The Securities and Exchange Board of India (SEBI) has in exercise of powers conferred under Securities and Exchange Board of India, Act, 1992 has made the Securities and Exchange Board of India (Prohibition of Insider Trading) (Amendment) Regulations, 2018 to amend the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015
Effective Date: April 01, 2019
The major amendments brought in by the Amendment are as follows:
1. MEANING OF FINANCIALLY LITERATE
An explanation has been inserted in Regulation 2(1)(c) of the SEBI (Prohibition of Insider Trading) Regulations, 2015, which provides that for the purpose of this regulation, “financially literate” shall mean a person who has the ability to read and understand basic financial statements i.e. balance sheet, profit and loss account, and statement of cash flows.”
Accordingly a person can be appointed as Compliance Officer if he has the ability to read and understand basic financial statements i.e. balance sheet, profit and loss account, and statement of cash flows.
2. DEFINITION OF “PROPOSED TO BE LISTED” INSERTED
“Proposed to be Listed” shall include securities of an unlisted company:
(i) if such unlisted company has filed offer documents or other documents, as the case may be, with the Board, stock exchange(s) or registrar of companies in connection with the listing; or
(ii) if such unlisted company is getting listed pursuant to any merger or amalgamation and has filed a copy of such scheme of merger or amalgamation under the Companies Act, 2013; ”
It will clear the ambiguity as to the applicability of Insider Trading Regulations. A Company which meets the criteria as stated above is also required to comply the Regulations.
3. POLICY FOR DETERMINATION OF “LEGITIMATE PURPOSES” & SHARING OF INFORMATION PURSUANT TO A LEGITIMATE PURPOSE
√ The board of directors of a listed company shall now make a policy for determination of “legitimate purposes” as a part of “Codes of Fair Disclosure and Conduct” formulated under regulation 8.”
√ “legitimate purpose” shall include sharing of unpublished price sensitive information in the ordinary course of business by an insider with partners, collaborators, lenders, customers, suppliers, merchant bankers, legal advisors, auditors, insolvency professionals or other advisors or consultants, provided that such sharing has not been carried out to evade or circumvent the prohibitions of these regulations.”
√ Persons in receipt of unpublished price sensitive information pursuant to a “legitimate purpose” shall be considered an “insider” for purposes of these regulations and due notice shall be given to such persons to maintain confidentiality of such unpublished price sensitive information in compliance with these regulations.”
Insertion of definition of legitimate purpose will remove the ambiguity and provide clarity as to the circumstances under which sharing of unpublished price sensitive information (UPSI) is allowed subject to the compliance of these regulations.
Persons to whom the UPSI is shared pursuant to a legitimate purpose will be treated as insider and prior intimation shall also be given to them by the Company to maintain confidentiality of the same.
4. TRADING WHEN IN POSSESSION OF UNPUBLISHED PRICE SENSITIVE INFORMATION
Earlier the trading in securities was allowed between promoters, when in possession of the unpublished price sensitive information without being in breach of regulation 3 if
√ the trading was off-market inter-se transfer and
√ both parties had made a conscious and informed trade decision;
After the amendment the word “Promoters” shall be substituted with the word “Insiders”.
Accordingly an Insider can trade in securities that are listed and are proposed to be listed if:
√ the trading was off-market inter-se transfer,
√ both parties had made a conscious and informed trade decision
√ UPSI was not obtained under Regulation 3(3) [condition added as a proviso in proviso in clause (i) to Regulation 4(1)] and
√ The insider shall report the trade to the company within 2 working days and the company shall further notify the particulars of the same to the stock exchanges where the securities are listed within 2 trading days from the receipt of information or from becoming aware of the information. [condition added as a second proviso in proviso in clause (i) to Regulation 4(1)]
Further in the proviso after clause (i) to Regulation 4(1), the following clauses shall be inserted namely (new insertions under which trading when in possession of UPSI, is allowed):
“(ii) the transaction was carried out through the block deal window mechanism between persons who were in possession of the UPSI without being in breach of regulation 3 and both parties had made a conscious and informed trade decision;
Provided that such unpublished price sensitive information was not obtained by either person under sub-regulation (3) of regulation 3 of these regulations.
(iii) the transaction in question was carried out pursuant to a statutory or regulatory obligation to carry out a bona fide transaction.
(iv) the transaction in question was undertaken pursuant to the exercise of stock options in respect of which the exercise price was pre-determined in compliance with applicable regulations.”
Insertion of new clauses in the proviso will widen the scope of the transactions or situations under which trading in securities that are listed and are proposed to be listed, when in possession of the unpublished price sensitive information is allowed.
5. AMENDMENT IN REGULATION 9 – CODE OF CONDUCT
i. In case of a market intermediary, the board of directors or head(s) of the organisation of every intermediary shall ensure that the chief executive officer or managing director has formulated a code of conduct after taking their approval.
Accordingly in case of the market intermediary the responsibility to formulate the code of conduct has been specifically casted upon the officials of the Company.
ii. A new Schedule “Schedule C” has been specified to specify the minimum standards to be set out in the Code of Conduct of a market intermediary.
iii. Now the Code of Conduct is required to be followed by the designated persons and immediate relatives of designated persons as specified in the Code of Conduct.
iv. An explanation has been inserted after the Regulation 9(1) which states that “For the avoidance of doubt it is clarified that intermediaries, which are listed, would be required to formulate a code of conduct to regulate, monitor and report trading by their designated persons, by adopting the minimum standards set out in Schedule B with respect to trading in their own securities and in Schedule C with respect to trading in other securities.”
