Analysis of SEBI (Prohibition of Insider Trading) Regulations, 2015

CS D Hem Senthil Raj

Overview: SEBI has notified and issued SEBI (Prohibition of Insider Trading) Regulations, 2015 on January 15, 2015. These regulations are notified to replace the earlier framework of SEBI (Prohibition of Insider Trading) Regulations, 1992 which are in place for the past two-decades. In addition to broadening the definitions of unpublished price-sensitive information (UPSI), insider and connected persons in SEBI (PIT) Regulations, 2015 the legal perspective also imposes graver consequences for company officials involved in selective exchange of price-sensitive information.

“Under the new regulations, mere communication of UPSI would be punishable, however in earlier, SEBI (PIT) Regulations, 1992 mere communication of UPSI (without any trade) would not be proceeded against. Corporates are now required to raise their eye brows on revealing the UPSI selectively “

Effective Date:

The New Regulations shall come into force with effect from May 15, 2015 (120 days from the date of publication in the Official Gazette)

Broader Explanation for Definitions and New Insertions:

Who is an Insider?

Under the new definition, an insider would mean a person in possession of or has access to price-sensitive information or Connected Person.

SEBI defines ‘Insider’ to include persons connected on the basis of being in any contractual, fiduciary or employment relationship that allows such people access to unpublished price sensitive information (UPSI).

Who is a connected person?

This is a new definition included in the new regulations by SEBI, where in, it defines “connected person” as anyone who is or has during the six months prior to the act been associated with a company, directly or indirectly in any capacity, including by reason of frequent communication with its officers or by being in any contractual, fiduciary or employment relationship or by being a director, officer or employee. It also covers persons holding any position that allows access to unpublished price-sensitive information.

The above definition of connected person also brings into its ambit of those persons who may not seemingly occupy any position in a company but are in regular touch with the company and its officers who are involved in the day to day operations of the Company.

Generally available Information:

Generally available information means information that is accessible to the public on a non-discriminatory basis.

Note: It is intended to define what constitutes generally available information so that it is easier to crystallize and appreciate what unpublished price sensitive information is. Information published on the website of a stock exchange, would ordinarily be considered generally available.

Threshold Limit for Disclosures [including KMP’s and Employees]:

The Disclosures shall be made by Promoter’s/Director’s/KMP as well as employees on crossing the threshold of Rs. 10 Lakhs in value as prescribed within two trading days of such transaction, if the value of the securities traded, whether in one transactions or a serious of transactions over any calendar quarter

Duties of Compliance Officer:

The new SEBI (PIT) Regulations, 2015 cast duties on the Compliance Officer of the company who is appointed under the regulations including monitoring and compliances of requirements under these regulations. Such duties are to be undertaken very prudently.

For instance, in case of employees where there is no requirement of initial disclosure but continual disclosure is required to be made in case of triggering the threshold. In such a case, it would be difficult for the compliance officer to check whether compliances are made or not. Above this, the regulations also put an onus on the company to intimate trading crossing a threshold of Rs. 10 Lakh in value irrespective of the disclosure receive by the employee as the Regulation 7(2)(b) states as follows:

“Every Company shall notify the particulars of such trading to the stock exchange on which the securities are listed within two trading days of receipt of the disclosure or from becoming aware of such information.”

As per the new SEBI (PIT) 2015, it is very clear that the company shall put in a place a system to monitor trading of all its employees unlike of designated persons as were required under earlier regulations.

Trading Plans:

An insider shall be entitled to formulate a trading plan and present it to the compliance officer for approval and public disclosure pursuant to which trades may be carried out on his behalf in accordance with such plan.

This provision intends to give an option to persons who may be perpetually in possession of unpublished price sensitive information and enabling them to trade in securities in a compliant manner. This provision would enable the formulation of a trading plan by an insider to enable him to plan for trades to be executed in future. By doing so, the insider who is in possession of unpublished price sensitive information and formulated a Trading Plan approved by the Compliance Officer subsequently would not be prohibited from execution of such trades as per the trading plan approved by the Compliance Officer on such stand that he/she had pre-decided the trade even before such unpublished price sensitive information available to them.

