In the 1987 film, Wall Street, Gordon Gekko famously said “The most valuable commodity I know of is information.” Insider Trading or Insider Dealing is the illegal practice of trading on the stock exchange to one’s own advantage because of having access to confidential information. One of the primary objectives of Securities Exchange Board of India (SEBI) is to protect the investor. SEBI has issued regulations to create a framework for prohibition of insider trading in securities. Accordingly, to curb the malpractice of Insider Trading more effectively, the SEBI (Prohibition of Insider Trading) Regulations, 2015 (“PIT Regulations”) were introduced with effect from 15th May, 2015, by repealing the erstwhile SEBI (Prohibition of Insider Trading) Regulations 1992.
Reg. 2(1)(n) the SEBI (Prohibition of Insider Trading) Regulations, 2015 (“PIT Regulations”) defines UPSI which is an inclusive definition and includes certain information as financial results, dividends, change in capital structure, mergers, de-mergers, acquisitions, delistings, disposals and expansion of business and such other transactions, changes in KMP. As per this definition, UPSI 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. Here, meaning of generally available information means information that is accessible to the public on a nondiscriminatory basis.
Regulation 3 of SEBI (PIT) Regulation 2015 deals with communication or procurement of unpublished price sensitive information (UPSI). As per Regulation 3(1) of the SEBI (Prohibition of Insider Trading) Regulations, 2015, no insider shall communicate, provide, or allow access to any unpublished price sensitive information, relating to a company or securities listed or proposed to be listed, to any person including other insiders except where such communication is in furtherance of legitimate purposes, performance of duties or discharge of legal obligations. According to Regulation 3(2A) of the Regulations, the Board of Directors of a listed company shall create a policy for determination of ‘legitimate purposes’ as a part of ‘Codes of Fair Disclosure and Conduct’ formulated under regulation 8. Regulation 3(5) of the Regulation provides the BoD of the company is required to ensure that a Structured Digital Database is maintained. The Compliance Officer may be designated to maintain the database and he shall enter the names of all the DPs and persons bought inside in the structured digital database, on the basis of information received by him for other departments.
Every listed company has to disclose events or information which is material in nature. Companies prepare a materiality policy to determine such events or information. However, Regulation 30 of SEBI (Listing Obligations and disclosure Requirement) Regulations 2015 also talks about disclosure of material events and information. Since all such material events may not be UPSI, companies would have to exercise caution and their own prudence to determine which of these deemed material events and other material events as determined by the materiality policy of the company would be UPSI as they are likely to affect the price of securities of the company.
Communication of UPSI whether orally or written shall be termed as on offence if not done for a legitimate reason. The Company shall conduct education sessions so as to minimise such incidents where UPSI is shared on informal basis. Any such instance shall be immediately be reported by the Compliance Officer to SEBI.
Regulation 3(3) of the SEBI (PIT) Regulations, 2015 provides for certain exceptions where communication/procurement of UPSI is allowed in transactions where:
(a) an open offer is triggered: As per Regulation 3(3), “Notwithstanding anything contained in this regulation, an unpublished price sensitive information may be communicated, provided, allowed access to or procured, in connection with a transaction that would:
(i) entail an obligation to make an open offer under the takeover regulations where the board of directors of the listed company is of informed opinion that sharing of such information is in the best interests of the company;”
The above provision was inserted to stipulate that, in cases involving mergers/takeovers where change of control and trading in securities takes place, it would become necessary to communicate/procure UPSI to analyse a potential investment. However, it is pertinent to note that sharing of UPSI shall be done only if the board of directors of the target listed company is of the informed opinion that such a transaction is in the best interests of the company.
(b) an open offer is not triggered: As per Regulation 3(3), “Notwithstanding anything contained in this regulation, an unpublished price sensitive information may be communicated, provided, allowed access to or procured, in connection with a transaction that would:
(ii) not attract the obligation to make an open offer under the takeover regulations but where the board of directors of the listed company is of informed opinion that sharing of such information is in the best interests of the company and the information that constitute unpublished price sensitive information is disseminated to be made generally available at least two trading days prior to the proposed transaction being effected in such form as the board of directors may determine to be adequate and fair to cover all relevant and material facts.”
