Insider Trading – Prevention, Control and Management

SEBI (Prohibition of Insider Trading) Regulations, 2015

Responsibilities of Compliance Officer under PIT Regulations 2(c)

♦ Compliance of Policies

♦ Compliance of Procedures

♦ Maintenance of Records

♦ Monitoring compliance of Rules for preservation of UPSI

♦ Monitoring of Trades

♦ Implementation of Code in guidance of ‘Board’

Insider 2(g)

♦ Insider means any person who is:

• a Connected Person
• in possession of UPSI
• having access to UPSI

Connected Person 2(d)(i)

♦ Any person who is or has been connected with the:

• Company, directly or indirectly in any capacity
  • By reason of frequent communication with the officer
  • By being in any contractual or fiduciary or employment relationship

♦ Directors

♦ Officers

♦ Employees

♦ Person having professional business relationship (that provides access to UPSI)

♦ Immediate relative of connected person

♦ Holding Co., Subsidiary Co. or Associate Co.

♦ Intermediary (or any employee or director thereof)

♦ Investment Co., Trustee Co., or Asset Management Co. (or any employee of director thereof)

♦ Official of Stock Exchange or Clearing House Corporation

♦ Member of Board of Trustee of Mutual Fund*

♦ Member of Board of Directors of Asset Management Co.*

*including its employees

Deemed Connected Person 2(d)(ii)

• Member of Board or Employee of PFI
• Any officer of employee of Self Regulatory Organisation
• Bankers of the Company
• Any Concern*
• Firm*
• Trust*
• HUF*
• Company*
• Association of Persons*

*Director + Immediate Relative + Banker = greater than 10% interest

Connected Person 2(d)

Connected person is a person who due to his association with the Company puts him in the possession of UPSI.

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This definition is also intended to bring into its ambit persons who may not seemingly occupy any position in a company but are in regular touch with the company and its officers and are involved in the know of the company’s operations.

What is Unpublished Price Sensitive Information 2(n)

• Any Information
  • Relating to company
  • Its securities
• Not generally available
• Likely to affect price of securities if made generally available
• Some examples (including but not limited to):
  • Financial Results
  • Dividend
  • Change in capital structure
  • Mergers, de-mergers, acquisitions, de-listings, disposals and expansion of business and such other transactions
  • Change in KMPs

Objectives of Insider Trading Code

• To prevent communication of UPSI by insiders
• To control trading in securities of a Company while in possession of UPSI;
• To make certain event-based disclosures in the event of trading;
• Reporting of Instances of Insider Trading norms violation.

Prevention of Communication 3

Regulation 3(1): No Insider shall communicate or provide access to UPSI to anyone.

Regulation 3(2): No person shall procure any communication by an insider of an UPSI.

Exception: UPSI can be provided or procured:

• in furtherance of legitimate purposes;
• performance of duties;
• discharge of legal obligations.

Legitimate Purpose 3(2A), 3(2B)

Responsibility on the Board to formulate policy for determination of legitimate purpose forming part of Codes of fair disclosure and conduct under regulation 8;

All persons receiving UPSI in accordance with policy of legitimate purpose will be deemed insiders.

Board of Directors shall give notice to recipient of the UPSI to maintain confidentiality.

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Exceptions to Regulation 4(1) cases where insider can prove his innocence 4(1)(i)

Off-market inter-se transfer between two insiders in possession of same UPSI without violation of Regulation 3; and both parties had made a conscious and informed decision.

Disclosure of trades would be required to be done by the insiders within two working days: to the Company;

Company to intimate the disclosure so received to the Stock Exchange(s) where its securities are listed within two days of receipt of disclosure or from becoming aware of such information.

Exceptions to Regulation 4(1) cases where insider can prove his innocence4(1)(ii)(iii)(iv)(v)

4(1)(ii) Block deal window mechanism transaction between two person in possession of same UPSI without violation of Regulation 3; and both parties had made a conscious and informed decision.

4(1)(iii) Transaction carried in pursuance of statutory or regulatory obligation to carry out a bonafide transaction;

4(1)(iv) Transaction undertaken pursuant to exercise of Stock Options where exercise price was pre-determined in compliance with applicable regulations.

4(1)(vi) Transaction in pursuance of Trading Plan.

Trading Plan 5(1)

Insiders can formulate trading plan

Trading plan to be submitted to Compliance Officer

Compliance Officer to disclosure Trading Plan on Stock Exchange(s) website.

Insiders who are in perpetual possession of Price Sensitive information can use Trading Plan to effectuate genuine trading in securities of the Company.

Contents of Trading Plan 5(2)(v)

Either:

• Value of Trades;
• Number of Securities to be traded;

Along with:

• Number of securities to be traded;
• Nature of trade;
• Trading Interval or dates of Trading.