The Trading plan shall comply with the requirements as follows:

i)    It shall be submitted for a minimum period of 12 months.

ii)   No Overlapping of plan with the existing plan submitted by Insider

iii)  It shall set out either the value of trades to be effected or the number of securities to be traded along with the nature of the trade and the intervals at, or dates on which such trades shall be effected.

iv) Trading can only commence only after 6 months from public disclosure of plan.

v)  No trading between 20th day prior to closure of financial period and 2nd trading day after disclosure of financial results.

vi) Compliance Officer to approve the plan.

vii)The trading plan once approved shall be irrevocable and the insider shall mandatorily have to implement the plan, without being entitled to either deviate from it or to execute any trade in the securities outside the scope of the trading plan. (Except in few case like where insider is in possession of price sensitive information at the time of formulations of the plan and such information has not become generally available at the time of the commencement of implementation.)

viii) Upon approval of the trading plan, the compliance officer shall notify the plan to the stock exchanges on which the securities are listed.

Disclosure of Trading by Insiders:

The disclosure to be made by any person shall also include those persons who are immediate relatives to such person who are/have made the trading, and it also includes any other person for whom such person takes trading decisions.

The disclosures of trading in securities shall also include trading in derivatives of securities and the traded value of the derivatives shall be taken into account. (please note that section 194 of CA, 2013 prohibits Director or KMP from entering into forward dealings etc.)

Maintenance of disclosures:

The disclosures made under these regulations shall be maintained by the company for a minimum period of five years.

Classification of Disclosures:

a)    Initial Disclosures

b)    Continual Disclosures

Disclosures by certain persons:

a) Initial Disclosure:

1. Every promoter, KMP and Director of every company whose securities are listed on any recognized stock exchange shall disclose his/her holding of securities of the company as on the date of these regulations talking effect, to the company within 30 days of these regulations taking effect. (Effective Date: May 15, 2015, Due Date: June 14, 2015)
2. Every person on appointment as a KMP or a director of the company or upon becoming a promoter shall disclose his holding of securities of the company as on the date of appointment or becoming a promoter to the company within seven days of such appointment or becoming a promoter.

b) Continual Disclosures:

i) Every promoter, employee and Director of every company shall disclose to the company the number of such securities acquired or disposed of within two working days of such transaction if the value of the securities traded, whether in one transaction of a series of transactions over any calendar quarter, aggregates to a traded value in excess of ten lakh rupees or such other value as may be specified.

ii) Every company shall notify the particulars of such trading to the Stock Exchanges on which the securities are listed within two trading days of receipt of the disclosure or from becoming aware of such information.

Disclosure by other connected persons

Any company whose securities are listed on a stock exchange may, at its discretion require any other connected person or class of connected persons to make disclosures of holding and trading in securities of the company in such form and at such frequency as may be determined by the company in order to monitor compliance with these regulations.

Code of Fair Disclosure:

Companies need to establish a code of practices and procedures for fair disclosures of unpublished price sensitive information.

The new SEBI (PIT) Regulations, 2015 intends the listed entities to formulate a stated framework and policy for fair disclosure of events and occurrences that could impact price discovery in the market for its securities.

The principles as set out in the schedule are:

i)      Equality of access to information.

ii)     Publication of policies such as dividend, inorganic growth pursuits, calls and meeting with analysts.

iii)    Publication of such calls and meeting etc.

The Code of practices and procedures for fair disclosures of unpublished price sensitive information and every amendment thereto shall be promptly intimated to the stock exchanges where the securities are listed.

Code of Conduct:

Every Listed Company shall formulate a code of conduct to regulate, monitor and report trading by its employees and other connected persons towards achieving compliance with these regulations.

Every listed company formulating a code of conduct shall indentify and designate a compliance officer to administer the code of conduct and other requirements under these regulations.

Question of Fact:

Under Section 195 of Companies Act, 2013, No person including any director or Key managerial personnel of a Company shall enter into insider trading, however in case of SEBI (PIT) Regulations, 2015, an insider (which includes connected person) shall be entitled to formulate the Trading Plan and get it approved from the Compliance Officer of the Company, pursuant to which trades may be carried out on his behalf in accordance with such plan. We feel that the insider cannot purchase or plan to purchase during “Trading window” period and shall exclude this period while he does the trading plan.

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