Checklist on Insider Trading Regulations

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:-

 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.