Gist of Insider Trading Regulation

What is Insider Trading?

Insider trading is defined as using unpublished price sensitive information to deal in securities of a company for one’s own benefit.

Implementation stage of Insider Trading Regulation in India

• SEBI (Insider Trading) Regulation, 1992
• Dec 7, 2013 Justice N K Sodhi Committee Report on review of 1992 Regulations
• May 15, 2015 SEBI (Prohibition of Insider Trading) Regulations , 2015 was implemented
• Dec 31 2015 Regulations were amended w.e.f. April, 1, 2019
• June 25, 2020 Regulation amended w.e.f. July 17, 2020
• Aug, 2021 Regulation amended Aug, 2021

Important Terminologies

Who is Insider?

As per Regulation 2(1)(g) of the SEBI (Prohibition of Insider Trading) Regulations, 2015– Insider is a Person who is “Connected” with the company, who could have the Unpublished Price Sensitive information (UPSI) or receive the information from somebody in the company.

• A Connected Person; or
• In possession of or having access to UPSI

Note- The term connected person is defined in regulation 2(1)(d) of the SEBI (Prohibition of Insider Trading) Regulations, 2015, which includes the following person:

• Any person associated with the company during the six months prior to the concerned act
• An immediate relative
• Holding/associate/subsidiary company
• An official of stock exchange or clearing corporation
• A Banker of the company
• A concern, firm, trust, HUF, company or AOP wherein above person having interest or holding more that 10%
• Legal consultant and auditors and other person having direct or indirect interest with the company

What is Unpublished Price Sensitive Information?

As per Regulation 2(1) (n) of the SEBI (Prohibition of Insider Trading) Regulations, 2015-

“unpublished price sensitive information” means any information, relating to a company or its securities, directly or indirectly, that is not generally available which upon becoming generally available, is likely to materially affect the price of the securities and shall, ordinarily including but not restricted to, information relating to the following: –

• financial results
• dividends
• change in capital structure
• Capital Restructuring
• changes in key managerial personnel

When Communication and Procurement of UPSI is Permitted? (Regulation 3)

No insider shall communicate, provide, or allow access to any unpublished price sensitive information, relating to a company or securities listed or proposed to be listed, to any person including other insiders except where such communication is in furtherance of legitimate purposes, performance of duties or discharge of legal obligations.

Note- The Term “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.

Trading when in possession of unpublished price sensitive information

General Rule- No insider shall trade in securities that are listed or proposed to be listed on a stock exchange when in possession of unpublished price sensitive information.

Exceptions of General Rule- (Regulation 4)

• An off-market inter-se transfer between insiders
• Transaction was carried out through the block deal window mechanism
• Pursuant to a statutory or regulatory obligation
• Pursuant to the exercise of stock options – if exercise price was pre-determined
• Pursuant to a Trading plan

Trading Plans (Regulation 5)

• These Regulation entail a new concept of trading plans which was not there under the erstwhile Regulations on Insider Trading.
• Insider shall have an option to formulate a Trading Plan & Present it to Compliance officer for approval & Public Disclosure. Upon approval, the compliance officer shall notify the Trading Plan to Stock Exchanges.
• Trading Plan shall be for a period of 12 months.
• Such Trading Plan shall not entail commencement of trading earlier than 6 months from public disclosure of plan.

DISCLOSURES OF TRADING BY INSIDERS-

Initial Disclosures: Every person on appointment as a key managerial personnel or a director of the company or upon becoming a promoter or member of the promoter group 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.

Disclosure to Stock Exchange-

• Off market trades executed by insiders have to be reported within 2 trading days to Stock exchange, upon receipt.
• If any promoter/ member of promoter group/ DP executes trade which exceeds Rs. 10 lakhs over the quarter, the same has to be reported within 2 trading days of receipt of information or becoming aware about the trade.
• Trading plan once approved has to be intimated to the Stock exchange
• Approval as well as any amendment to the code of fair disclosure has to be intimated to the Stock exchange
• Any violation of the Regulations or the Code of Conduct to be promptly intimated to the SE in the format specified by SEBI

CODES OF FAIR DISCLOSURE AND CONDUCT-