Securities laws: SEBI ICDR, SAST and insider trading regulations

Company Secretaryship (CS (ICSI)) · Securities law and governance · free study notes for exams, placements and interviews

In short

Three SEBI regulations govern the three big events in a listed company's share capital: the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR) control how securities are issued to the public, institutions or a select group; the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (SAST) control changes in control and large acquisitions; and the SEBI (Prohibition of Insider Trading) Regulations, 2015 (PIT) prohibit dealing on unpublished price sensitive information. All three flow from the SEBI Act, 1992, the Companies Act, 2013 and the SCRA/SCRR, 1957, and a Company Secretary signs off on compliance under every one of them. This is core CS Professional (Securities Laws and Capital Markets, Secretarial Audit, Drafting) material and is examined in every merchant-banking, compliance, legal and investment-banking interview. In practice a CS drafts the DRHP sections, the open-offer timetable, the code of conduct under PIT and the structured digital database.

Explained

Architecture and scope

ICDR 2018 applies to: IPO and FPO on the main board, SME IPOs (Chapter IX), rights issues, preferential allotment, qualified institutions placement (QIP), bonus issues, issue of Indian Depository Receipts, convertibles and the Social Stock Exchange.
A merchant banker (lead manager) is mandatory for public issues; SEBI issues observations on the draft offer document (DRHP) - SEBI does not approve the issue or vet the price, it only checks adequacy of disclosure. Pricing is free (Companies Act, 2013 s.23 read with ICDR).
SAST 2011 is a shareholder-protection code: when control or a substantial stake changes hands, public shareholders get an exit at the same price through a mandatory open offer.
PIT 2015 rests on the asymmetry of information: an insider must not trade, or pass on information, while in possession of UPSI. It covers listed securities and, since the November 2022 amendment, units of mutual funds (Chapter IIA).
Non-compliance is met with penalties under SEBI Act ss.15A-15HB, directions under s.11B, prosecution under s.24, plus settlement/disgorgement.

ICDR: eligibility, promoters' contribution and lock-in

Profitability route (Reg 6(1)): net tangible assets of at least ₹3 crore in each of the three preceding full years (not more than 50% in monetary assets unless committed for the objects of the issue); average operating profit of at least ₹15 crore in any three of the preceding five years; net worth of at least ₹1 crore in each of the three preceding years; if the name was changed in the last year, at least 50% of revenue from the new activity.
Alternative route (Reg 6(2)): an issuer failing the above may still list if the issue is made through book building with at least 75% allotted to QIBs (full refund if not achieved).
Minimum promoters' contribution (MPC): 20% of the post-issue capital, locked in for 18 months (reduced from three years in 2021); promoter holding in excess of MPC is locked in for 6 months. Financial institutions, SEBI-registered AIFs/FVCIs can contribute towards MPC up to prescribed limits; a professionally managed company with no identifiable promoter is exempt.
Minimum public offer (SCRR Rule 19(2)(b)): 25% of post-issue capital at offer price if that capital is up to ₹1,600 crore; ₹400 crore worth if between ₹1,600 crore and ₹4,000 crore; 10% if above ₹4,000 crore - with 25% public shareholding to be reached within the time allowed under Rule 19A.
Anchor investors: up to 60% of the QIB portion, one-third reserved for mutual funds; anchor lock-in is 50% of allotted shares for 90 days and the rest for 30 days.
Other issue conditions: price band cap not more than 120% of the floor; general corporate purposes capped at 25% of the fresh issue, and GCP plus objects for unidentified acquisitions together capped at 35%; a monitoring agency (a SEBI-registered credit rating agency) is mandatory where the fresh issue exceeds ₹100 crore; minimum subscription 90% of the fresh issue; a pre-IPO shareholder holding more than 20% may offer for sale not more than 50% of its holding, and one holding less than 20% not more than 10% (selling-shareholder caps added in 2022). The minimum application value under ICDR must fall within a band of ₹10,000-₹15,000 per application.
SME platform (Chapter IX, tightened in 2025): operating profit of at least ₹1 crore in two of the three preceding financial years, OFS capped at 20% of issue size, selling shareholders restricted to 50% of their holding, phased release of the locked-in excess promoter holding, and a tighter cap on GCP.

