SEBI Inspections on compliance with SEBI (PIT) – Setting up of internal controls under SEBI (PIT)
Securities and Exchange Board of India (‘SEBI’) brought major amendments to Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 [‘SEBI PIT’] with effect from April 1. 2019. With this amendment SEBI inter-alia introduced the concept of ‘Structured Digital Database’ to track flow of unpublished price sensitive information. Maintenance of Structured Digital Database was made mandatory to all the market participants who are required to handle unpublished price sensitive information. Listed companies, fiduciary, intermediaries, and any other persons required to handle unpublished price sensitive information were required to maintain a structured digital database. To further strengthen the compliance with SEBI PIT, SEBI recently introduced the concept of ‘freezing of PAN at security level’ to prohibit insider trading during window closures for declaration of financial results.
To strictly enforce the provisions of structured digital database stock exchanges mandated listed companies to submit a certificate on compliance with structured digital database vide its circular dt: October 28, 2022[i]. This certification was latter on made part of annual secretarial compliance report submitted to stock exchanges by listed companies under regulation 24A of SEBI (Listing Obligations and Disclosure Requirements), Regulations, 2015. Now the maintenance of structured digital database is certified by a practicing company secretary in the annual secretarial compliance report[ii]. Also, SEBI through stock exchanges had carried out physical inspections of structured digital databases.
SEBI has been strictly enforcing provisions of SEBI PIT. Till date SEBI has passed more than 400 orders (including adjudication and settlement orders) pertaining to violation of SEBI PIT, insider trading, violation of code of conduct etc. These depict efforts taken by SEBI in implementing and enforcing provisions relating to SEBI PIT.
Introduction
Market intermediaries are also required handle unpublished price sensitive information. It seems SEBI has now started questioning the compliance with SEBI PIT with the intermediaries also.
SEBI vide its adjudication orders dt: May 30, 2024, penalized Finshore Management Services Pvt Ltd and Aryaman Financial Services Ltd for non-compliance with various provisions of SEBI PIT[iii]. SEBI in its regular inspection of merchant bankers had sought details of compliance with SEBI PIT by these merchant bankers. On perusal of practices being followed by merchant bankers with respect to compliance with SEBI PIT SEBI raised concerns.
SEBI during investigation found that merchant bankers had not complied with following:
1. Code of conduct as per SEBI PIT was adopted in 2019 when it was newly introduced and since then the code of conduct was not updated with subsequent amendment to SEBI PIT
2. Failure to maintain list of designated persons, Structured Digital Database and deficiencies in the internal controls put in place by the merchant bankers.
These orders also highlight that SEBI in their inspection at these merchant bankers had sought following data for checking compliance with SEBI PIT as an intermediary:
1. Details of Compliance Officer designated under SEBI PIT along with a certified true copy of Board Resolution passed for the same.
2. Code of Conduct under SEBI PIT (Schedule C) along with a certified true copy of the Board Resolution passed for the same.
3. List of Designated Persons (DPs), as per SEBI PIT.
4. Write up on internal controls along with an extract of Board minutes reviewing the same.
5. Walk through of Structured Digital Database (SDD) required to be maintained under SEBI PIT.
These orders highlight that SEBI has started seeking details of compliances with respect to SEBI PIT from intermediaries. So, this might be seen as a trend wherein SEBI has started seeking details of SEBI (PIT) compliance from intermediaries.
Internal Controls under SEBI (PIT)
Reg. 9A (1) of SEBI (PIT) states that Chief Executive Officer, Managing Director, or such other analogous person of a listed company, intermediary or fiduciary shall put in place adequate and effective system of internal controls to ensure compliance with the requirements given in these regulations to prevent insider trading. Internal controls shall include framing processes for identification of designated persons, processes for identification of UPSI and maintaining its confidentiality, placing restrictions on communication or procurement of unpublished price sensitive information, entering into confidentiality agreements with persons with whom UPSI is shared, and periodic process review to evaluate effectiveness of such internal controls.
The responsibility for setting up these internal controls is with the Chief Executive Officer, Managing Director, or such other analogous person of the intermediaries. It is not only about setting up of internal controls but also about reviewing these internal controls.
SEBI has been penalising Managing Director of listed companies for not having internal controls relating to SEBI (PIT) in place. Recently SEBI has penalised renowned listed companies for not having internal controls[iv].
Conclusion
SEBI registered intermediaries are a crucial link in the handling of UPSI. Intermediaries are not actual ‘insiders’ i.e. they are third parties with whom UPSI is shared on a need-to-know basis. Once UPSI reaches the intermediaries onus is on them to ensure that the UPSI is handled responsibly within the intermediary. Hence it is necessary that proper controls are set up for administration of SEBI (PIT) at each and every intermediary.
This article is written by Mr. Vallabh M Joshi – Senior Manager – [email protected]
[i] https://taxguru.in/sebi/sop-sebi-pit-regulations-2015-compliance-sdd.html
[ii] https://www.bseindia.com/markets/MarketInfo/DispNewNoticesCirculars.aspx?page=20230329-21
[iii] https://www.sebi.gov.in/enforcement/orders/may-2024/adjudication-order-in-the-matter-of-finshore-management-services-limited-_83723.html and https://www.sebi.gov.in/enforcement/orders/may-2024/adjudication-order-in-the-matter-of-aryaman-financial-services-ltd-_83783.html
[iv] https://www.sebi.gov.in/enforcement/orders/jun-2024/settlement-order-in-settlement-application-no-7401-of-2023-filed-by-salil-parekh-pan-aaepp5758n-in-the-matter-of-insider-trading-in-the-scrip-of-infosys-ltd-_84427.html and https://www.sebi.gov.in/enforcement/orders/apr-2023/settlement-order-in-respect-of-mr-punit-goenka-in-the-matter-of-zee-entertainment-enterprises-limited_70163.html
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