SEBI has issued and notified the SEBI (Prohibition of Insider Trading) Regulations, 2015 (Regulations) on 15th January, 2015. A high Level Committee (‘Committee’) was constituted by SEBI under the chairmanship of Justice Shri N.K Sodhi, former chief justice of Karnataka and Kerala High Courts and former presiding officer of the Securities Appellate Tribunal to review the Regulations. Based on the recommendation of the committee, these Regulations have been formulated.
While some of the Regulations have been enacted at par with the international practices to bring more clarity, some of the Regulations are more onerous and testing for the corporate to implement at initial stage. The Regulations are precisely more clear in some aspects say as on what to be construed as price sensitive information by defining specifically “generally available information” separately. The said Regulation also laid down the concept of “pre-trading plan” for those insiders who are supposed to have unpublished price sensitive information throughout the year. The landmark deviation in new Regulations in context to the 1992 regulation is right of defense by the insider to rebut the charges of insider trading. The Regulations though establish all together a new set of governance by legislating these Regulations in all-inclusive way covering disclosures of trading by KMP/Directors/promoters as well as employees on crossing the threshold of Rs. 10 lakh in value. On the other hand, some Regulations have been left for open ended for discussion requiring clarity such as whether the stock options granted to employees can be exercised by employee during closure of trading window. Looking into the Regulations, it indicates that such ESOP can only be exercised if disclosed in trading plan as submitted by employee and further whether such trading plan can be executed during the closure of the trading window or not is not specifically mentioned. Another ambiguity in the Regulations relates to the requirement of disclosure of trades in securities by directors, promoters as well as employees on crossing the threshold of Rs. 10 lakhs in value, which seems to be too much arduous for the companies having market price of share above or approx. Rs. 1000 (means triggering disclosure on acquisition/dispose of approx.1000 shares). It would have been more rational to have the requirement of continual disclosure limited to KMP/directors/promoters on threshold of Rs. 10 lakh in value and for employees the threshold could have been kept at higher value say Rs. 15 or 20 lakh.
The new Regulations also cast duties on the compliance officer appointed under the Regulations including monitoring and compliances of requirements under the Regulations. Such duties are to be undertaken very prudently. Say in case of employees where there is no requirement of initial disclosure but continual disclosure is required to be made in case of triggering the threshold. In such a case, it would be difficult for the compliance officer to check whether compliances are made or not. Above this, the Regulations also put an onus on the company to intimate trading crossing a threshold of Rs. 10 lakh in value irrespective of the disclosure receive by the employee as the Regulation 7(2)(b) states as follows-
“Every company shall notify the particulars of such trading to the stock exchange on which the securities are listed within two trading days of receipt of the disclosure or from becoming aware of such information”
Refer the above, it is very clear that company shall put in place a system to monitor trading of all its employees unlike of designated person as were required earlier regulations.
What’s new in Regulations
- Connected person now also includes any person who is or has during the six months prior to the concerned act been associated with a company, directly or indirectly, in any capacity including by reason of frequent communication with its officers or by being in any contractual, fiduciary or employment relationship.
- Disclosures by KMP and employees.
- Open to the insider to prove his innocence by demonstrating the circumstances mentioned in the proviso of Regulation 4.
- Trading plans for Insiders who are in possession of unpublished price sensitive information.
- Companies to establish code of practices and procedures for fair disclosure of unpublished price sensitive information.
- Disclosures by other connected person or class of connected persons at the discretion of the company.
Prohibition on communication:
The Regulation 3 prohibits the insider from communicating, providing, or allowing access to any unpublished price sensitive information except where such communication is in furtherance of legitimate purpose, performance of duties or discharge of legal obligations.
However in case of a transaction that would—(i)entail an obligation to make an open offer under the takeover regulation where the board of directors of the company is of informed opinion, or (ii)not attract the obligation to make an open offer under the takeover regulations but where the board of directors of the company is informed opinion that the proposed transaction is in the best interests of the company and the information that constitute unpublished price sensitive information is disseminated to be made generally available at least two trading days prior to the proposed transaction exemption from this Regulation has been provided
Prohibition on trading :
Regulation 4 prescribes that no insider shall trade in securities that are listed or proposed to be listed on stock exchange when in possession of unpublished price sensitive information.
However there are certain exemptions i.e. when there is an off-market transfer between promoters who are aware of price sensitive information or where the trading is pursuant to trading plan.