ICDR: allocation, further issues and rights issues

Book-built issue under Reg 6(1): QIBs not more than 50% (5% of the net QIB portion to mutual funds), non-institutional investors not less than 15% (one-third for applications of ₹2-10 lakh, two-thirds above ₹10 lakh), retail individual investors not less than 35% (application value up to ₹2 lakh).
Book-built issue under Reg 6(2): QIBs not less than 75%, NII not more than 15%, retail not more than 10%. In a fixed-price issue, retail gets at least 50%.
QIP (Chapter VI): only to QIBs, by a company whose equity is listed and in compliance with minimum public shareholding; floor price = average of the weekly high and low of the closing prices of the related shares during the two weeks preceding the relevant date, with a discount of up to 5% permitted; at least 10% to mutual funds; securities not transferable for one year except on a recognised stock exchange; minimum gap of two weeks between placements; aggregate in a financial year capped at five times net worth.
Preferential issue (Chapter V): requires a special resolution; for frequently traded shares the price is the higher of the 90-trading-day VWAP and the 10-trading-day VWAP preceding the relevant date (reduced from 26 weeks/2 weeks in 2022); infrequently traded shares need a registered valuer's report; lock-in of 18 months for promoter/promoter-group allottees and 6 months for others; allottees must have a PAN and no depository demat freeze; a promoter or promoter-group allottee that has sold or transferred any equity share of the issuer during the ninety trading days preceding the relevant date is ineligible.
Rights issue: the 2025 reform did away with filing the draft letter of offer with SEBI altogether and compressed the timetable (completion in about 23 working days from board approval), made the merchant banker optional and permitted allotment to specific identified investors. Rights entitlements (REs) are credited in demat and are tradable on the exchange.
Bonus issue: out of free reserves, securities premium or capital redemption reserve built out of profits; not out of revaluation reserves; no bonus in lieu of dividend; no default on interest/principal of debt securities or on statutory dues of employees.

SAST 2011: triggers, exemptions and the open offer

Reg 3(1) - substantial acquisition: an acquirer, with persons acting in concert (PAC), acquiring shares or voting rights entitling 25% or more must make an open offer for a minimum 26% of the target's voting capital.
Reg 3(2) - creeping acquisition: a holder of 25% or more but below the maximum permissible non-public shareholding who acquires more than 5% in a financial year triggers an offer; the 5% is computed on a gross basis (sales cannot be netted off).
Reg 4 - control: acquisition of control triggers an open offer irrespective of the number of shares; control means the right to appoint a majority of directors or to control management or policy decisions.
Reg 5 - indirect acquisition: acquiring an entity that in turn holds the target. It is treated as a direct acquisition if the target's proportionate net asset value, sale consideration or market capitalisation is more than 80% of the corresponding consolidated figure of the entity acquired.
Reg 6 - voluntary open offer: minimum 10%, available to a holder of 25% or more who has not acquired any share in the preceding 52 weeks; no further acquisition for six months after completion except through another voluntary offer.
Offer price (Reg 8), frequently traded shares - the highest of: the negotiated price; the volume-weighted average price of shares acquired by the acquirer/PAC in the 52 weeks before the public announcement (PA); the highest price paid by them in the 26 weeks before the PA; and the 60-trading-day VWAP of the target before the PA. For infrequently traded shares the last parameter is replaced by valuation (book value, comparable multiples, earning capacity). Indirect acquisitions add the per-share value of other non-compete/other payments; the whole of any non-compete fee or similar payment is included in the offer price - the 25% exclusion allowed under the 1997 Regulations is gone.
Timetable (Reg 13-18, 22): PA on the date of the agreement/trigger; detailed public statement within 5 working days in newspapers; draft letter of offer to SEBI within 5 working days of the DPS with fees; letter of offer to shareholders within 7 working days of SEBI comments; the tendering period starts within 12 working days of receipt of SEBI's comments and stays open 10 working days; payment within 10 working days of closure; escrow of 25% of the first ₹500 crore of consideration plus 10% of the balance, created before the DPS; and under Reg 22(2) the acquirer may complete the triggering acquisition after 21 working days from the DPS if 100% of the consideration is in escrow.
Exemptions (Reg 10): inter-se transfer among qualifying persons (immediate relatives, persons named as promoters for at least three years, a holding company and its subsidiaries), increase from a buy-back, a scheme of arrangement sanctioned by a court/NCLT, acquisition under SARFAESI, and a resolution plan approved under s.31 of the IBC, 2016. Most exemptions require a report to SEBI within 21 working days; Reg 11 allows a case-specific SEBI exemption.
Disclosures: Reg 29(1) - crossing 5% of shares/voting rights, to the target and the exchanges within 2 working days; Reg 29(2) - a 5%+ holder on every change of 2% or more; Reg 31 - promoter encumbrance within 7 working days, with reasons where encumbrance exceeds 20% of total share capital or 50% of promoter holding. The annual disclosure under Reg 30 was omitted with effect from 1 April 2022 (the data is already in LODR shareholding patterns).
Post-offer: public shareholding must not fall below the minimum; if it does, it must be restored within 12 months (Reg 7(4)) and no voluntary delisting for 12 months (Reg 7(5)). An acquirer may combine the open offer with a delisting attempt under the SEBI (Delisting of Equity Shares) Regulations, 2021. A competing offer may be made within 15 working days of the DPS (Reg 20).

