Abhijit Rajan (profit motive is essential; actual gain immaterial) and Balram Garg v. SEBI (SEBI must prove foundational facts and communication on cogent material; no presumption upon presumption). Be ready to apply these to a problem question where an insider trades during a closed window and pleads a proviso.
Frequently asked questions
What does “trading when in possession of UPSI” mean under Regulation 4?
It means an insider executes a trade in listed or to-be-listed securities at a time when he holds unpublished price sensitive information. Regulation 4(1) prohibits this outright; SEBI need not prove the information caused the trade, only that the insider possessed UPSI while trading. The NOTE then presumes the trade was motivated by that information.
How is the 2015 “possession” standard different from the 1992 “on the basis of” test?
The 1992 Regulations penalised dealing “on the basis of” UPSI, requiring SEBI to prove a causal link between the information and the trade. The 2015 Regulations penalise trading merely “when in possession of” UPSI, removing the causation enquiry and shifting innocent explanations into the affirmative provisos. This makes liability easier to establish.
What are the proof-of-innocence provisos to Regulation 4(1)?
There are six: off-market inter-se transfers between insiders with the same UPSI; block-deal-window transactions between equally informed parties; transactions under a statutory or regulatory obligation; ESOP exercises at a pre-determined price; non-individual insiders protected by genuine Chinese walls; and trades under a Regulation 5 trading plan. Each is an affirmative defence the insider must establish.
Did the proviso for off-market inter-se transfers always cover all insiders?
No. As originally notified in 2015, proviso (i) protected only off-market inter-se transfers between two promoters with the same UPSI. The SEBI (PIT) (Amendment) Regulations, 2018, effective 1 April 2019, substituted “promoters” with “insiders,” widening the defence to all insiders sharing identical UPSI, on the recommendation of the T.K. Viswanathan Committee.
Who bears the burden of proof under Regulation 4(2)?
For connected persons, the onus is on them to establish that they were not in possession of UPSI; the law presumes possession. For others, the onus is on SEBI to prove possession. The Supreme Court in Balram Garg v. SEBI clarified that even this reversed onus presupposes SEBI first laying a cogent factual foundation — it cannot be invoked on mere conjecture.
Is profit motive necessary to establish insider trading?
Following SEBI v. Abhijit Rajan (Supreme Court, 19 September 2022), the actual gain or loss is immaterial but the motive to make an unfair gain is essential. The Court held the direction and rationale of the trade are relevant, so the possession-based presumption of motive remains rebuttable where the insider shows a genuine, non-exploitative reason for trading.