Insider refers to any key person who has knowledge and cognition of what important decisions are taken by the Management of the Company and what impact it will create over the prices of the securities.
Trading in general sense refers to buying and selling of securities.
Grouping together both the words, the phrase “ Insider Trading” can be defined as buying or selling of any security by any person who has access to and is known to any kind of price sensitive information regarding the day to day affairs of the company, which they possess but which is not available to others.
For the first time, the concept of Insider trading came into existence in the year 1940’s when the Thomas Committee of 1948 constituted by the Government, evaluated the regulations in the US and thereafter, provisions relating to Insider Trading were enacted in the Companies Act, 1956 through Sections 307 and Section 308, which required shareholding disclosures by the directors and managers of a company.
The Indian Securities market at that time was growing by leaps and bounds and eventually this lead to inadequacy in the completeness of the provisions of the companies Act, 1956, the Sachar Committee in 1979, the Patel Committee in 1986 and the Abid Hussain Committee in 1989 put forth the recommendations for enactment of separate regulations for Insider Trading which ultimately lead to the formulation of the SEBI (Insider Trading) Regulations in the year 1992, which were further amended in the year 2002 after the discrepancies observed in the 1992 regulations in the cases like Hindustan Levers Ltd. vs. SEBI, Rakesh Agarwal vs. SEBI, etc. to remove the loopholes in the Regulations of 1992.
Further this regulations were polished by way of enacting the SEBI (Prohibition of Insider Trading Regulations) 2015 (“Regulations”) on January 15, 2015 which became effective from May 15, 2015, the provisions of which were recommended by an 18 member committee (“Committee”) constituted by SEBI under the chairmanship of Justice N.K. Sodhi, former Chief Justice of the High Courts of Kerala and Karnataka, which were approved by the SEBI Board in its meeting held on November 19, 2014 (“Board Meeting”).
The brief checklist for your ready reference is provided as follows:-
Description Of Regulations
Short title and commencement.
“compliance officer” means any senior officer, designated so and reporting to the board of directors or head of the organization in case board is not there,
• who is financially literate and is capable of appreciating requirements for legal and regulatory compliance under these regulations and
• who shall be responsible for compliance of policies, procedures, maintenance of records, monitoring adherence to the rules for the preservation of UPSI, monitoring of trades and
• the implementation of the codes specified in these regulations under the overall supervision of the board of directors of the listed company or the head of an organization, as the case may be;
“connected person” :-
Following shall be Connected/Designated Persons :
• Any person who is or has been associated with company, in any manner, during the six months prior to the concerned act;
Following shall be Deemed to be connected with the Company:
• An immediate relative of the connected person;
• A holding/associate/subsidiary company;
• An intermediary;
• An Investment Company, trustee Company, AMC or an employee or director;
• An official of stock exchange or of clearing corporation;
• A member of Board of trustees or MF or BOD of AMC of the MF or is an employee;
• A member of BOD or an employee of Public Financial Institution
• An official or an employee of a self regulatory organization recognized or authorized by the Board;
• A banker of the company;
• A concern, firm, trust, HUF, company or AOP wherein a director of a company / immediate relative/ banker of company, has more than 10% of the holding or interest;
“trading” means and includes subscribing, buying, selling, dealing, or agreeing to subscribe, buy, sell, deal in any securities, and “trade” shall be construed accordingly.
• Financial results;
• Change in capital structure;
• Mergers, de-mergers, acquisitions, delisting and such other transactions;
• Changes in KMPs;
• Material events in accordance with Listing Obligations (Regulation 30);
Communication or procurement of UPSI.
(1) No insider shall communicate, provide, or allow access to any UPSI, relating to a company or securities listed or proposed to be listed, to any person including other insiders
Except where such communication is in furtherance of legitimate purposes, performance of duties or discharge of legal obligations.
(2) No person shall procure from or cause the communication by any insider of UPSI, relating to a company or securities listed or proposed to be listed,
Except in furtherance of legitimate purposes, performance of duties or discharge of legal obligations.
(3) Notwithstanding anything contained in this regulation, an UPSI may be communicated, provided, allowed access to or procured, in connection with a transaction that would:–
• entail an obligation to make an open offer
• not attract the obligation to make an open offer
(4) For purposes of sub-regulation (3), the board of directors shall require the parties to execute agreements to contract confidentiality and non-disclosure obligations and shall not otherwise trade in securities of the company when in possession of UPSI.
Trading when in possession of UPSI.
(1) No insider shall trade in securities that are listed or proposed to be listed on a stock exchange when in possession of UPSI
a. Off market inter se transfer between promoters
b. By the non individual investors
c. Pursuant to trading plan
(2) Onus of Proof –
• In case of connected person, the burden of proving innocence shifted on connected person
• For other persons, it continuous to lie with SEBI.
(3) The Board may specify such standards and requirements, from time to time, as it may deem necessary for the purpose of these regulations.
(1) formulate a trading plan and present it to the compliance officer for approval and public disclosure
(2) Such trading plan shall:–
a) Six months cooling off period
b) No trading between 20 days prior to Financial Period and closure of second trading day after result announcement.
c) Plan for minimum 12 months
d) No overlapping of trading plan
e) Set out either the value of trades or the number of securities to be traded along with the nature and the intervals at, or dates of trade
f) No market abuse through trading plan
(3) The compliance officer shall review, approve and monitor the implementation of trading plan
(4) Trading plan once approved shall be irrevocable
the implementation of plan shall not be commenced if any UPSI is in possession of the insider at the time of formulation of the plan has not become generally available at the time of the commencement of implementation and in such event the compliance officer shall confirm that the commencement ought to be deferred until
such UPSI becomes generally available information so as to avoid a violation of sub-regulation (1) of regulation 4.
