Authored by: Sethupathy Rathna Kumar
SEBI has issued an informal guidance letter dated 4th August 2025 to Welspun Corp Limited under the Securities and Exchange Board of India (Informal Guidance) Scheme, 2003, clarifying the applicability of the SEBI (Prohibition of Insider Trading) Regulations, 2015 (“PIT Regulations”) to a proposed transaction involving revocation of pledge and subsequent sale of shares (issued pursuant to exercise of ESOPs) by the company’s Managing Director (“MD”).
The queries pertained to (i) whether revocation of pledge constitutes ‘trading’, (ii) whether it is considered a contra trade when pledge was created within the previous six months, (iii) whether the immediate sale of shares would trigger contra-trade restrictions, and (iv) whether pre-clearance may be granted by the compliance officer for such trades.
Background
As per the facts stated in the request letter, the MD had exercised ESOPs on two occasions (5,25,000 equity shares in June 2024 and 8,72,500 equity shares in June 2025) and had pledged both sets of shares in favour of a Non-Banking Financial Company to secure loans for such ESOP exercise. The MD now proposes to revoke the pledge on the 5,25,000 shares and sell them in the open market to repay the loan. The MD is not in possession of any UPSI, and the trading window is open.
SEBI’s Clarifications
1. Revocation of Pledge Amounts to ‘Trading’ Under PIT Regulations
SEBI referred to Regulation 2(1)(l), which defines ‘trading’ to include subscribing, buying, selling, dealing, or agreeing to subscribe, buy, sell, or deal in any securities, and emphasised that the term is widely construed to include pledge creation, invocation, and revocation. Accordingly, SEBI has confirmed that the revocation of pledge on 5,25,000 shares is considered a ‘trade’ for the purposes of the PIT Regulations.
2. Revocation Within Six Months Does Not Trigger Contra-Trade Restrictions
SEBI observed that pledge and un-pledge are opposite trades, but beneficial ownership does not change until the pledge is invoked. Therefore, revocation of pledge within six months of creation does not attract contra-trade restrictions. Consequently, SEBI has confirmed that the revocation of the pledge created in June 2024 would not trigger contra-trade norms, provided the MD establishes the bona fide nature of the transaction and obtains pre-clearance.
3. Sale of Shares Immediately After Revocation Not Treated as Contra Trade
SEBI clarified that the sale of shares immediately after revocation of pledge would also not attract contra-trade restrictions, subject to the condition that the MD demonstrating bona fides and obtaining pre-clearance from the compliance officer.
4. Compliance Officer May Grant Pre-Clearance
Since the MD is not in possession of UPSI and the trading window is open, Regulation 4(1) (which provides a defence for bona fide transactions) may not be invoked. But SEBI clarified that pre-clearance may be granted in accordance with Clause 6 of Schedule B read with Regulation 9(1) and noted that the compliance officer may take a suitable view in accordance with the applicable laws. The sale will still remain subject to compliance with all other provisions of the PIT Regulations.
Conclusion
SEBI’s guidance reiterates its broad interpretation of ‘trading’ to include pledge-related transactions and provides valuable clarity for listed entities where promoter/ KMP’s ESOP transactions involve financing arrangements. Importantly:
a. Creation of a pledge and the revocation of a pledge fall under the definition of ‘trading’, but the revocation of a pledge is not a contra trade since there is no transfer of beneficial ownership of shares by invocation of the pledge.
b. Immediate sale post-revocation is permissible, subject to bona fides and pre-clearance.
c. Absence of UPSI and open trading window support approval of the proposed transaction.
