Section 195 Companies Act: Prohibition on insider trading of securities

Section 195 of Companies Act: Corporate Governance & Statutory Compliance

Official Bare Act Text

Override / Mandate Mens Rea (Intent) Actus Reus (Conduct) Punishment Limitation Monetary

1. No person including any director or key managerial personnel of a company shall enter into insider trading:

Provided that: nothing contained in this sub-section shall apply to any communication required in the ordinary course of business or profession or employment or under any law.

Explanation.- — For the purposes of this section,

a. “insider trading“ means”

i. an act of subscribing, buying, selling, dealing or agreeing to subscribe, buy, sell or deal in any securities by any director or key managerial personnel or any other officer of a company either as principal or agent if such director or key managerial personnel or any other officer of the company is reasonably expected to have access to any non-public price sensitive information in respect of securities of company; or

ii. an act of counselling about procuring or communicating directly or indirectly any non-public price-sensitive information to any person;

b. "price-sensitive information" means any information which relates, directly or indirectly, to a company and which if published is likely to materially affect the price of securities of the company.

2. If any person contravenes the provisions of this section, he shall be punishable with imprisonment for a term which may extend to five years or with fine which shall not be less than five lakh rupees but which may extend to twenty-five crore rupees or three times the amount of profits made out of insider trading, whichever is higher, or with both.

Statutory Defined Terms in this Section: (Click any term for official legal definition)

Company Sec 2(20) Director Sec 2(34) Tribunal Sec 2(90)

Legal Commentary & Landmark Judgments: Section 195

Section 195 formerly enacted a statutory prohibition on insider trading by directors, key managerial personnel, and connected persons under company law; omitted by the Companies (Amendment) Act, 2017 to cede complete jurisdiction to SEBI's specialized insider trading regime.

Historical Scope of Section 195: Prohibited any person, including a director or KMP, from subscribing, buying, selling, or counseling transactions in securities while in possession of unpublished price sensitive information (UPSI).
Stringent Criminal Sanctions: Pre-amendment law imposed imprisonment up to five years and fines up to twenty-five crore rupees or three times the profit realized from insider trades.
Legislative Omission by Amendment Act of 2017: Omitted with effect from May 7, 2018, pursuant to the recommendations of the Company Law Committee to prevent jurisdictional conflict between the Ministry of Corporate Affairs and SEBI.
Current Regulatory Architecture: Insider trading is exclusively prosecuted by SEBI under the SEBI (PIT) Regulations, 2015 read with Sections 11, 12A, 15G, and 24 of the SEBI Act, 1992, covering both listed companies and proposed listing vehicles.

Key Landmark Precedents:

Chintalapati Srinivasa Raju v. SEBI, (2018) 7 SCC 443: The Supreme Court held that mere access to unpublished price sensitive information by virtue of directorship does not automatically create insider liability; actual possession and trading on the basis of UPSI must be proven.
SEBI v. Kishore R. Ajmera, (2016) 6 SCC 368: The Supreme Court recognized that in insider trading cases, direct evidence is rarely available and courts must rely on a cogent chain of circumstantial evidence, trading patterns, and temporal proximity to establish guilt.

Courtroom Practice & Strategic Litigation Guidance:

Counsel handling allegations of price-sensitive trading must challenge any ongoing RoC or MCA proceedings issued post-2018 for lack of subject-matter jurisdiction due to Section 195's omission. All evidentiary defenses, structured digital database (SDD) audit trails, and pre-clearance certificates must be addressed directly before the Adjudicating Officer of SEBI or the Securities Appellate Tribunal (SAT).

Section 195: Prohibition on insider trading of securities

Section 195 of Companies Act: Corporate Governance & Statutory Compliance

Legal Commentary & Landmark Judgments: Section 195