CS Chintan Doshi
Synopsis of SEBI (Prohibition of Insider Trading) (Amendment) Regulations, 2018 Dated 31-12-18, Effective From 01-04-2019
1. The definition of “promoter” and “promoter group category” to be read as per SEBI (ICDR) REGULATIONS, 2018 in place of 2009.
Definitions are as follows:
“promoter” shall include a person:
i) who has been named as such in a draft offer document or offer document or is identified by the issuer in the annual return referred to in section 92 of the Companies Act, 2013; or
ii) who has control over the affairs of the issuer, directly or indirectly whether as a shareholder, director or otherwise; or
iii) in accordance with whose advice, directions or instructions the board of directors of the issuer is accustomed to act:
Provided that nothing in sub-clause (iii) shall apply to a person who is acting merely in a professional capacity;
Provided further that a financial institution, scheduled commercial bank, foreign portfolio investor other than Category III foreign portfolio investor, mutual fund, venture capital fund, alternative investment fund, foreign venture capital investor, insurance company registered with the Insurance Regulatory and Development Authority of India or any other category as specified by the Board from time to time, shall not be deemed to be a promoter merely by virtue of the fact that twenty per cent.or more of the equity share capital of the issuer is held by such person unless such person satisfy other requirements prescribed under these regulations;
“Promoter group” includes:
i) the promoter;
ii) an immediate relative of the promoter (i.e. any spouse of that person, or any parent, brother, sister or child of the person or of the spouse); and
iii) in case promoter is a body corporate:
A) a subsidiary or holding company of such body corporate;
B) any body corporate in which the promoter holds twenty per cent. or more of the equity share capital; and/or any body corporate which holds twenty per cent. or more of the equity share capital of the promoter;
C) any body corporate in which a group of individuals or companies or combinations thereof acting in concert, which hold twenty per cent. or more of the equity share capital in that body corporate and such group of individuals or companies or combinations thereof also holds twenty percent or more of the equity share capital of the issuer and are also acting in concert; and
iv) in case the promoter is an individual:
A) any body corporate in which twenty per cent. or more of the equity share capital is held by the promoter or an immediate relative of the promoter or a firm or Hindu Undivided Family in which the promoter or any one or more of their relative is a member;
B) any body corporate in which a body corporate as provided in (A) above holds twenty per cent. or more, of the equity share capital; and
C) any Hindu Undivided Family or firm in which the aggregate share of the promoter and their relatives is equal to or more than twenty per cent. of the total capital;
v) all persons whose shareholding is aggregated under the heading “shareholding of the promoter group”:
Provided that a financial institution, scheduled bank, foreign portfolio investor other than Category III foreign portfolio investor, mutual fund, venture capital fund, alternative investment fund, foreign venture capital investor, insurance company registered with the Insurance Regulatory and Development Authority of India or any other category as specified by the Board from time to time, shall not be deemed to be promoter group merely by virtue of the fact that twenty per cent. or more of the equity share capital of the promoter is held by such person or entity:
Provided further that such financial institution, scheduled bank, foreign portfolio investor other than Category III foreign portfolio investor, mutual fund, venture capital fund, alternative investment fund and foreign venture capital investor insurance company registered with the Insurance Regulatory and Development Authority of India or any other category as specified by the Board from time to time shall be treated as promoter group for the subsidiaries or companies promoted by them or for the mutual fund sponsored by them;
2. Specific meaning is given to the words “proposed to be listed”
“proposed to be listed” shall include securities of an unlisted company:
(i) if such unlisted company has filed offer documents or other documents, as the case may be, with the Board, stock exchange(s) or registrar of companies in connection with the listing; or
(ii) if such unlisted company is getting listed pursuant to any merger or amalgamation and has filed a copy of such scheme of merger or amalgamation under the Companies Act, 2013; ”
[CHAPTER II :- RESTRICTIONS ON COMMUNICATION AND TRADING BY INSIDERS]
Reg. 3 COMMUNICATION OR PROCUREMENT OF UNPUBLISHED PRICE SENSITIVE INFORMATION.].