(5) Upon approval of the trading plan, the compliance officer shall notify the plan to the stock exchanges on which the securities are listed.
Disclosures by certain persons.
30 days of regulation taking effect
within 7 days of appointment or becoming a promoter
Form B [ similar to Form A]
Within 2 Trading Days of Transaction taking place
within 2 Trading Days of intimation / awareness
Form C received / no separate format
Company can define its own timeline/ awareness
Code of Fair Disclosure. (formulate and publish on its official website)
(Principles of Fair Disclosure for purposes of Code of Practices and Procedures for Fair Disclosure of UPSI)
Code of Conduct. (regulate, monitor and report trading by BOD and identify and designate a compliance officer to administer the code)
(Minimum Standards for Code of Conduct to Regulate, Monitor and Report Trading by Insiders)
Sanction for violations. (dealt with by the Board)
Power to remove difficulties. (Power to the Board)
reasonable opportunity of being heard
Repeal and Savings.
FAQ issued by SEBI:-
1. Does the contra trade restriction (for a period not less than six months) under clause 10 of Schedule B of the Regulations also apply to the exercise of ESOPs and the sale of shares so acquired?
Guidance: Exercise of ESOPs shall not be considered to be “trading” except for the purposes of Chapter III of the Regulations. However, other provisions of the Regulations shall apply to the sale of shares so acquired.
2. In case an employee or a director enters into Future & Option contract of Near/Mid/Far month contract, on expiry will it tantamount to contra trade? If the scrip of the company is part of any Index, does the exposure to that index of the employee or director also needs to be reported?
Guidance: Any derivative contract that is cash settled on expiry shall be considered to be a contra trade. Trading in index futures or such other derivatives where the scrip is part of such derivatives, need not be reported.
3. Whether contra trade is allowed within the duration of the trading plan?
Guidance: Any trading opted by a person under Trading Plan can be done only to the extent and in the manner disclosed in the plan, save and except for pledging of securities (Refer question 6).
4. Whether the restriction on execution of contra trade in securities is applicable in case of buy back offers, open offers, rights issues FPOs etc by listed companies?
Guidance: Buy back offers, open offers, rights issues, FPOs, bonus, etc. of a listed company are available to designated persons also, and restriction of ‘contra-trade’ shall not apply in respect of such matters.
5. Whether restriction on execution of contra trade is applicable only to designated persons of a listed company or whether it would also apply to the designated employees of market intermediaries and other persons who are require to handle UPSI in the course of business operations?
Guidance: The code prescribed by the Regulations is same for listed companies, market intermediaries and other persons who are required to handle UPSI in the course of business operations. Therefore, restrictions with regard to contra trade forming part of clause 10 of code of conduct shall apply to all according to the Regulations.
6. (a) Whether SEBI’s intent is to prohibit creation of pledge or invocation of pledge for enforcement of security while in possession of UPSI?
(b)Whether creation of pledge or invocation of pledge is allowed when trading window is closed?
Guidance: Yes. However, the pledgor or pledgee may demonstrate that the creation of pledge or invocation of pledge was bona fide and prove their innocence under proviso to sub-regulation (1) of regulation 4 of the Regulations.
7. What should be the value of the pledge / revoke transaction for the purpose of disclosure? Is it the market value on date of the pledge / revoke transaction or is it the value at which the transaction has been carried out between the pledgor and pledgee? For instance, if the pledgor has availed a loan of Rs 10 Lacs against which he has pledged shares worth Rs 15 Lacs, would the transaction value be Rs 10 Lacs or Rs 15 Lacs.
Guidance: For the purpose of calculation of threshold for disclosures relating to pledge under Chapter III of the Regulations, the market value on the date of pledge/revoke transaction should be considered. In the above illustration, the value of transaction would be considered as fifteen lakh rupees.
8. Who will be approving authority for trades done by the Compliance Officer or his immediate relatives, as Insiders?
Guidance: The board of directors of the company shall be the approving authority in such cases and may stipulate such procedures as are deemed necessary to ensure compliance with these regulations.
9. Whether separate code of conduct can be adopted for listed company and each of intermediaries in a group?
Guidance: In case of a group, separate code may be adopted for listed company and each of intermediaries, as applicable to the concerned entity.
10. Whether Chief investor relations officer will also be responsible along with compliance officer for not disseminating information or non-disclosure of UPSI?
Guidance: Regulation 2 (c) clearly provides the functions and responsibilities of the compliance officer. Specific responsibilities to deal with dissemination of information and disclosure of unpublished price sensitive information are given to Chief Investor Relations Officer (CIRO) under clause 3 of Schedule A.
It is company’s discretion to designate two separate persons as CIRO and Compliance Officer, respectively for fulfilling specified responsibilities. In cases where both CIRO and CO have been designated for overlapping functions, they shall be jointly and severally responsible.
11. If a spouse is financially independent and does not consult an insider while taking trading decisions, is that spouse exempted from the definition of ‘immediate relative’?
Guidance: A spouse is presumed to be an ‘immediate relative’, unless rebutted so.