Accordingly a market intermediary is required to formulate two Code of Conducts one as per “Schedule B” to regulate, monitor and report trading by their designated persons, with respect to trading in their own securities and another as per Schedule C with respect to trading in other securities.
v. Sub-regulation (2), shall be substituted with following words, namely:-
“The board of directors or head(s) of the organisation, of every other person who is required to handle unpublished price sensitive information in the course of business operations shall formulate a code of conduct to regulate, monitor and report trading by their designated persons and immediate relative of designated persons towards achieving compliance with these regulations, adopting the minimum standards set out in Schedule C to these regulations, without diluting the provisions of these regulations in any manner.
Explanation – Professional firms such as auditors, accountancy firms, law firms, analysts, insolvency professional entities, consultants, banks etc., assisting or advising listed companies shall be collectively referred to as fiduciaries for the purpose of these regulations.”
Accordingly Professional firms such as auditors, accountancy firms, law firms, analysts, insolvency professional entities, consultants, banks etc., assisting or advising listed companies are required to formulate Code of Conducts as per Schedule C to govern trading in securities by their designated persons.
6. INSERTION OF NEW SUB-REGULATION 4 IN REGULATION 9 – DEFINITION OF DESIGNATED PERSONS
The board of directors or such other analogous authority shall in consultation with the compliance officer specify the designated persons to be covered by the code of conduct on the basis of their role and function in the organisation and the access that such role and function would provide to unpublished price sensitive information in addition to seniority and professional designation and shall include:-
a. Employees of such listed company, intermediary or fiduciary designated on the basis of their functional role or access to unpublished price sensitive information in the organization by their board of directors or analogous body;
b. Employees of material subsidiaries of such listed companies designated on the basis of their functional role or access to unpublished price sensitive information in the organization by their board of directors;
c. All promoters of listed companies and promoters who are individuals or investment companies for intermediaries or fiduciaries;
d. Chief Executive Officer and employees upto two levels below Chief Executive Officer of such listed company, intermediary, fiduciary and its material subsidiaries irrespective of their functional role in the company or ability to have access to unpublished price sensitive information;
e. Any support staff of listed company, intermediary or fiduciary such as IT staff or secretarial staff who has access to unpublished price sensitive information.”
Insertion of an indicative definition of the designated persons will provide clarity as to which persons are required to follow the code of conduct.
7. INSTITUTIONAL MECHANISM FOR PREVENTION OF INSIDER TRADING
A new Regulation, Regulation 9A has been inserted after Regulation 9 to provide for the institutional mechanism for prevention of Insider Trading, which states as follows:
7A. WHO SHALL PREPARE INSTITUTIONAL MECHANISM FOR PREVENTION OF INSIDER TRADING?
The Chief Executive Officer, Managing Director or such other analogous person of a listed company, intermediary or fiduciary shall put in place adequate and effective system of internal controls to ensure compliance with the requirements given in these regulations to prevent insider trading.
7B. COVERAGE OF THE INSTITUTIONAL MECHANISM FOR PREVENTION OF INSIDER TRADING
The internal controls shall include the following:
a. all employees having access to UPSI are identified as designated employee;
b. all the UPSI shall be identified and its confidentiality shall be maintained as per the requirements of these regulations;
c. adequate restrictions shall be placed on communication or procurement of UPSI as required by these regulations;
d. lists of all employees and other persons with whom UPSI is shared shall be maintained and confidentiality agreements shall be signed or notice shall be served to all such employees and persons;
e. all other relevant requirements specified under these regulations shall be complied with;
f. periodic process review to evaluate effectiveness of such internal controls.
7C. RESPONSIBILITY TO FRAME INSTITUTIONAL MECHANISM FOR PREVENTION OF INSIDER TRADING
The board of directors of every listed company and the board of directors or head(s) of the organization of intermediaries and fiduciaries shall ensure that the Chief Executive Officer or the Managing Director or such other analogous person ensures compliance with regulation 9 and sub-regulations (1) and (2) of this regulation.
7D. REVIEW OF THE INSTITUTIONAL MECHANISM FOR PREVENTION OF INSIDER TRADING
√ The Audit Committee of a listed company or other analogous body for intermediary or fiduciary shall review compliance with the provisions of these regulations;
√ At least once in a financial year and
√ Shall verify that the systems for internal control are adequate and are operating effectively.
7E. WHISTLE BLOWER POLICY – TO INQUIRE LEAK OF UPSI
√ Every listed company shall formulate written policies and procedures;
√ which shall be approved by board of directors of the company;
√ for inquiry in case of leak of UPSI or suspected leak of UPSI;
√ the board of directors of the company shall initiate appropriate inquiries on becoming aware of leak of UPSI or suspected leak of UPSI;
√ and inform the SEBI promptly of such leaks, inquiries and results of such inquiries;
√ the listed company shall make employees aware of such policy to enable employees to report instances of leak of UPSI.
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