(Trading Plan shall not entail trading for market abuse) 5(2)(vi).

Meaning of Market abuse

Market manipulation by doing/ not doing an act that creates false, misleading impression as to:

• Price;
• Supply;
• Demand;

With intention to make undue financial gain or any other benefit.

Approval and Monitoring of Trading plan 5(3)

• Compliance Officer to review Trading plan to assess whether there would be any possible violation of PIT Regulations.
• CO can ask for undertakings to assess, approve and monitor implementation of the plan.

(no pre clearance of trade would be required in case Trading plan has been approved by the CO)

Exception to Implementation of Trading Plan 5(4)

• If UPSI in possession of Insider hasn’t been made generally available at the commencement of implementation.

Disclosure of Trading Plan 5(5)

• Upon approval, Compliance Officer to disclosure Trading plan to Stock Exchanges(s) where securities are listed.

Disclsoures 6

Format: as specified by SEBI from time to time

Disclosure to: Stock Exchange(s) where securities listed

Trading by: Person, his immediate relatives, any other person for whom such person takes trading decisions.

Trading in: Securities and Derivatives

Record Keeping: Minimum Five Years

Type of Disclosures 7

• Initial disclosure
• Initial disclosure
• Disclosure by Connected Person

Initial Disclosure 7(1)(b)

• Who should make this disclosure?
  • Key Managerial Person
  • Director
  • Promoter
  • Promoter Group
• Triggering event to make this disclosure?
  • Appointment as KMP / Director
  • Becoming a Promoter / member of Promoter Group
• Time limit?
  • Within seven days of such appointment or becoming
• What disclosure to make?
  • Holding of securities on date of appointment or becoming.

Continual Disclosure – Company 7(2)(b)

• Who should make this disclosure?
  • Company
• Triggering event to make this disclosure?
  • Receipt of disclosure of trading under 7(2)(a) / becoming aware of such trading
• Time limit?
  • Within Two days above
• What disclosure to make?
  • Disclosure of trading received under 7(2)(a)

Code of Fair Disclosure and Conduct 8

Board to formulate code of practices and procedures for fair disclosure of UPSI as per Schedule A, that Company will follow.8(1)

Disclosure of such code is required to be made on website of the Company.8(1)

Disclosure of such code and every amendment thereto should be promptly intimated to Stock Exchange(s)8(2)

Code of Conduct to regulate, monitor and report trading 9

Board to ensure formulate a code of conduct (Annexure B) to:

• Regulate
• Monitor
• Report the trading.

By: Designated Persons and their immediate relatives

Compliance Officer to be designated by the Board to administer compliance of code of conduct

Board in consultation with Compliance Officer to specify designated person on whom code will be applicable.

Internal Control Mechanism 9A

• All employees having access to UPSI are identified as designated persons 9A(2)(a)
• All UPSI to be identified and its confidentiality to be maintained 9A(2)(b)
• Restriction on communication and procurement of UPSI 9A(2)(c)
• List of employees and other persons with whom UPSI shared to be maintained and confidentiality agreement be signed with them or notice served to all such employees or persons. 9A(2)(d)
• Periodic review of effectiveness of Internal Controls 9A(2)(f)

Role of Audit Committee 9A(4)

• Audit committee to review compliance with the provisions of these regulations atleast once in a financial year.
• Audit committee to verify that the systems for internal control are adequate and are operating effectively.

Procedure to deal with leak of UPSI 9A(5)(6)

Formulation and approval of policies and procedures by the Board for inquiry in case of leak/ suspected leak of UPSI; 9A(5)

Initiating inquiries on becoming aware of leak/ suspected leak of UPSI. Inform the Board promptly of any such leaks, inquiries and result of such inquiries; 9A(5)

Company to have Whistle Blower (‘WB’) Policy. 9A(6)

Employees to be made aware of the WB Policy to report instances of leak of UPSI. 9A(6)

Type of Disclosures to Stock Exchange(s)

Time limit 30(6)

• As soon as possible but within 24 hours of occurrence of event
• Schedule III, Part A, Para A, Sub Para 4, within 30 Minutes of conclusion of Board Meeting

Continual disclosure 30(7)

• Company to update material developments on regular basis with relevant explanations.
• Till the event is resolved/ closed

Disclosure on website 30(8)

• All events to be disclosed on website of the Company for a period of Five years.
• After five years, information to be dealt with as per archival policy of the Company.

Disclosure relating to Subsidiary 30(9)

• All events/ information of subsidiary that are material for the company

Schedule III, Part A, Para A, Para B

Thanks

By CS Mohnish Dutta| ICSI M.No. F10411