3. To prepare a Policy: [new regulation inserted 3(2A)]
“The board of directors of a listed company shall make a policy for determination of “legitimate purposes” as a part of “Codes of Fair Disclosure and Conduct” formulated under regulation 8.”
“Explanation–For the purpose of illustration, the term “legitimate purpose” shall include sharing of unpublished price sensitive information in the ordinary course of business by an insider with partners, collaborators, lenders, customers, suppliers, merchant bankers, legal advisors, auditors, insolvency professionals or other advisors or consultants, provided that such sharing has not been carried out to evade or circumvent the prohibitions of these regulations.”
4. To have a Structured Digital Database: [new regulation inserted 3(5)] [chapter II Restriction on Communication and Trading by insider].
“The board of directors shall ensure that a structured digital database is maintained containing the names of such persons or entities as the case may be with whom information is shared under this regulation along with the Permanent Account Number or any other identifier authorized by law where Permanent Account Number is not available. Such databases shall be maintained with adequate internal controls and checks such as time stamping and audit trails to ensure non-tampering of the database.”
Reg. 4TRADING WHEN IN POSSESSION OF UNPUBLISHED PRICE SENSITIVE INFORMATION.].
5. Now in regulation 4(1)(i) the word “promoters” substituted with the word “insiders”, hence inter-se transfer between insiders who were in possession of UPSI is possible, earlier it is limited to only promoters, whole sub regulation with proviso to be read as follows:
“the transaction is an off-market inter-se transfer between insiders who were in possession of the same unpublished price sensitive information without being in breach of regulation 3 and both parties had made a conscious and informed trade decision;
“Provided that such unpublished price sensitive information was not obtained under sub regulation (3) of regulation 3 of these regulations.”
“Provided further that such off-market trades shall be reported by the insiders to the company within two working days. Every company shall notify the particulars of such trades to the stock exchange on which the securities are listed within two trading days from receipt of the disclosure or from becoming aware of such information.”
6. Another 3 clauses are added under the regulation 4(1) for trading when in possession of unpublished price sensitive information and old sub regulation (ii) & (ii) renumbered as (v) & (vi):
“(ii) the transaction was carried out through the block deal window mechanism between persons who were in possession of the unpublished price sensitive information without being in breach of regulation 3 and both parties had made a conscious and informed trade decision;
Provided that such unpublished price sensitive information was not obtained by either person under sub-regulation (3) of regulation 3 of these regulations.
(iii) the transaction in question was carried out pursuant to a statutory or regulatory obligation to carry out a bona fide transaction.
(iv) the transaction in question was undertaken pursuant to the exercise of stock options in respect of which the exercise price was pre-determined in compliance with applicable regulations.”
(v) in the case of non-individual insiders: –
(a) 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; and
(b) appropriate and adequate arrangements were in place to ensure that these regulations are not violated and no unpublished price sensitive information was communicated by the individuals possessing the information to the individuals taking trading decisions and there is no evidence of such arrangements having been breached;
(vi) the trades were pursuant to a trading plan set up in accordance with regulation 5.
Reg. 5TRADING PLANS.].
7. No pre-clearance of trade required when trade is executed as per approved trading plan:
Regulation 5(3) two new proviso are inserted:
“Provided that pre-clearance of trades shall not be required for a trade executed as per an approved trading plan.
Provided further that trading window norms and restrictions on contra trade shall not be applicable for trades carried out in accordance with an approved trading plan.”
[CHAPTER IV :- CODES FOR FAIR DISCLOSURE AND CONDUCT]
Reg. 9CODE OF CONDUCT.].
8. Formulation of code of conduct: Schedule B (in case of Listed Company) and Schedule C (In case of Intermediary):
Regulation 9(1) to be read as follows:
The board of directors of every listed company and the board of directors or head(s) of the organisation of every intermediary shall ensure that the chief executive officer or managing director shall formulate a code of conduct with their approval to regulate, monitor and report trading by its designated persons and immediate relatives of designated persons towards achieving compliance with these regulations, adopting the minimum standards set out in Schedule B(in case of a listed company) and Schedule C (in case of a intermediary) to these regulations, without diluting the provisions of these regulations in any manner.
