Insider Trading essentially denotes dealing in a company’s securities on the basis of confidential information, relating to the company, which is not published or not known to the public (known as ‘unpublished price-sensitive information), used to make personal profits or avoid loss.
The practice of Insider Trading came into existence ever since the very concept of trading of securities of a company became prevalent among the investors worldwide and has now become a formidable challenge for investors all over the world.
To understand the regulations, we first need to understand the basic definitions:
1. “Insider” means any person who,
- is or was connected with the company or is deemed to have been connected with the company and is reasonably expected to have access to unpublished price sensitive information in respect of securities of company, or
- has received or has had access to such unpublished price sensitive information.
2. “Connected Person” means any person who—
- any person who is or has during six months prior to the concerned Act has 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 relation) or
- is a director, officer or an employee of the company or holds any position including a professional or business relationship between himself and the company, whether temporary or permanent; or
that allows such person, directly or indirectly, access to unpublished price-sensitive information or reasonably expected to allow such access.
3. “Person is deemed to be a connected person”, if such person—
- is a company under the same management or group, or any subsidiary company thereof or
- is an intermediary, Investment company, Trustee Company, Asset Management Company or an employee or director thereof or an official of a stock exchange or of clearing house or corporation
- is a merchant banker, share transfer agent, registrar to an issue, debenture trustee, broker, portfolio manager, Investment Advisor, sub-broker, Investment Company or an employee thereof, or is member of the Board of Trustees of a mutual fund or a member of the Board of Directors of the Asset Management Company of a mutual fund or is an employee thereof who have a fiduciary relationship with the company
- is a Member of the Board of Directors or an employee of a public financial institution
- is an official or an employee of a Self-regulatory Organisation recognised or authorised by the Board of a regulatory body; or
- is a relative of any of the aforementioned persons;
- is a banker of the company.
- relatives of the connected person; or
- is a concern, firm, trust, Hindu undivided family, company or association of persons wherein any of the connected persons or any of the persons mentioned in sub-clause (vi), (vii) or (viii) of this clause have more than 10 per cent of the holding or interest.
4. “Price sensitive information” means any information which relates directly or indirectly to a company and which if published is likely to materially affect the price of securities of company.
Explanation.—The following shall be deemed to be price sensitive information :— (i) periodical financial results of the company; (ii) intended declaration of dividends (both interim and final); (iii) issue of securities or buy-back of securities; (iv) any major expansion plans or execution of new projects. (v) amalgamation, mergers or takeovers; (vi) disposal of the whole or substantial part of the undertaking; (vii) and significant changes in policies, plans or operations of the company.
5. “Unpublished” 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
- Mergers, de-mergers, acquisitions, delisting, disposals and expansion of business and such other transactions
- Changes in Key Managerial Personnel
PROHIBITION ON DEALING, COMMUNICATING OR COUNSELLING ON MATTERS RELATING TO INSIDER TRADING
No insider shall—
- either on his own behalf or on behalf of any other person, deal in securities of a company listed on any stock exchange when in possession of any unpublished price sensitive information; or
- communicate or counsel or procure directly or indirectly any unpublished price sensitive information to any person who while in possession of such unpublished price sensitive information shall not deal in securities.
Provided that nothing contained above shall be applicable to any communication required in the ordinary course of business or profession or employment or under any law.
No company shall deal in the securities of another company or associate of that other company while in possession of any unpublished price sensitive information.
INSIDER NOT TO TRADE IN SECURITIES WHILE IN POSSESSION OF UNPUBLISHED PRICE SENSITIVE INFORMATION
An insider shall not trade in securities, which are listed or proposed to be listed on stock exchange, when in possession of unpublished price sensitive information, except in the following situations:
- where there is an off-market inter-se transfer between insiders who were in possession of the same unpublished price sensitive information, or
- the transaction was carried through the block deal window mechanism between persons who were in the possession of the unpublished price sensitive information
Provided that:
- there should be no breach of regulations
- both the parties had made a conscious and informed trade decision
CONCEPT OF TRADING PLANS
In every company there are persons holding key managerial positions or promoters who may be perpetually in possession of Unpublished Price Sensitive Information (UPSI). For such persons it is impossible to trade in the securities of the Company. These persons are always involved in decision making and thus have access to UPSI. Trading plans provide such persons opportunity to trade in the securities of the company without compromising the prohibitions imposed under the PIT Regulations.
