To check Insider trading, R 8(1) of the Regulations states that the Board of Directors of every listed company shall lay down and publish on its official website, a code of practices and procedures for fair disclosure of unpublished price sensitive information that would be followed to adhere to each of the principles laid down in Schedule A to the Regulations, without diluting the provisions of these regulations in any manner.
Note to the provision requires every listed company to formulate a stated framework and policy for fair disclosure of events and occurances that could have impact on price discovery in the securities market. Principles such as, equality of access to information, publication of policies such as those on dividend, inorganic growth pursuits, calls and meetings with analysts, publication of transcripts of such calls and meetings, and the like are set out in the schedule.
The code of practices and procedures for fair disclosure of upsi as per Schedule A would have to be approved by the Board of Directors in its meeting. On approval the code would have to forwarded to the stock exchange. The code would have to have to hoisted in the Website of the company. This would only fulfil the criteria of disclosure of any upsi in the know of an insider.
Note to the provision intends to require every company whose securities are listed on stock exchanges 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. Principles such as, equality of access to information, publication of policies such as those on dividend, inorganic growth pursuits, call and meetings with analysts, publication of transcripts of such calls and meetings, and the like are set out in the schedule.
2. SCHEDULE A [ R 8(1) ]
[ sub-regulation (1) of regulation 8]
Principles of Fair Disclosure for purposes of Code of Practices and Procedures for Fair Disclosure of Unpublished Price Sensitive Information.
The provisions are very clear that the aforesaid principles cannot be diluted while being adopted by the Board of Directors of a company.
R 8(2) states that every code of practices and procedures for fair disclosure of unpublished price sensitive information and every amendment thereto shall be promptly intimated to the stock exchanges where the securities are listed. Presently there are only two stock exchanges i.e BSE and NSE in the country. The other stock exchanges non-functional.
Note to the provision states that it is aimed to provide transparent disclosure of the Code of Fair Disclosure formulated as required by R 8(1).
3. Code of Conduct
R 9(1) of the Regulations state that the Board of directors of every listed company and market intermediary i.e. Merchant Bankers, Stock Brokers, Syndicate Members,Registrars, Underwriters,Bankers to an Issue, Portfolio Managers, Debenture Trustees, FIIs, Depositors, DPs,Custodians, Credit Rating Agencies, Venture Capitalists. shall formulate a code of conduct to regulate, monitor and report trading by employees and other connected persons towards achieving compliance of the regulations, adopting minimum standards set out in Schedule B to the regulations, without diluting the provisions of these regulations in any manner.
Note to the provision states that every listed company and every market intermediary registered with SEBI is mandatorily required to formulate to a code of conduct governing trading by its employees. The standards set out in the schedule are required to be addressed by such code of conduct.
R 9(2) states that every other person who is required to handle upsi in the course of business operations of a listed company shall formulate code of conduct to regulate, monitor, report trading by employees and other connected persons towards achieving compliance with these regulations, adopting the minimum standards set out in Schedule B to the regulations without dilution of the provisions in any manner.
Note to the regulations state that the provision is intended to mandate persons other than listed companies and market intermediaries that are required to handle upsi to formulate a code of conduct governing trading in securities by their employees. The entities are professional firms such as auditors, accountancy firms, law firms, analysts, consultants etc., assisting or advising listed companies, market intermediaries and other capital market participants. Even entities that normally operate outside the capital market may handle upsi. The provision requires all of them to formulate a code of conduct.
As per R 9 (3) every listed company, market intermediary and other persons formulating code of conduct shall indentify and designate a compliance officer to administer the code of conduct and other requirements according to the regulations.
Note to the provision states that the provision intends to designate a senior officer as the compliance officer with responsibility to administer the code of conduct and monitor compliance with these regulations.
4. SCHEDULE B [ R 9 (1) & (2) ]
[ sub- regulation(1) and sub-regulation (2) of regulation 9]
Minimum Standards for Code of Conduct to Regulate, Monitor and Report Trading by Insiders.
Disclosure by insiders is important to curb insider trading. The Regulations lay down principles for fair disclosure of uspi obtained by insiders. R 8 (1) under Chapter IV in Schedule A to the Regulations states the Principles of Fair Disclosure for the purposes of Code of Fair Practices and Conduct Procedures for Fair Disclosure of Unpublished Price Sensitive Information by insiders. R 9 (1) and (2) in Schedule B to the Regulations states of the Minimum Standards for Code of Conduct to Regulate, Monitor and Report Trading by Insiders. Board of Directors of listed companies are required to approve and adopt these regulations without change. They must be disclosed in its web site and must be informed communicated to the Stock Exchanges where the securities are listed. For an orderly securities market Insider trading needs to be checked by all means. Role of the Compliance Officer is significant for implementation of the Code of Fair Disclosure and Code of Conduct of insiders which includes connected persons. It is important for the Board of Directors to allow the Compliance Officer to function as per the Regulations. The Regulations in R 2(1) ( c ) defines Compliance Officer. Any senior officer can be a designated Compliance Officer . So a Company Secretary may not be the Compliance Officer. Framers of the Regulations must have found the logic of having any senior officer as the Compliance Officer. Why any other senior officer other than the Company Secretary be appointed as Compliance Officer is not known. Having the Company Secretary as the Compliance Officer for the purpose of these Regulations would have been beneficial for the companies. Implementation of the Regulations in the right spirit by companies is sine qua non.
The Regulations have laid down stipulations for all those who can bring about disequilibrium in the securities market. However, the Regulations have not been able to lay down stipulation in respect information passed on to a person who is not an insider e.g. an insider passing on uspi to an outsider and the outsider acts on the same. In US the Regulator has gone to the extent of detecting conversation over phone after a Board Meeting by an insider to an outsider. The current Regulations is deficient in this aspect and this area needs to be brought under scanner. The Regulation’s successful implementation depends on the insiders which includes connected persons but if the insiders fail to follow the requirements as per the provisions laid down in the Regulations, there seems to be a gap which needs to be monitored.
6. Danger of the Principles of Fair Disclosure for purposes of Code of Practices and Procedures for Fair Disclosure of Uspi – para 2.
Para 2 of Schedule A has the words, `unpublished price sensitive ‘ repeated and the repetition needs to be deleted by the Regulator otherwise all listed companies will have the mistake in their Principles of Fair Disclosure for purpose of Code of Practices for Fair Disclosure of Upsi submitted to the stock exchanges where shares are listed as none of the companies can modify the principles prepared and submitted pursuant to R 8(1) to the stock exchanges and hoisted in their website.
However, the provisions of the Regulations are honest in approach to have transparent market practices for the securities market. Implementation of the Regulations need to be monitored to see the fulfillment of the current Regulations.
Author : CS Saibal Chandra Pal, Advocate
Securities Law & Financial Sector Regulatory Practice
Edited by : Soubhik Chakraborty, Advocate
[ Opinion expressed is that of the Author]
Copyright & Publishing Rights with Author.