“Explanation – For the avoidance of doubt it is clarified that intermediaries, which are listed, would be required to formulate a code of conduct to regulate, monitor and report trading by their designated persons, by adopting the minimum standards set out in Schedule B with respect to trading in their own securities and in Schedule C with respect to trading in other securities.”
9. Code of conduct for every other person who is required to handle UPSI:
Regulation 9(2) along with note substituted with following regulation:
“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 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 to these regulations, without diluting the provisions of these regulations in any manner.
Explanation – Professional firms such as auditors, accountancy firms, law firms, analysts, insolvency professional entities, consultants, banks etc., assisting or advising listed companies shall be collectively referred to as fiduciaries for the purpose of these regulations.”
“NOTE: This provision is intended to mandate persons other than listed companies and intermediaries that are required to handle unpublished price sensitive information to formulate a code of conduct governing trading in securities by their designated persons. These entities include professional firms such as auditors, accountancy firms, law firms, analysts, insolvency professional entities, consultants, banks etc., assisting or advising listed companies. Even entities that normally operate outside the capital market may handle unpublished price sensitive information. This provision would mandate all of them to formulate a code of conduct.”
10. In consultation with the Compliance officer specify the designated person to be covered by the code of conduct:
Newly inserted regulation 9(4):
“(4) For the purpose of sub regulation (1) and (2), the board of directors or such other analogous authority 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 and shall include:-
i. Employees of such listed company, intermediary or fiduciary designated on the basis of their functional role or access to unpublished price sensitive information in the organization by their board of directors or analogous body;
ii. Employees of material subsidiaries of such listed companies designated on the basis of their functional role or access to unpublished price sensitive information in the organization by their board of directors;
iii. All promoters of listed companies and promoters who are individuals or investment companies for intermediaries or fiduciaries;
iv. Chief Executive Officer and employees upto two levels below Chief Executive Officer of such listed company, intermediary, fiduciary and its material subsidiaries irrespective of their functional role in the company or ability to have access tounpublished price sensitive information;
v. Any support staff of listed company, intermediary or fiduciary such as IT staff or secretarial staff who have access to unpublished price sensitive information.”
11. Adequate and effective system of internal controls to ensure compliance with the requirements given in these regulations to prevent insider trading:
Regulation 9A newly inserted after regulation 9: Institutional Mechanism for prevention of insider trading
9A. (1) The 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.
(2) The internal controls shall include the following:
a. all employees who have access to unpublished price sensitive information are identified as designated employee;
b. all the unpublished price sensitive information shall be identified and its confidentiality shall be maintained as per the requirements of these regulations;
c. adequate restrictions shall be placed on communication or procurement of unpublished price sensitive information as required by these regulations;
d. lists of all employees and other persons with whom unpublished price sensitive information is shared shall be maintained and confidentiality agreements shall be signed or notice shall be served to all such employees and persons;
e. all other relevant requirements specified under these regulations shall be complied with;
f. periodic process review to evaluate effectiveness of such internal controls.
(3) The board of directors of every listed company and the board of directors orhead(s) of the organisation of intermediaries and fiduciaries shall ensure that the Chief Executive Officer or the Managing Director or such other analogous personensures compliance with regulation 9 and sub-regulations (1) and (2) of thisregulation.
(4) The Audit Committee of a listed company or other analogous body for intermediary or fiduciary shall review compliance with the provisions of theseregulations at least once in a financial year and shall verify that the systems for internal control are adequate and are operating effectively.
(5) Every listed company shall formulate written policies and procedures for inquiryin case of leak of unpublished price sensitive information or suspected leak of unpublished price sensitive information, which shall be approved by board ofdirectors of the company and accordingly initiate appropriate inquiries on becomingaware of leak of unpublished price sensitive information or suspected leak ofunpublished price sensitive information and inform the Board promptly of such leaks,inquiries and results of such inquiries.
