Codes of Fair Disclosure and Conduct – Provisions under SEBI (Prohibition of Insider Trading) Regulations, 2015

1. Introduction

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company shall lay down and publish on its official website, a code of practices and procedures for fair disclosure of unpublished price sensitive information that would be followed to adhere to each of the principles laid down in Schedule A to the Regulations, without diluting the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) ]

                                                           SCHEDULE A

                                         [ 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Principles of Fair Disclosure for purposes of Code of Practices and Procedures for Fair Disclosure of Unpublished Price Sensitive Information.

1. Prompt public disclosure of unpublished price sensitive information that would impact price discovery no sooner than credible and concentrate information comes into being in order to make such information generally available.
2. Uniform and universal dissemination of unpublished price sensitive information to avoid selective disclosure.
3. Designation of a senior officer as a chief investor relations officer to deal with dissemination of information and disclosure of unpublished price sensitive information.
4. Prompt dissemination of unpublished price sensitive information that gets disclosed selectively, inadvertently or otherwise to make such information generally available.
5. Appropriate and fair response to queries on news report and requests for verification of market rumours by regulatory authorities.
6. Ensuring that information shared with analysts and research personnel is not unpublished price sensitive information.
7. Developing best practices to make transcripts or records of proceedings of meetings with analysts and other investor relations conferences on the official website to ensure official confirmation and documentation of disclosures made.
8. Handling of all unpublished price sensitive information on a need –to-know basis.

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) ]

                                                       SCHEDULE   B

                         [ sub- regulation(1) and sub-regulation (2) of regulation 9]

Minimum Standards for Code of Conduct to Regulate, Monitor and Report Trading by Insiders.

1. The Compliance Officer shall report to the board of directors and in particular, shall provide reports to the Chairman of the Audit Committee, if any, or to the Chairman of the Chairman of the board of directors at such frequency as may be stipulated by the board of directors.
2. All information shall be handled within the organization on a need-to-know basis and no unpublished price sensitive information shall be communicated to any person except in furtherance of the insider’s legitimate purposes, performance of duties or discharge of his legal obligations. The code of conduct shall contain norms for appropriate Chinese Walls procedures, and processes for permitting any designated person to “ cross the wall.”
3. Employees and connected persons designated on the basis of their functional role (“designated person”) in the organization shall be governed by an internal code of conduct governing dealing in securities. The board of directors shall in consultation with the compliance officer specify the designated persons to be covered by such code on the basis of their role and function in the organization. Due regard shall be had to the access that such role and function would provide to unpublished price sensitive information in addition to seniority and professional designation.
4. Designated persons may execute trades subject to compliance with these regulations. Towards this end, a notional trading window shall be used as an instrument of monitoring trading by the designated persons. The trading window shall be closed when the compliance officer determines that a designated person or class of designated persons can reasonably be expected to have possession of unpublished price sensitive information. Such closure shall be imposed in relation to such securities to which unpublished price sensitive information relates. Designated persons and their immediate relatives shall not trade in securities when the trading window is closed.
5. The timing for re-opening of the trading window shall be determined by the compliance officer taking into account various factors including the unpublished price sensitive information in question becoming generally available and being capable of assimilation by the market, which in any even shall not be earlier than forty-eight hours after the information becomes generally available. The trading window shall also be applicable to any person having contractual or fiduciary relation with the company, such as auditors, accountancy firms, law firms, analysts, consultant etc., assisting or advising the company.
6. When the trading window is open, trading by designated persons shall be subject to pre-clearance by the compliance officer, if the value of the proposed trades is above is such thresholds as the board of directors may stipulate. No designated person shall apply for pre-clearance of any proposed trade if such designated person is in possession of unpublished price sensitive information even if the trading window is not closed.
7. The compliance officer shall confidentially maintain a list of such securities as a “ restricted list” which shall be used as the basis for approving or rejecting applications for pre-clearance of trades.
8. Prior to approving any trades, the compliance officer shall be entitled to seek declarations to the effect that the applicant for pre-clearance is not in possession of any unpublished price sensitive information. He shall also have regard to whether any such declaration is reasonably capable of being rendered inaccurate.
9. The code of conduct shall specify any reasonable timeframe, which in any event shall not be more than seven trading days, within which trades that have been pre-cleared have to be executed by the designated person, failing which fresh pre-clearance would be needed for the trades to be executed.
10. The code of conduct shall specify the period , which any event shall not be less than six months, within which a designated person who is permitted to trade shall not execute a contra trade. The compliance officer may be empowered to grant relaxation from strict application of such restriction for reasons to be recorded in writing provided that such relaxation does not violate these regulations. Should a contra trade be executed, inadvertently or otherwise, in violation of such a restriction, the profits from such trade shall be liable to be disgorged for remittance to the Board for credit to the Investor Protection and Education Fund administered by the Board under the Act.
11. The code of conduct shall stipulate such formats as the board of directors deems necessary for making applications for pre-clearance, reporting of trades executed, reporting of decisions not to trade after securing pre-clearance, recording of reasons for such decisions and for reporting level of holdings insecurities at such intervals as may be determined as being necessary to monitor compliance with these regulations.
12. Without prejudice to the power of the Board under the Act, the code of conduct shall stipulate the sanctions and disciplinary actions, including wage freeze, suspension etc., that may be imposed, by the persons required to formulate a code of conduct under sub-regulation(1) and sub-regulation (2) of regulation 9, for the contravention of the code of conduct.
13. The code of conduct shall specify that in case it is observed by the person required to formulate a code of conduct under sub-regulation (1) and sub-sub-regulation (2) of regulation 9, that there has been a violation of these regulations, they shall inform the Board promptly.

5. Discussion         

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.

7. Conclusion

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.

Source : SEBI (Prohibition of Insider Trading ) Regulations,2015