Introduction:
The Securities and Exchange Board of India's (SEBI), capital markets regulator framed Regulations known as “SEBI (Prohibition of Insider Trading) Regulations, 1992. The main objective of these Regulations is to prohibit an insider from making any personal gain from unpublished price sensitive information. Let us now unfold these Regulations for a clear understanding.
Applicability:
Insider trading Regulations came into force w.e.f 19th November, 1992 and are applicable to all listed companies which are required to disseminate price sensitive information such as the financial results, dividend/bonus declarations, mergers/amalgamations and other material developments, which has an impact on the share prices of the company.
Subsequent Amendments at a glance: Major amendments were made in 2002 and 2008. Amendments made in 2002 are significant as these required the companies to frame a model code of conduct for its directors/officers to create a Chinese wall to monitor and prevent insider trading. Besides this unpublished price sensitive information has been defined
Again in 2008 three significant changes were made to the Regulations. Definition of insider has been widened to include any one (need not necessarily be connected with the company) who has access to the unpublished price sensitive information. The other significant amendment is that officers/directors/designated employees have to disclose their holdings in the company and dependants within 2 days in prescribed form. They can not carry out reverse trade within 6 months i.e. if one sells shares, he can not buy vice versa and no derivative positions can be taken. Certain other amendments such as permitting e-filing, defining of trading window, reducing time limit for disclosure to 2 days, appeal to SAT etc.
The loop holes exposed by accused persons in insider trading cases lead to amendments and to some extent strengthened the SEBI’s powers.
Important definitions:
To understand the objective of the Regulations, certain important definitions have to be analysed. These in my view are “insider”, “connected person”, “deemed to be connected person”, “price sensitive information”. Let us first deal with insider.
Who is an insider?
An insider would be a person who is or was connected to the company or deemed to have been connected to the company and who is reasonably expected to have access to unpublished price-sensitive information in respect to the securities of that company.
The following will emerge from the definition:-
An insider
- must be connected to the company or deemed to be connected to the company
- must have access to the unpublished price sensitive information or reasonably expected to have access to the information which has an effect on share price movements
Let us now list out those who are directly connected with the company. Directors and deemed directors, Manager, Secretary, MD/CEO/CFO and any other designated employees of the company. Even auditors will be treated as insiders. A ceased employee will also come within the ambit of insider but a span of 6 months prior to act of insider trading will be considered.
Who is deemed to be connected person?
This is an extension of connected persons. This category includes Companies under the same management, subsidiary, Registrars & Share transfer agents, Merchant Bankers, bankers to the issue, members of Board of public financial institutions including relatives of the above persons.Relative of connected person shall be determined as per section 6 of the Companies Act, 1956
What is price sensitive information?
Price sensitive information means any information which relates directly or indirectly to a company which if published is likely to materially affect the price of securities of company. These include periodical financial results of companies, dividend declaration, issue or buy-back of securities, any major expansion plans or execution of new projects, amalgamation, mergers or takeovers, disposal of whole or substantial part of undertaking and significant changes in policies, plans or operations of the company.
Dealing in securities:
Dealing in securities means an act of subscribing, buying, selling or agreeing to Subscribe, buy, sell or deal in securities by any person either as principal or agent. Simply stated buying and selling of securities either primary market or secondary market. The buying can be direct or through any of his relatives or firms/bodies corporate in which he is interested as a substantial shareholder.
What is prohibited?
An insider shall not communicate or counsel or procure directly or indirectly any unpublished price sensitive Information to any person while in possession of such unpublished information or deal in securities. {Regulation 3}
Regulation 3 A also bars the company from dealing in securities of another company or associate of company while in possession of any unpublished price sensitive information.
What is relaxed?
As per code of conduct, the trading window will have to be closed during the consideration of any of price sensitive information and be opened 24 hours after the price sensitive information is made public. Insiders are permitted to deal in the securities of the company when the trading window is open. However with permission and disclosure officers in case of financial problems can trade provided disclosure are made to regulator and stock exchanges as per code of conduct framed by the company Similarly communications /counsel required in the ordinary course of business by professionals or under law is also permitted. Similarly restriction under Regulation 3A is not applicable when systems and procedures are in place to prevent access to unpublished price sensitive information.
In the concluding part, code of conduct for prevention of insider trading, Disclosure requirements, power of SEBI, Investigation procedure, famous case laws and penalties will be covered in detail.
G S Rao,
DGM (Legal), OCL India Limited
CAclubindia
