Summary: Creation, invocation and revocation of a pledge of shares fall within the meaning of “trade” under the PIT Regulations, and the FAQs on the PIT Regulations are unambiguous on this point. These pledge-related transactions trigger contra trade restriction under Schedule B of the PIT Regulations. SEBI’s informal guidance clarifies how the regulatory position on this subject has evolved. This article traces this evolution and analyses the considerations relevant to listed entities when creating pledges.
Link to Introduction Introduction
This broadened terminology sometimes creates complications with the commercial reality of pledging, as shares are routinely pledged, released and re-pledged to secure financing, often without any intention to benefit from the UPSI. Treating every leg of this lifecycle as a “trade” for the purposes of contra trade restriction under Clause 10 of Schedule B[4] means that a bona fide pledge could, in principle, trigger a contra trade against an unrelated transaction, regardless of why the pledge was created. Each of the below informal guidance addresses a different facet of pledges (creation, revocation and the creation-invocation combination) under the framework.
Link to Regulatory Position on Pledges, and the ESOP Exemption Regulatory Position on Pledges, and the ESOP Exemption
A separate, and narrower issue concerns the exercise of ESOPs, distinct from pledges created to fund them. The FAQs have expressly clarified that the exercise of ESOPs must not be treated as “trading” for contra trade under the PIT Regulations. Hence, subscription, exercise and the subsequent sale of shares acquired by exercising ESOPs are not counted towards contra trade. This exemption, however, does not extend to a pledge created to finance the exercise of ESOPs.
Link to Geetanjali: The First Signal on Creation Geetanjali: The First Signal on Creation
SEBI’s informal guidance to Geetanjali Trading and Investments Private Limited[5] clarified that the creation, release and further creation of a pledge within a six-month period is permissible, provided that the transactions are carried out in the spirit of the PIT Regulations. It should also be demonstrated by the pledgor/ pledgee that the transaction is bona fide and undertaken for genuine business purposes, and the defences under the proviso to Regulation 4(1) of the PIT Regulations would be available.
The Geetanjali guidance, therefore, indicates that, albeit indirectly, creation of a pledge could potentially be treated as a “trade” for contra trade purposes, as well as the first indication that a pledge, created for a genuine business purpose, may be permissible even within the contra period.
Link to Welspun: Beneficial Ownership Enters the Picture Welspun: Beneficial Ownership Enters the Picture
SEBI’s informal guidance to Welspun Corp Limited[6] stated that beneficial ownership of pledged shares does not change until the pledge is invoked. Basis this, SEBI concluded that revocation of a pledge within six months of its creation would not trigger contra trade restrictions under PIT Regulations. However, Welspun addressed only revocation without extending this reasoning to creation itself, leaving open the question of whether creation of a pledge, which similarly does not alter beneficial ownership by itself, would be assessed on the same footing or treated differently.
Link to Avenue Supermarts: Extending the Rationale to Invocation Avenue Supermarts: Extending the Rationale to Invocation
SEBI’s informal guidance to Avenue Supermarts Limited[7] clarified that a pledge created for bona fide purposes (such as raising funds, including to fund the exercise of ESOPs) may be permitted even when the trading window is closed, subject to grant of pre-clearance by the compliance officer. On contra trade, SEBI extended the beneficial ownership rationale stated in Welspun to invocation of a pledge. The guidance stated that invocation results in change in beneficial ownership of shares, which may be considered akin to sale of shares, and may therefore be treated as a “sell” trade.
Further, SEBI observed that creation of a pledge by a designated person for availing financial assistance to exercise ESOPs, followed by the invocation of that pledge within six months, may attract contra trade restrictions. It will, however, depend on whether the designated person undertakes any other transaction involving the acquisition of shares (other than through exercise of ESOPs) within six months before or after the invocation. In other words, Avenue Supermarts takes a position on creation of a pledge, but only if it’s followed by invocation within the relevant window. It does not address how creation of a pledge alone would be treated without a subsequent invocation.