PIT 2015: UPSI, insiders and prohibitions

UPSI (Reg 2(1)(n)): information relating to a company or its securities, directly or indirectly, not generally available, which on becoming generally available is likely to materially affect the price. The illustrative list was expanded by the 2025 amendment to around seventeen items - financial results, dividend, change in capital structure, mergers/demergers/acquisitions/delisting, change of KMP (other than due to superannuation or end of term) or of auditor, fund raising, credit rating changes, one-time bank settlement, resolution plans and insolvency proceedings, forensic audit, award or termination of material orders/contracts, outcome of litigation, and fraud or default.
Generally available information: information accessible to the public on a non-discriminatory basis - typically an exchange filing.
Insider (Reg 2(1)(g)): a connected person, or any person in possession of or having access to UPSI - possession alone is enough, no connection needed. A connected person is anyone associated with the company in any capacity in the six months prior, allowing access to UPSI, plus the deemed list (immediate relatives, officials of intermediaries, bankers, public servants, and firms/HUFs in which a connected person or their relative is a partner/member).
Reg 3 - communication: no insider shall communicate or procure UPSI except for legitimate purposes, performance of duty or discharge of legal obligations. A recipient of UPSI for a legitimate purpose becomes an insider and must be told so and brought under confidentiality.
Reg 3(5)-(6) - structured digital database (SDD): the board of directors or head of the organisation must maintain a non-tamperable, audit-trailed database of the nature of UPSI and the names and PANs (or other identifiers) of persons who shared or received it, preserved for eight years (longer if under investigation). SDD gaps are among SEBI's most frequent adjudication findings.
Reg 4 - trading: an insider in possession of UPSI shall not trade. Defences: an off-market inter-se transfer between insiders who both possess the same UPSI; a block-deal window transaction between such insiders; trades carried out under an approved trading plan; and, for a non-individual insider, proof that the individuals taking the decision had no UPSI and that effective Chinese walls existed.
Reg 5 - trading plan: disclosed to and approved by the compliance officer, publicly disclosed, and irrevocable once approved. The 2024 amendment (in force from 2025) cut the cool-off period from six months to 120 calendar days, dropped the minimum 12-month plan duration and allowed the plan to specify price limits within which trades must occur, with non-implementation permitted only on the stated grounds.
Reg 6-9 - code and disclosures: the board must adopt a Code of Fair Disclosure and Conduct (Schedule A) and a Code of Conduct (Schedule B for listed companies, Schedule C for intermediaries and fiduciaries), appoint a compliance officer, and maintain a list of designated persons. Initial disclosures by promoters, promoter group members, directors and KMPs within 30 days; continual disclosure to the company within 2 trading days where the value of trades exceeds ₹10 lakh in a calendar quarter, and by the company to the exchange within 2 trading days.
Trading window and controls: the window is closed from the end of every quarter until 48 hours after the results are declared; pre-clearance of trades above the limit set in the code, with execution within 7 trading days; a six-month contra-trade restriction; and, for designated persons' trades above the threshold, automated restriction of PAN-based trading by the depositories.
Enforcement: penalty under SEBI Act s.15G - not less than ₹10 lakh, extending to ₹25 crore or three times the profit made, whichever is higher; s.15A(b) for disclosure default (₹1 lakh a day up to ₹1 crore); s.15H for takeover default on the same scale as s.15G; s.24 provides imprisonment up to 10 years and/or fine up to ₹25 crore. The informant mechanism (Reg 7A-7D) pays up to 10% of monetary sanctions recovered, capped at ₹10 crore.