It is a mechanism which facilitates monetizing of securities by insiders on a regular basis who may otherwise be unable to trade in securities of the company. The compliance officer shall review the trading plan to assess whether the plan would have any potential for violation of these regulations and shall be entitled to seek such express undertakings as may be necessary to enable such assessment and to approve and monitor the implementation of the plan.
To curb the abuse of the Trading Plans, certain safeguards have been built in the provisions of PIT Regulations, which are:
- cooling off period of six months
- no trading during specified periods
- trading plan to cover a period of at least 12 months
- no overlapping of trading period in two trading plans
- approval of trading plan
- public dissemination of trading plan
- mandatory implementation of trading plan
- trading plan to be deferred in case UPSI at the time of formulation of the trading plan is not generally available at the time of execution of trades.
DISCLOSURE REQUIREMENTS
Initial Disclosures:
Every Promoter/Member of Promoter Group/Director/Key Managerial personnel to disclose holding of their securities to the company Within 7 days from the date of their appointment/becoming promoter or member of promoter group.
Continued Disclosures:
Every promoter/ Member of Promoter Group/Designated Person/director to disclose to the company the number of such securities acquired or disposed of within two trading days of such transaction if the value of the securities traded, whether in one transaction or a series of transactions over any calendar quarter, aggregates to a traded value in excess of ten lakh rupees or such other value as may be specified.
Company to notify to the exchange within 2 trading days of receipt of intimation.
Disclosures By Other Connected Persons:
Any other connected person or class of connected persons to make disclosures of holdings and trading in listed securities as prescribed.
CODE OF FAIR DISCLOSURE AND CONDUCT
Principles for fair disclosure shall be as follows:
1. Prompt public disclosure of unpublished price sensitive information that would impact price discovery no sooner than credible and concrete information comes into being in order to make such information generally available.
2. Uniform and universal dissemination of unpublished price sensitive information to avoid selective disclosure.
3. Designation of a senior officer as a chief investor relations officer to deal with dissemination of information and disclosure of Unpublished price sensitive information.
4. Prompt dissemination of unpublished price sensitive information that gets disclosed selectively, inadvertently or otherwise to make such information generally available
5. Appropriate and fair response to queries on news reports and requests for verification of market rumours by regulatory authorities.
6. Handling of all unpublished price sensitive information on a need-to-know basis.
Code of Conduct:
1. The board of directors or head(s) of the organisation, of every other person who is required to handle unpublished price sensitive information in the course of business operations shall mandatorily formulate a code of conduct to regulate, monitor and report trading by their designated persons and immediate relative of designated persons towards achieving compliance with these regulations, adopting the minimum standards set out in Schedule C.
2. Every listed company, intermediary and other persons formulating a code of conduct shall identify and designate a compliance officer to administer a code of conduct and other requirements.
3. The board of directors shall in consultation with the compliance officer specify the designated persons to be covered by the code of conduct on the basis of their role and function in the organisation and the access that such role and function would provide to unpublished price sensitive information in addition to seniority and professional designation.
PENALTY PROVISIONS FOR VIOLATIONS OF THE REGULATIONS
If any insider who,—
- either on his own behalf or on behalf of any other person, deals in securities of a body corporate listed on any stock exchange on the basis of any unpublished price-sensitive information; or
- communicates any unpublished price-sensitive information to any person, with or without his request for such information except as required in the ordinary course of business or under any law; or
- counsels, or procures for any other person to deal in any securities of any body corporate on the basis of unpublished price-sensitive information, shall be liable to a penalty which shall not be less than ten lakh rupees but which may extend to 25 Crore rupees or three times the amount of profits made out of insider trading, whichever is higher.
APPEAL TO SECURITIES APPELLATE TRIBUNAL
Violation of the provisions of these regulations attract huge monetary penalty and may lead to criminal prosecution. However, those aggrieved by an order of SEBI, may prefer an appeal to the Securities Appellate Tribunal within a period of 45 days of the order.
CONCLUSION
The SEBI has strengthened the laws on Insider Trading by introducing amendment. Insider Trading is the misuse of Privileged position and breach of trust which affects the whole structure of Securities market. The Companies that are affected by Insider Trading becomes inefficient.
The leak of price sensitive information can be beneficial to some investors but harmful to others. The investors with the price sensitive information takes abnormal gains at the cost of other investors and this affects the transparency of the market. Insider Trading is the practice that is prevalent from the start and it is not possible to end it completely, but efforts can be made to curb this evil practice to reach at a greater extent.
The author can be reached at shubhikhandelwal30@yahoo.com
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