SEBI Clarifies Position on Pledge Revocation and Contra-Trade Restrictions for ESOPs

The Securities and Exchange Board of India (SEBI), in an informal guidance letter dated August 4, 2025 (Guidance, which can be viewed by clicking on this link), as made available in public domain on November 3, 2025, issued to Welspun Corp Limited (Welspun), has provided critical clarity regarding the applicability of “contra-trade” restrictions on the revocation of pledged shares acquired via Employee Stock Options (ESOPs). 

• Background

The applicant, Welspun, sought clarification regarding a proposed transaction by its Managing Director and CEO (MD). The MD had acquired shares by exercising ESOPs on two separate occasions (June 12, 2024, and June 2, 2025) by availing loans from a Non-Banking Financial Company (NBFC) and pledging the respective shares as security.

The MD proposed to release (revoke) the pledge on the first tranche of shares (5,25,000 shares acquired in 2024) and subsequently sell them in the open market inter alia to repay the loan. A concern arose because this revocation would occur within six months of the creation of the second pledge (on June 2, 2025). Welspun sought SEBI’s guidance on whether this sequence of events would violate the “contra-trade” restrictions under the SEBI (Prohibition of Insider Trading) Regulations, 2015 (PIT Regulations). 

• Key Clarifications by SEBI 

SEBI analyzed the queries based on the PIT Regulations and the relevant FAQs on PIT Regulations, and clarified as follows:

1. 1. Pledge Revocation constitutes ‘Trading’: Addressing the first query, SEBI reiterated that the definition of “trading” under Regulation 2(1)(l) of the PIT Regulations is wide enough to include “dealing” in securities. SEBI clarified that trading includes activities strictly not limited to buying or selling, such as pledging, to curb activities based on unpublished price sensitive information (UPSI). Consequently, the creation, invocation, or revocation of a pledge is considered a “trade”.

1. 2. Exemption from Contra-Trade Restrictions: On the core issue of whether revoking a pledge constitutes a prohibited “contra-trade” against a recent pledge creation, SEBI provided a nuanced distinction. While acknowledging that pledge and un-pledge/revocation are indeed “opposite trades,” SEBI emphasized that in these transactions, the beneficial ownership of the shares does not change until the pledge is actually invoked. Therefore, SEBI clarified that the revocation of a pledge within six months of the creation of another pledge does not trigger contra-trade restrictions.

1. 3. Subsequent Sale of Shares: Regarding the MD’s intent to sell the shares immediately after revoking the pledge, SEBI succinctly clarified that such a sale would not attract contra-trade restrictions against the revocation itself. This is subject to the transaction being bona fide and the MD obtaining necessary pre-clearance from Welspun’s Compliance Officer.

1. 4. Role of Compliance Officer and Pre-Clearance: SEBI noted that the MD was not in possession of UPSI and the trading window was open. Consequently, SEBI stated that the specific defense provided under Regulation 4(1) of the PIT Regulations (which deals with trading while in possession of UPSI) would not be applicable to this transaction. Instead, the matter falls to the Compliance Officer to grant pre-clearance in terms of the PIT Regulations. 

• Takeaway 

This Guidance provides necessary relief for designated persons utilizing leverage to exercise ESOPs. By clarifying that pledge-related transactions do not trigger the six-month contra-trade ban due to the absence of a change in beneficial ownership, SEBI has facilitated smoother liquidity management for such designated persons.