SEBI has been constantly focusing on developing and regulating the Indian capital market to boost the investor’s confidence. One of its steps was towards replacing the two decade old insider trading norms by notifying the SEBI (Prohibition of Insider Trading Regulations) 2015 (“Regulation”) on January 15, 2015, which was effective from May 15, 2015, which was effective from May 15, 2015.
The history of Insider Trading in India relates back to the 1940’s with formulation of government committees such as, the Thomas committee under the chairmanship of Mr. P.J. Thomas, which was constituted with an objective to regulate insider trading and evaluate global practice in restricting insider trading, securities Exchange Act,1934 (USA). Thereafter in India provisions relating to Insider Trading were incorporated in the companies Act, 1956 under section 307 and 308, which required shareholding disclosures by the directors and managers of company. Due to inadequate provisions of enforcement in the Companies Act, 1956 the sachar committee in 1979, the patel committee in 1986 and Abid hussain committee in 1989 proposed recommendations for a seprate statue for regulating Insider Trading. SEBI introduced the formal rules on insider trading. Due to inadequate provisions in the companies Act, 1956 and rapidly advancing Indian Securities market , there was a need for a more comprehensive legislation to regulate the practice of Insider Trading , thus resulting in a formulation of SEBI (Insider Trading) regulation in the year 1992, which was further amended in the year 2002 after the discrepancies observed in the 1992 regulations in the cases like Hindustan Levers Ltd. Vs. SEBI, Rakesh Agarwal vs. SEBI, etc. to remove the lacunae existing in the Regulation of 1992.
Applicability of the Regulations
The charge of insider trading has been extended to securities listed and proposed to be listed on stock exchanges. This is an expansion from the 1992 Regulations which only applied with respect to companies that were listed. Additionally, the Regulations also strengthen the definition of who an ‘insider’ is. The scope of ‘connected persons’ under the Regulations has been widened to include persons associated with the company in a contractual, fiduciary or employment relationship or having direct or indirect access to unpublished price-sensitive information. Further, under the Regulations, the criteria for what constitutes ‘unpublished price sensitive information’ would be whether the information is ‘generally available’ or not. The definition of ‘unpublished price sensitive information’ has been extended to both a company and securities.
Prohibition on Insider Trading
Multiple restrictions have been placed i.e. (i) prohibition on communication of unpublished price sensitive information (ii) procurement of unpublished price sensitive information and (iii) trading in securities when in possession of unpublished price sensitive information. The1992 Regulations prohibited ‘dealing’ in securities when in possession of unpublished price sensitive information, amongst others; the expression ‘dealing’ has been replaced with ‘trading’ in securities. Under the Regulations, the definition of ‘trading’ has been kept wide. It must be noted that the 1992 Regulations placed no restrictions on the ‘procurement’ of unpublished price sensitive information by other persons.
The Regulations provide for certain exclusions where the charge of insider trading will not get attracted, namely:-
> In the conduct of due diligences: Communication and procurement of information in connection with transactions involving mergers and acquisitions, subject to certain conditions;
> For off-market transactions between promoters who are in possession of the same information, and are making a conscious and informed decision;
> In case of non-individual insiders:–
> the individuals who were in possession of such unpublished price sensitive information were different from the individuals taking trading decisions and such decision-making individuals were not in possession of such unpublished price sensitive information when they took the decision to trade;
> when the trade was executed in the absence of any leakage of information, thereby recognising the concept of ‘chinese walls’ in large organisations;
> When trades executed in pursuance of trading plans.
Regulation 5(1) of the SEBI (Prohibition of Insider Trading) 2015 provides an Insider with the option to formulate a trading plan which plan shall be approved by the Compliance Officer and be made public.
This shall enable the Insider to plan his trades that shall be executed in the future of which there will be no UPSI available to him at the time of making trading plan. As a result of which the trading in securities, which were planned or pre- decided even before the unpublished price sensitive information was in existence, shall not be prohibited in spite of the insider in possession of unpublished Price Sensitive Information.
Further while availing the right to draft the said trading plan the following shall be taken into consideration by the Insider.
> No insider shall trade before six month from the date of disclosure of his trading plan. A cooling off period of six months is necessary but the Insider is not immune if he had the position of Unpublished Price Sensitive Information of plan.
> A reasonable period, of twenty days before the closure of financial period and until the second trading day after the disclosure of financial result, shall be provided in the trading plan during which the insiders shall not trade in spite of their being a trade plan.
> Further there shall be a reasonable time gap between the decision to trade and actual trade and therefore the regulators find a time gap of twelve months, reasonable which is depicted in Regulation 5(3) (i).
> Also, it shall be ensured by the insider that not more than one trading plan is operative at the same time.
> The trading plan shall clearly specify the value of securities or the number of securities that shall invested into or divested by the insider. The trading plan shall clearly set out the specific dates and time intervals between which the Insider shall intend to trade in the securities.
> The Employees in inside area may be physically separated from the Employees in public area.
The demarcation of various department as inside area shall be determined by the Compliance officers in consultation with the Board
> Only in exceptional circumstances. Employees from the public areas are brought over the wall and given UPSI on the basis of need to know criteria under intimation to the Compliance officer
> To prevent the misuse of UPSI the Company has adopted a CHINESE WALL policy which separates those departments which routinely have access to UPSI, considered- inside areas from those department which deal with sale/marketing or other departments providing support services, considered- public areas.
> As per the said policy:
> The Employees in the inside areas are not allowed to communicate any UPSI to anyone in the public areas.
Other than the periods for which the Trading Window is closed as prescribed hereunder, the same shall remain open for Trading in the Securities of the Company
Unless otherwise specified by the Compliance officer, the trading window for trading in securities of the Company shall be closed for the Designated persons when the Compliance officer determines that Designated person or class of Designated persons are reasonably expected to have UPSL, including for the following purposes:-
(a) Declaration of financial result,
(b) Declaration of dividend
(c) Change in capital structure
(d) Mergers, demerger, acquisition, delisting, disposals and expansion of business and such other transactions
(e) Changes in key managerial personal
(f) Material events in accordance with the listing agreement
In respect of declaration of financial results, the trading window shall remain closed from a date that is 7days prior to the end of respective quarter half year or financial year as the case may be.
As regards declaration of dividend and other matters referred to in (c) to (f) above the Managing Director/ Chief Executive Officer shall well before initiation of such activity project form a core team of employees who would work on such
Limited access to confidential information
Specified Persons privy to confidential information shall in preserving the confidentiality of information, and to prevent its wrongful dissemination, adopt among others, the following safeguards:
> Files containing confidential information shall be kept secure
> Computer files must have adequate security of login through a password
> Follow the guidelines for maintenance of electronic records and systems as may be prescribed by the Compliance Officer from time-to-time in consultation with the person in charge of the information technology function.
The core of securities regulations is the implementation of the purpose that all investors should have equal access to the rewards of participation in securities transactions. In other words all members of the investing public should be subject to identical market risks. Inequities based upon unequal access to knowledge should not be shrugged off as inevitable in our way of life. It is therefore important for there to be markets free from all types of fraud and in particular insider trading which disenchants the common investor from the workings of the markets as if he is being invited to play a game of crap with loaded dice.
Unfortunately with the unearthing of large frauds, even though India is not unique in this, the concept of corporate good governance has been lost in the war cry for blood. And as a result, the government has gotten into overregulation and micromanagement by converting good governance into statutory provisions. We tend to forget that fraudulent action cannot be stamped out by micro management; it can only be reduced by effective enforcement of the laws which should prohibit obvious illegalities.
SEBI (Insider trading regulations), 2015