Comparing the three codes

	ICDR 2018	SAST 2011	PIT 2015
Protects against	Mis-pricing and poor disclosure in issues	Loss of exit on change of control	Trading on information advantage
Trigger	Decision to issue securities	25% stake, 5% creeping, or control	Possession of UPSI
Core obligation	Offer document, eligibility, lock-in	Open offer for 26% at the regulated price	Abstain or disclose; code, SDD
Key officer	Lead manager and compliance officer	Manager to the open offer	Compliance officer
Penalty section	15HB / 11B directions	SEBI Act s.15H	SEBI Act s.15G

Key points

ICDR Reg 6(1) - profitability route: ₹3 crore net tangible assets, ₹15 crore average operating profit, ₹1 crore net worth.
ICDR Reg 6(2) - the QIB route: at least 75% to QIBs when the profitability tests fail.
MPC - 20% of post-issue capital from promoters, locked in 18 months; excess holding 6 months.
Rule 19(2)(b) SCRR - minimum public offer 25% / ₹400 crore / 10% by size of post-issue capital at offer price.
Book-building split - QIB ≤50%, NII ≥15%, retail ≥35% in a Reg 6(1) issue; reversed in a Reg 6(2) issue.
Monitoring agency - a credit rating agency, compulsory where the fresh issue exceeds ₹100 crore; GCP capped at 25%.
QIP floor - two-week average of weekly high/low closing prices, up to 5% discount, one-year transfer restriction.
Preferential pricing - higher of 90-trading-day and 10-trading-day VWAP; lock-in 18 months (promoters) / 6 months.
SAST Reg 3(1) - 25% triggers an open offer for a minimum of 26%.
SAST Reg 3(2) - more than 5% acquired in a financial year by a 25%+ holder, computed gross.
SAST Reg 4 - acquisition of control triggers an offer regardless of shares acquired.
Offer price - highest of negotiated price, 52-week VWAP of acquirer's purchases, highest price in 26 weeks, and 60-trading-day VWAP.
Escrow - 25% of the first ₹500 crore of consideration plus 10% of the balance, deposited before the DPS.
Reg 29 disclosure - 5% crossing and every 2% change thereafter, within 2 working days.
UPSI - not generally available plus likely to materially affect price; possession makes an insider.
SDD - non-tamperable database of UPSI sharers and recipients with PAN, kept eight years.
Trading window - shut from quarter end to 48 hours after results; contra-trade barred for six months.
Section 15G - ₹10 lakh minimum, up to ₹25 crore or three times the profit, whichever is higher.

Formulas and examples

Minimum open offer size = 26% × total voting share capital of the target (as of the tenth working day after the offer closes)
Open offer price = max (negotiated price, 52-week VWAP of acquirer's acquisitions, highest price paid in 26 weeks, 60-trading-day VWAP of the target)
Escrow = 25% × (consideration up to ₹500 crore) + 10% × (consideration above ₹500 crore); consideration = offer size × offer price, in ₹
Minimum promoters' contribution = 20% × post-issue paid-up equity capital (number of shares)
VWAP = Σ(price × quantity) / Σ(quantity), over the stated window of trading days
Preferential issue floor = max (90-trading-day VWAP, 10-trading-day VWAP) preceding the relevant date, ₹ per share
QIP floor = average of the weekly high and low of the closing prices of the two weeks before the relevant date; allotment price ≥ 0.95 × floor
Insider trading penalty = max (₹25 crore, 3 × profit made), subject to a minimum of ₹10 lakh

Example 1 - IPO structure under ICDR. A company has 6 crore equity shares of ₹10 pre-issue and makes a fresh issue of 2 crore shares at ₹175.