In the second case, even though the transaction does not entail an obligation to make an open offer under the takeover regulations, but the board of directors consider sharing of UPSI to be in the company’s best interest, such communication/procurement is permitted. However, the board of directors should mandatorily ensure that such UPSI is publicly disclosed prior to the aforesaid transaction to enable uniform dissemination of UPSI.
Regulation 3(4) of the SEBI (PIT) Regulations,2015 provides that to utilise the exemptions enumerated under sub-regulation (3) above, the board of directors shall entail the parties to implement agreements to ensure confidentiality and non-disclosure obligations on the part of such parties and such parties shall maintain confidentiality of the information received, except for the purpose of sub-regulation (3), and shall not otherwise trade in securities of the company when in possession of UPSI.
As per Regulation 4 of SEBI (PIT) Regulations, 2015, trading while in possession of UPSI is prohibited. However, the insider may prove his innocence by demonstrating the circumstances including the following:
√ The transaction is an off – market inter-se transfer between Insiders having possession of same UPSI.
√ The transaction is carried out through block deal mechanism between Persons having possession of same UPSI.
√ The transaction carried out pursuant to a statutory or regulatory obligation to carry out a bonafide transaction.
√ The transaction was undertaken pursuant to the exercise of Employee Stock Options
√ The transaction was undertaken pursuant to a Trading Plan
√ The transaction involves pledge of Shares for bona fide purpose
√ The transaction was undertaken pursuant to respective SEBI Regulations such as Bonus Issue, Rights Issue etc, preferential allotment, buyback offer, open offer etc.
Preservation of UPSI is an important duty of the company. To prevent insider trading and to ensure compliance with the requirements given in the SEBI (Prohibition of Insider Trading) Regulations, 2015, the Chief Executive Officer, Managing Director, Compliance officer or such other analogous person of a listed company, intermediary or fiduciary has to put in place an adequate and effective system of internal controls. Companies’ responsibilities in handling UPSI include the following:
|S.no.||Case Name||Particulars||Penalty on and amount|
|1.||Bala Reddy Case||In this case a Company had secured work orders but the same were not disclosed to stock exchange as the contract was not yet issued to the Company and the Company was only found to be the lowest price bidder. Company contended that it cannot be a UPSI.||Promoter, Chairman, Director, their spouse and relatives (Jointly and severally)- Penalty Rs. 40 Cr.|
|2.||V.K. Kaul case||Mr. Kaul was a non-executive independent director of Ranbaxy. Ranbaxy was holding company of Rexcel and Solus. Rexcel and Solus has a partnership firm named Solrex. Hence, indirectly Ranbaxy was also the parent company of Solrex. Here, group company acquiring some stake in another Listed company.||ID- Rs 50 lakhs
Wife of ID- Rs10 lakhs
|3.||NDTV Case||Tax demand of Rs. 450 crores which was material as compared to net worth of NDTV||NDTV- Rs. 1.75 crores Compliance officer- Rs. 3 lakh for not promptly informing UPSI|
|4.||Indiabulls Ventures Ltd.||In this case, the executive director of Indiabulls was accused of making Rs. 87 lakhs unlawfully by trading in Indiabulls when they had access to unpublished secret information of sale of land and property privately which is the subsidiary of Indiabulls venture limited. According to the regulator, the executive director of the Indiabulls venture limited was in the management committee of the Indiabulls, therefore she was an insider and her husband too was an insider. These unlawful gains were made in the year from 2017-19.||Pia Johson (NED of IVL) and mehul Johnson (Spouse)- Rs 87,21,918.55 (69,09,237.50+ interest of 18,12,681.05)|
|5.||P.C. Jewellers Case||Corporate announcement (of buyback) and subsequent developments. SEBI noted that late Padam Chand and Balram Garg communicated UPSI (Unpublished Price Sensitive Information) about the proposal for buyback of equity shares and its subsequent withdrawal to Shivani Gupta, Sachin Gupta, Amit Garg and QDPL.||Shivani Gupta, Sachin gupta, amit garg (relative of Chairman and MD of PC Jewellers) and group co impounding order of Rs 8.3 crore approx.|
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