Link to Analysis: An Evolution Towards Beneficial Ownership, With Creation Standing Alone Still Open Analysis: An Evolution Towards Beneficial Ownership, With Creation Standing Alone Still Open
The three informal guidance trace a visible progression centred around beneficial ownership. Geetanjali suggests that creation of a pledge could attract contra trade restrictions if the bona fide defences are not met. Welspun introduces the beneficial ownership test and applies it to revocation, which leaves beneficial ownership undisturbed and does not trigger contra trade. Avenue Supermarts observes that invocation changes beneficial ownership and is treated akin to sale for the purposes of contra trade restrictions.
These positions converge on a coherent test for revocation and invocation: both are assessed by reference to whether beneficial ownership has changed, and invocation can constitute a “sell” trade.
What they do not address is the treatment of creation of pledge when it is not followed by invocation or revocation. If the underlying rationale for contra trade is a change in beneficial ownership, as Welspun and Avenue Supermarts suggest, then creation on its own should logically fall outside the scope of “buy” or “sell” trades, akin to revocation. SEBI has itself acknowledged that creation of a pledge does not alter its beneficial ownership unless it is invoked.[8] Yet, none of the three aforesaid guidance state this conclusively. Consequently, even though the FAQs are unambiguous on creation of pledge amounting to “dealing in securities” and therefore a “trade”, it remains unsettled whether creation alone would trigger contra trade restrictions. Moreover, pledging of shares is a routine activity for banks and financial institutions. In this scenario, the guidance under Geetanjali remains relevant and the onus of demonstrating bona fide intention behind such transaction would lie with the pledgor/ pledgee.
Link to The Relaxation Mechanism The Relaxation Mechanism
The relaxation mechanism under Clause 10 of Schedule B is a viable route for listed companies in this regard. It empowers the compliance officer to grant relaxation from the strict application of contra trade restrictions, provided the reasons are recorded in writing and he/ she is satisfied that doing so would not otherwise violate the PIT Regulations.[9] SEBI’s informal guidance to Century Plyboards, is instructive on how the relaxation mechanism operates once a contra trade is triggered. The compliance officer is required to ascertain the bona fide nature of the creation/ revocation of a pledge before granting pre-clearance.
Accordingly, if the compliance officer is satisfied with the reasons provided and the bona fide purpose of the pledge, grant of relaxation may be a plausible solution in appropriate cases. However, caution must be exercised, as views stated in SEBI Informal Guidance are limited to the clarifications sought and do not represent a binding view of SEBI.
[1] Regulation 2(1)(d) of SEBI (Prohibition of Insider Trading) Regulations, 1992.
[2] Regulation 2(1)(l) of SEBI (Prohibition of Insider Trading) Regulations, 2015.
[3] Comprehensive FAQs on SEBI (Prohibition of Insider Trading) Regulations, 2015, revised on December 31, 2024, available at: https://www.sebi.gov.in/enforcement/clarifications-on-insider-trading/dec-2024/comprehensive-faqs-on-sebi-pit-regulations-2015_90403.html.
[4] Clause 10 of Schedule B, read with Regulation 9(1) of PIT Regulations defines contra trades as any buy/ sell trade undertaken by a designated person within 6 months of an earlier sell/ buy trade, respectively or vice versa, where both trades have been executed in the open market.
[5] Informal Guidance to Geetanjali Trading and Investments Private Limited, dated November 09, 2015, available at: SEBI | Informal Guidance in the matter of Geetanjali Trading and Investment Private Limited.
[6] Informal Guidance to Welspun Corp Limited, dated August 04, 2025, available at: SEBI | In the matter of Welspun Corp Limited under SEBI (Prohibition of Insider Trading) Regulations, 2015..
[7] Informal Guidance by way of an Interpretive Letter under the SEBI (Informal Guidance) Scheme, 2025, received from Avenue Supermarts Limited, dated May 08, 2026, available at: SEBI | Informal Guidance by way of an Interpretive Letter under the Securities and Exchange Board of India (Informal Guidance) Scheme, 2025 received from Avenue Supermarts Limited in relation to the provisions of the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015.
[9] Informal Guidance to Century Plyboards (India) Limited, dated February 07, 2025, available at: SEBI | In the matter of Century Plyboards (India) Limited under SEBI (Prohibition of Insider Trading) Regulations, 2015”.