Post-issue shares = 8 crore; post-issue capital at offer price = 8 × 175 = ₹1,400 crore (≤ ₹1,600 crore), so Rule 19(2)(b) needs 25% public shareholding. Public holding = 2/8 = 25% - just satisfied.
MPC = 20% × 8 crore = 1.6 crore shares locked in for 18 months; the remaining 4.4 crore promoter shares locked in for 6 months.
Issue size = 2 crore × 175 = ₹350 crore → monitoring agency compulsory (> ₹100 crore); GCP ≤ 25% × 350 = ₹87.5 crore.
Allocation: QIB ≤ 1.00 crore shares, NII ≥ 0.30 crore, retail ≥ 0.70 crore. Anchor portion ≤ 60% × 1.00 crore = 0.60 crore shares, of which one-third to mutual funds.

Example 2 - SAST trigger, price and escrow. Target has 20 crore shares. Acquirer A holds 4 crore (20%) and buys 1.5 crore (7.5%) from the promoter at ₹310, reaching 27.5%.

27.5% > 25% → Reg 3(1) trigger; minimum offer = 26% × 20 crore = 5.2 crore shares.
Price parameters: negotiated ₹310; 52-week VWAP of A's purchases ₹290; highest price in 26 weeks ₹305; 60-trading-day VWAP ₹298 → offer price = ₹310.
Consideration = 5.2 crore × 310 = ₹1,612 crore. Escrow = 0.25 × 500 + 0.10 × 1,112 = 125 + 111.2 = ₹236.2 crore.
If fully accepted, A holds 27.5 + 26 = 53.5%; public shareholding 46.5%, above the 25% minimum, so no Reg 7(4) problem.

Example 3 - creeping acquisition on a gross basis. B holds 30% on 1 April. During the year B buys 3%, sells 2%, then buys 2.5%.

Closing holding = 30 + 3 − 2 + 2.5 = 33.5%, a net increase of only 3.5%.
But gross acquisition = 3 + 2.5 = 5.5% > 5% → Reg 3(2) is triggered. Netting is not allowed; this is a classic exam trap.

Example 4 - preferential allotment price. For a frequently traded share, the 90-trading-day VWAP is ₹182.40 and the 10-trading-day VWAP is ₹196.80.

Floor = max(182.40, 196.80) = ₹196.80. For 50 lakh shares the minimum consideration = 50,00,000 × 196.80 = ₹98.4 crore.
Promoter allottees' shares are locked in for 18 months from the date of trading approval.

Example 5 - QIP floor and insider penalty.

Closing prices in the two weeks before the relevant date: week 1 high ₹420, low ₹400; week 2 high ₹440, low ₹408. Floor = (420 + 400 + 440 + 408)/4 = 1,668/4 = ₹417. Maximum 5% discount → minimum allotment price = 0.95 × 417 = ₹396.15.
Separately, an insider avoids a loss/makes a profit of ₹4 crore by trading on unpublished results. Penalty = max(₹25 crore, 3 × ₹4 crore = ₹12 crore) = up to ₹25 crore, subject to the ₹10 lakh minimum, plus disgorgement of ₹4 crore with interest.

Where it is used

Merchant banking and investment banking (Kotak Mahindra Capital, ICICI Securities, Axis Capital, JM Financial): DRHP drafting, due diligence certificates, book building, anchor allocation, open-offer management.
Listed-company secretarial departments: code of conduct and SDD maintenance under PIT, trading-window closures around quarterly results, Reg 29/31 takeover filings, preferential and QIP paperwork, and the annual secretarial compliance report.
Practising Company Secretaries and law firms: SEBI representations, consent/settlement applications, Reg 11 exemption applications, takeover opinions, diligence reports on share transfers under SEBI (DP) norms.
Regulators and infrastructure: SEBI's Corporation Finance, CFID and Investigation departments; NSE/BSE listing and surveillance; depositories operating PAN-based trading restrictions.
Private equity, M&A and insolvency: structuring acquisitions to stay below 25%, inter-se transfer exemptions, and Reg 10(1) exemption for resolution plans approved under the IBC - as in the Essar Steel, Bhushan Steel and Ruchi Soya resolutions.
Known Indian illustrations: the Mindtree-L&T open offer (hostile acquisition), Sebi's actions in the Reliance/RIL-RPL and Infosys whistle-blower matters, and the many adjudication orders on missing structured digital databases.