(6) The listed company shall have a whistle-blower policy and make employees aware of such policy to enable employees to report instances of leak of unpublished price sensitive information.
(7) If an inquiry has been initiated by a listed company in case of leak of unpublishedprice sensitive information or suspected leak of unpublished price sensitive information, the relevant intermediaries and fiduciaries shall co-operate with thelisted company in connection with such inquiry conducted by listed company.”
SCHEDULE B: [SEE SUBREGULATION 1 OF REGULATION 9] MINIMUM STANDARDS FOR CODE OF CONDUCT TO REGULATE, MONITOR AND REPORT TRADING BY DESIGNATED PERSONS:
12. Report to the BoD/Chairman of Audit Committee/Chairman of BoD: Not less than once in a year:
Now clause 1 of schedule B to be read as follows:
The compliance officer shall report to the board of directors 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 one in a year.
13. Trading restriction period can be made applicable from the end of every quarter till 48 hrs after the declaration of Financial Results:
Now clause 4 to be read as follows: [insertion of two new para]
Designated persons may execute trades subject to compliance with these regulations.Towards this end, a notional trading window shall be used as an instrument of monitoring tradingby the designated persons. The trading window shall be closed when the compliance officerdetermines that a designated person or class of designated persons can reasonably be expected tohave possession of unpublished price sensitive information. Such closure shall be imposed inrelation to such securities to which such unpublished price sensitive information relates.Designated persons and their immediate relatives shall not trade in securities when the tradingwindow is closed.
“Trading restriction period can be made applicable from the end of every quarter till 48 hours after the declaration of financial results.
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.”
14. Code of conduct shall stipulate the sanctions and disciplinary actions:
Under clause 12 & 13 the word “person” replaced by “listed co.” and now it is to be read as follows:
12. Without prejudice to the power of the Board under the Act, the code of conduct shall stipulate the sanctions and disciplinary actions, including wage freeze, suspension, recovery, clawback etc., that may be imposed, by the listed company required to formulate a code of conduct under sub-regulation (1) and sub-regulation (2) of regulation 9, for the contravention of the code of conduct.
13. The code of conduct shall specify that in case it is observed by the listed co. required to formulate a code of conduct under sub-regulation (1) and sub-regulation (2) of regulation 9, that there has been a violation of these regulations, it shall inform the Board promptly.
15. Designated person required to disclose names and PAN:
Clause 14 is newly inserted:
“14. Designated persons shall be required to disclose names and Permanent Account Number or any other identifier authorized by law of the following persons to the company on an annual basis and as and when the information changes:
(a) immediate relatives
(b) persons with whom such designated person(s) shares a material financial relationship
(c) Phone, mobile and cell numbers which are used by them
In addition, the names of educational institutions from which designated persons have graduated and names of their past employers shall also be disclosed on a one time basis.
Explanation–The term “material financial relationship” shall mean a relationship in which one person is a recipient of any kind of payment such as by way of a loan or gift during the immediately preceding twelve months, equivalent to at least 25% of such payer’s annual income but shall exclude relationships in which the payment is based on arm’s length transactions.”
16. Process for how and when people are brought ‘inside” on sensitive transactions:
Clause 15 newly inserted:
“15. Listed entities shall have a process for how and when people are brought ‘inside’ on sensitive transactions. Individuals should be made aware of the duties and responsibilities attached to the receipt of Inside Information, and the liability that attaches to misuse or unwarranted use of such information.”
NEWLY INSERTED SCHEDULE C: MINIMUM STANDARDS FOR CODE OF CONDUCT FOR INTERMEDIARIES AND FIDUCIARIES TO REGULATE, MONITOR AND REPORT TRADING BY DESIGNATED PERSONS
[See sub-regulation (1) and sub-regulation (2) of regulation 9]
Minimum Standards for Code of Conduct for Intermediaries and Fiduciaries to Regulate, Monitor and Report Trading by Designated Persons
1. The compliance officer shall report to the board of directors or head(s) of the organisation (or committee constituted in this regard) and in particular, shall provide reports to the Chairman of the Audit Committee or other analogous body, if any, or to the Chairman of the board of directors or head(s) of the organisation at such frequency as may be stipulated by the board of directors or head(s) of the organization but not less than once in a year.