What is Trading plan
It is basically introduced with the concept to have transparent frame for trading in securities by those insiders who are having unpublished price sensitive information through the year. The insider would be required to submit trading plan in advance to the compliance officer for his approval. The compliance officer is also empowered to take additional undertakings from the insiders for approval of the trading plan. Such trading plan on approval will also be disclosed to the stock Exchanges, where the securities of the company are listed.
The trading plan shall comply with requirements as follows:
(i) It shall be submitted for a minimum period of 12 months.
(ii) No overlapping of plan with the existing plan submitted by Insider.
(iii) It shall set out either the value of trades to be effected or the number of securities to be traded along with the nature of the trade and the intervals at, or dates on which such trades shall be effected.
(iv) Trading can only commence only after 6 months from public disclosure of plan.
(v) No trading between 20th day prior to closure of financial period and 2nd trading day after disclosure of financial results.
(vi) Compliance officer to approve the plan.
(vii) The trading plan once approved shall be irrevocable and the insider shall mandatorily have to implement the plan, without being entitled to either deviate from it or to execute any trade in the securities outside the scope of the trading plan.(Except in few case like where insider is in possession of price sensitive information at the time of formulation of the plan and such information has not become generally available at the time of the commencement of implementation)
(viii) Upon approval of the trading plan, the compliance officer shall notify the plan to the stock exchanges on which the securities are listed.
Disclosures:
- Disclosures made by person shall also include those relating to trading by such person’s immediate relatives, and by any other person for whom such person takes trading decisions.
- The disclosures of trading in securities shall also include trading in derivatives of securities if permitted under law (please note that section 194 of the Companies Act, 2013 prohibits Director or KMP from entering into forward dealings etc.)
- Such disclosure shall be preserved for 5 years.
- Disclosure are classified as Initial and continual disclosures.
Initial Disclosures:
| By whom | To whom | When | |
| 1 | Every promoter, KMP and Director | Company | Within 30 days of these Regulations taking effect.(These Regulations are effective from 120th day of the date of notification i.e. on and from 15th May, 2015) |
| 2 | Every person on appointment as a KMP or a Director of the Company or upon becoming promoter | Company | Within 7 days of such appointment or becoming a promoter |
Continual Disclosure
| By whom | To whom | When | |
| 1 | Every promoter, employee and director.Since employee have been covered, the Regulations does not specify KMP separately | Company | Within 2 trading days if the trading value of the securities traded, whether in one transaction or a series of transactions over any calendar quarter, aggregate to a traded value in excess of Rs. 10 lakh. |
| 2 | The Company | Stock Exchange where the securities are listed | The particulars of trading within 2 trading days of the receipt of the disclosure or from becoming aware of such information. |
Disclosure by other connected person:
The company may at its discretion require any other connected person or class of connected persons to make disclosures of holdings and trading in securities of the company in such from and at such frequency as may be determined by the company.
Establishment of code of practices and code of conduct:
The Regulation requires the company – (i) to establish code of practices and procedures for fair disclosure of unpublished price sensitive information which also needs to be published on website, (ii) to formulate code of conduct to regulate, monitor and report trading by its employees and other connected persons towards achieving compliance with these Regulations.
With these practices as envisaged under the Regulations, it may be stated that to curb the activities by the insiders which motivate them to make superfluous advantage, it was a time to essentially have a broader frame of legislation but at the same time burdening the companies with some additional requirements, which are practically challenging, would also leave the spaces for the ambiguity to continue till SEBI comes out with FAQ/ clarification in this regard.
Author : Ravi Varma (renowned CS faculty)
Email Id: ravivarma8@gmail.com
Dear Mr. Kumar
Even the person who retired or resigned remains for 6 months a connected person of the company and hence cant not enter into opposite transaction.
An employee exercises all the vested options and resigns. Company allots the shares and also accepts resignation + relieves the employee. In this case can the employee sell the shares immediately after separation from the company or does have to wait for 6 months to sell the shares. Kindly help me out clarification
Sir
Does it mean that every employee will have to submit trading plan for trading in Company’s shares?
Is it practicable for large companies to track tradings of all the employees where there are lacs of employees ?
Is it possible for Compliance Officer to track trading plans of huge number of employees and ensure proper compliance of the Regulations ?
kind regards
s c jain