Interview questions

Q: What are the three events that trigger a mandatory open offer? A: Acquiring 25% or more of voting rights (Reg 3(1)), acquiring more than 5% in a financial year while holding between 25% and the maximum permissible non-public shareholding (Reg 3(2)), and acquiring control (Reg 4), irrespective of the shares involved.
Q: Does SEBI approve an IPO price? A: No. Pricing is free; SEBI only issues observations on the adequacy of disclosure in the draft offer document and does not vouch for the price or the issuer's financial soundness.
Q: How is the minimum promoters' contribution computed and how long is it locked in? A: 20% of the post-issue paid-up equity capital, locked in for 18 months from allotment; promoter holding beyond that is locked in for six months.
Q: Is a person who overhears UPSI in a lift an insider? A: Yes - under Reg 2(1)(g)(ii) mere possession of or access to UPSI makes a person an insider, even with no connection to the company.
Q: What are the defences available to an insider who has traded while in possession of UPSI? A: An approved trading plan, an off-market or block-window inter-se transfer between insiders who both have the same UPSI, and, for a non-individual, proof that the decision-makers had no UPSI and effective Chinese walls existed.
Q: Why is the creeping-acquisition limit computed on a gross basis? A: Because Reg 3(2) targets the act of acquisition; allowing purchases to be netted against sales would let an acquirer build a large stake in instalments without giving public shareholders an exit.
Q: What is the difference between a voluntary and a mandatory open offer? A: A voluntary offer under Reg 6 is made by choice by a holder of 25% or more who has not acquired shares in the preceding 52 weeks, for a minimum of 10%; a mandatory offer follows a trigger and must be for at least 26%.
Q: How does the price of a preferential issue differ from that of a QIP? A: A preferential issue floor is the higher of the 90-trading-day and 10-trading-day VWAP with no discount; a QIP floor is the two-week average of weekly high and low closing prices, with up to a 5% discount allowed.
Q: What is a structured digital database and who must maintain it? A: A non-tamperable, audit-trailed record of the nature of UPSI and the names/PANs of those who shared and received it, maintained internally by the board or the head of the organisation and preserved for at least eight years.
Q: When is an indirect acquisition treated as a direct one? A: When the target's proportionate net asset value, sale consideration or market capitalisation exceeds 80% of the corresponding consolidated figure of the entity being acquired - the offer price and timing rules then follow the direct-acquisition route.
Q: An IPO applicant for ₹1.8 lakh - which category? A: Retail individual investor; the retail limit is an application value of up to ₹2 lakh, beyond which the applicant falls in the non-institutional category.
Q: Does an IBC resolution plan need an open offer? A: No - Reg 10(1) exempts an acquisition pursuant to a resolution plan approved under s.31 of the Insolvency and Bankruptcy Code, 2016, subject to the prescribed reporting.

Common mistakes

Quoting the open-offer trigger as 15% or the offer size as 20% - those were the 1997 Regulations, replaced in 2011.
Taking the offer price as simply the negotiated price, instead of the highest of the four Reg 8 parameters.
Netting sales against purchases while testing the 5% creeping-acquisition limit.
Computing minimum promoters' contribution on pre-issue capital, or still saying the lock-in is three years.
Treating "connected person" as a precondition for being an insider, and forgetting that possession alone suffices.
Confusing the preferential-issue pricing window (90/10 trading days) with the old 26-week/2-week formula, or with the QIP two-week average.
Calling the trading window closure a statutory ban on all trading - it applies to designated persons, and pre-clearance plus the six-month contra-trade rule operate separately.