2. All information shall be handled within the organisation on a need-to-know basis and no unpublished price sensitive information shall be communicated to any person except in furtherance of legitimate purposes, performance of duties or discharge of legal obligations. The code of conduct shall contain norms for appropriate Chinese Wall procedures, and processes for permitting any designated person to “cross the wall”.
3. Designated persons and immediate relatives of designated persons in the organisation shall be governed by an internal code of conduct governing dealing in securities.
4. Designated persons may execute trades subject to compliance with these regulations. Trading by designated persons shall be subject to pre- clearance by the compliance officer(s), if the value of the proposed trades is above such thresholds as the board of directors or head(s) of the organisation may stipulate.
5. The compliance officer shall confidentially maintain a list of such securities as a “restricted list” which shall be used as the basis for approving or rejecting applications for pre-clearance of trades.
6. Prior to approving any trades, the compliance officer shall seek declarations to the effect that the applicant for pre-clearance is not in possession of any unpublished price sensitive information. He shall also have regard to whether any such declarationis reasonably capable of being rendered inaccurate.
7. The code of conduct shall specify any reasonable timeframe, which in any eventshall not be more than seven trading days, within which trades that have been preclearedhave to be executed by the designated person, failing which fresh preclearancewould be needed for the trades to be executed.
8. The code of conduct shall specify the period, which in any event shall not be lessthan six months, within which a designated person who is a connected person of thelisted company and is permitted to trade in the securities of such listed company, shallnot execute a contra trade. The compliance officer may be empowered to grantrelaxation from strict application of such restriction for reasons to be recorded inwriting provided that such relaxation does not violate these regulations. Should acontra trade be executed, inadvertently or otherwise, in violation of such a restriction,the profits from such trade shall be liable to be disgorged for remittance to the Boardfor credit to the Investor Protection and Education Fund administered by the Boardunder the Act.
Provided that this shall not be applicable for trades pursuant to exercise of stockoptions.
9. The code of conduct shall stipulate such formats as the board of directors orhead(s) of the organisation (or committee constituted in this regard) deems necessaryfor making applications for pre-clearance, reporting of trades executed, reporting ofdecisions not to trade after securing pre-clearance, and for reporting level of holdingsin securities at such intervals as may be determined as being necessary to monitorcompliance with these regulations.
10. Without prejudice to the power of the Board under the Act, the code of conductshall stipulate the sanctions and disciplinary actions, including wage freeze,suspension, recovery, clawback etc., that may be imposed, by the intermediary orfiduciary required to formulate a code of conduct under sub-regulation (1) and subregulation(2) of regulation 9, for the contravention of the code of conduct.
11. The code of conduct shall specify that in case it is observed by the intermediary orfiduciary required to formulate a code of conduct under sub-regulation (1) or subregulation(2) of regulation 9, respectively, that there has been a violation of theseregulations, such intermediary or fiduciary shall inform the Board promptly.
12. All designated persons shall be required to disclose name and Permanent Account Number or any other identifier authorized by law of the following to the intermediary or fiduciary on an annual basis and as and when the information changes:
a) immediate relatives
b) persons with whom such designated person(s) shares a material financial relationship
c) Phone, mobile, and cell numbers which are used by them
In addition, names of educations institutions from which designated persons have studied and names of their past employers shall also be disclosed on a one time basis.
Explanation – the term “material financial relationship” shall mean a relationship in which one person is a recipient of any kind of payment such as by way of a loan or gift during the immediately preceding twelve months, equivalent to at least 25% of such payer’s annual income but shall exclude relationships in which the payment is based on arm’s length transactions.
13. Intermediaries and fiduciaries shall have a process for how and when people are brought ‘inside’ on sensitive transactions. Individuals should be made aware of the duties and responsibilities attached to the receipt of Inside Information, and the liability that attaches to misuse or unwarranted use of such information.”
