Role of Compliance Officer under SEBI Insider Trading Regulations

Role of Compliance Officer under SEBI (Prohibition of Insider Trading) Regulations, 2015

SEBI (Prohibition of Insider Trading) Regulations, 2015 “Regulations” has always posed challenges for the Compliance Officers to implement and ensure compliance. Adherence with these regulations primarily depends on the employees of the Company, connected persons and other such person who is privy to price sensitive information. The Compliance Officer has to play the role of watchdog for the Company and ensure that unpublished price sensitive information (UPSI) is handled with utmost diligence, ensure people having access to UPSI do not trade in Company shares or misuse the information and make the timely disclosures to Stock Exchanges.

Over the years SEBI has taken stringent action against the violation of these Regulations. As per SEBI’s Annual Report F.Y. 18-19, SEBI investigated 15 cases of violations of these Regulations in 2017-18 whereas the investigations undertaken in 2018-19 were 70. Further, for conducting investigations and tracing connections, SEBI has used matrimonial sites, various social media sites like Facebook and Instagram. This itself is enough to understand how serious the regulator is in ensuring compliance requirements as prescribed are met with. Hence, it is very crucial for the Compliance officer to be aware of his/her duties.

The duties of Compliance Officer and some measures that can be taken to adhere to these Regulations are briefed below:

Who can be designated as Compliance Officer?

Any senior officer, designated so and reporting to the board of directors of the listed company or head of the organization in case board is not there, who is financially literate and is capable of appreciating requirements for legal and regulatory compliance under these Regulations and who shall be responsible for compliance of policies, procedures, maintenance of records, monitoring adherence to the rules for the preservation of UPSI, monitoring of trades and the implementation of the codes specified in these Regulations under the overall supervision of the board of directors of the listed company or the head of an organization, as the case may be.

Explanation – For the purpose of this regulation, “financially literate” shall mean a person who has the ability to read and understand basic financial statements i.e. balance sheet, profit and loss account, and statement of cash flows.

The definition itself gives a list of responsibility of the Compliance Officer, however below are the key points section-wise to ascertain the role of Compliance Officer under this Regulations.

Code of Fair Disclosure and Code of Conduct :

A. Code of Fair Disclosure:

• To ensure Company’s Code of Practices and Procedures for Fair Disclosure of UPSI is formulated along with a policy for determination of “legitimate purposes” without diluting the provisions of the Regulations.
• To publish the Code on official website of the listed company.
• To intimate to Stock Exchanges where the securities are listed, providing this code and every amendment thereto.

B. Code of Conduct:

• To ensure a code of conduct to regulate, monitor and report trading by its employees and other connected persons is formulated without diluting the provisions of the Regulations.
• To ensure designated persons are covered by the code of conduct based on their role and function in the organization and the access that such role and function would provide to UPSI in addition to seniority and professional designation including but not limited to the persons covered in the Regulations.
• To administer the code of conduct and monitor compliance with these Regulations – Send emails to the designated persons informing about the code and restrictions on trading while in possession of UPSI.
• To obtain yearly confirmation from the designated persons under the Code.

Trading Plan

• To review and approve the trading plan, if any, submitted by insiders upon being convinced that such plan is not in violation of these Regulations.
• To seek necessary information and undertaking from the person submitting such plans as may be necessary to enable such assessment.
• To seek declaration from the person that neither he/she is in possession of UPSI and will not trade with the shares of the company while having access to UPSI.
• To notify the Stock Exchanges upon approval of the trading plan;
• To confirm that the commencement of the plan is deferred, if the insider is in possession of UPSI until such UPSI becomes generally available information.
• To approve and monitor the implementation of the plan.

Trading window closure

• To close the trading window if the Compliance Officer determines that a designated person or class of designated persons can reasonably be expected to have possession of UPSI or during corporate actions.
• To restrict trading from the end of every quarter until 48 hours after the declaration of financial results.
• To ensure that the gap between clearance of accounts by audit committee and board meeting should be as narrow as possible and preferably on the same day to avoid leakage of material information.

The timing for re-opening of the trading window shall be determined by the Compliance Officer taking into account various factors including the UPSI in question becoming generally available to public and being capable of assimilation by the market, which in any event shall not be earlier than forty-eight hours after the information becomes generally available.

Pre-clearance before Trading in company shares

• To ensure that designated persons obtain preclearance from the Compliance officer – if the value of the proposed trades is above such thresholds as the board of directors of the company may stipulate in the Company’s code.
• To seek declarations to the effect that the applicant for pre-clearance is not in possession of any UPSI prior to approving any trades. He shall also have regard to whether any such declaration is reasonably capable of being rendered inaccurate.
• To ensure that the pre-clearance given is not for more than seven days.
• To ensure that designated person who is permitted to trade shall not execute a contra Trade within six months.
• To confidentially maintain a list of such securities as a “restricted list” which shall be used as the basis for approving or rejecting applications for preclearance of trades (applicable to Intermediaries and Fiduciaries)
• To ensure that the details of the trade are informed to the Stock Exchanges in the given format if the number of securities traded/or amount crosses the threshold limit.

Disclosures

A. Disclosure by certain persons

• To ensure initial disclosures are given to the Company by every person becoming a promoter, member of promoter group or upon appointment as key managerial personnel and director within seven days from such appointment or becoming promoter.
• To ensure continual disclosures are done to the Company by promoter, employee and director, within two trading days, if the value of securities acquired or disposed of aggregates to ten lakh rupees in a calendar quarter.

B. Disclosure to the Stock Exchanges

• To ensure that every continual disclosure received by the Company is notified to stock exchange within two trading days of receipt of the disclosure or from becoming aware of such information.
• To ensure that every public disclosure under these Regulations are done as per the specified format.
• To ensure that the disclosure made under these Regulations must be maintained for            at least five years.
• Further if there is any doubt whether a disclosure must be made or no, it is advisable to make it.

Disclosure to the Board

• To report to the board of directors of the company and in particular, shall provide reports to the Chairman of the Audit Committee, if any, or to the Chairman of the board of directors at such frequency as may be stipulated by the board of directors, but not less than once in a year.
• Apart from the reporting requirements mentioned above, any details of trading in company shares that are without following the requisite procedure that comes to the knowledge of the Compliance Officer must be informed to the Stock Exchange within two working days.

Conclusion

Though the policies and the framework for prohibition of Insider Trading is decided and approved by the Board of Directors of the Company, it’s the Compliance Officer who must acquaint the Board of the requirements of the Regulations and ensure that the same is implemented. Some measures that can be taken by the Compliance Officer like creating awareness amongst designated persons; Ensuring internal controls and protocols within the organization are complied with; prompt, uniform and universal public disclosure of UPSI; Handling all UPSI on need to know basis; Ensuring a structured digital database is set-up as required under the Regulations. Further if UPSI is required to be shared for legitimate purposes, notices to be served for maintaining confidentiality and sign non-disclosure agreements to keep information so received confidential.

The views mentioned in this article belong to the author alone and do not represent the opinions of the institutions affiliated with the authors. Any error is regretted. For comprehensive understanding of the protocols in place it is advisable to go through the following links.

https://www.sebi.gov.in/sebiweb/home/HomeAction.do?doListing=yes&sid=1&ssid=3&smid=0