WHAT IT GENERALLY CONSTITUTES?
Insider trading is one of the sins of the corporate existence which is extremely difficult to restrict. In simple terms it will involve illegal gains through dealings in the listed securities of a company by those persons who are in the know of the internal workings of that company.
EXISTING SEBI REGULATIONS
Insider trading is a complex white collar offence, difficult to track and curb but efforts are being made to make the law have more teeth to deal with this menace. Existing SEBI (Prohibition of Insider Trading) Regulations, 1992, has been brought in the statute book decades ago but amendments had been taking place from time to time and now being replaced by a new law.
NEW SEBI REGULATIONS TO COME IN FORCE
To ensure that the regulatory framework dealing with insider trading in India is further strengthened, SEBI recently has issued SEBI (Prohibition of Insider Trading) Regulations, 2015. {new SEBI Regulations} which shall come into force from mid May 2015.
On reading and analysing the provisions the following emerge:-
1. Both listed companies and companies that are ‘proposed to be listed’ are covered.
2. The definition of “Insider” has been made wider by including any person connected with the company.
3. The Insider will also be any person in possession of or having access to “unpublished price sensitive information” {UPSI} relating to a company or its securities.
4. The “connected person” would mean any person currently or during past specified period, associated in any capacity with the company including through frequent communication with its officers, or on the basis of contractual, fiduciary or employment relationship, or as a director etc. This association allows or reasonably expects him to allow access to UPSI of the company. Moreover, the association can be direct or indirect. There are specified categories of persons who shall be deemed to be connected person unless contrary is established.
5. In the case of connected person the onus of establishing, that they are not in possession of UPSI, shall be on such person. Immediate relative the connected person is also covered as connected person with a right to rebut the presumption.
6. Companies would be entitled to require third-party connected persons to disclose their trading and holdings in securities of the company.
7. “Unpublished price sensitive information” (UPSI) has been defined as information not generally available and which may materially affect the price of securities on coming into public domain. Illustrative guidance of UPSI has been given aligning with listing agreement and providing platform of disclosure. Earlier, the definition of UPSI had reference to company only. The new Regulations cover both the company and its securities. Also in line with Companies Act, 2013, prohibition on derivative trading on securities of a company has also been provided.
8. The concept of “trading” has replaced the concept of “dealing” thus giving a broad and inclusive definition. Trading includes subscribing, buying, selling, dealing, agreeing to subscribe, buy, etc. This is to cover transactions done by insiders which are not strictly buying, selling etc, such as pledging etc based on and when in possession of UPSI.
9. “Generally Available Information” will be that which is accessible to the public on a non-discriminatory basis and on a platform which is ordinarily a stock exchange.
10. Disclosure of UPSI in public domain has been made mandatory before trading, so as to rule out asymmetry of information in the market.
11. A new concept of giving “note” against many provisions to explain them has been introduced. These appear to give statutory interpretations to the Regulations.
12. There is prohibition on (i) communicating, providing or allowing access of UPSI, (ii) procurement of UPSI; except for legitimate purposes, performance of duties or discharge of legal obligations.
13. UPSI is permitted to be communicated etc to make an open offer under SEBI Takeover Regulations, moreover for substantial transactions, such as, mergers and acquisitions involving trading in securities and change of control to assess a potential investment. It should be in the best interest of the company.
14. UPSI is permitted to be communicated etc also for transactions that do not entail an open offer if it is in the best interests of the company. The public disclosure of such unpublished price sensitive information has to be made well before the proposed transaction, to obviate any information asymmetry in the market.
15. For the purposes of communication etc of UPSI, the company must require third parties, who are likely to obtain access to UPSI, to enter with it confidentiality & non-disclosure agreements.
16. Prohibition is also in trading in securities when in possession of UPSI. In certain circumstances an insider is permitted to prove his innocence.
17. Pertinently it is not relevant while charging an insider for violations, the reason for the transaction or the purpose to which he applies the proceeds of the transaction. That he has traded when in possession of UPSI is what would need to be established at the outset to bring a charge. The insider is permitted to prove his innocence by demonstrating the circumstances statutorily provided.
18. Insiders who are liable to possess UPSI all round the year would have the option to formulate pre-scheduled irrevocable & mandatory Trading plan which cannot be deviated. It has to be approved by the compliance officer of a company and can be put into action only six months after receiving the approval. Trading plan has to be disclosed on the stock exchanges and to be strictly adhered to. Such plan shall be available for bona fide transactions. Basically the Plan provides an exception to the general rule that insider should not trade when in possession of UPSI. It however does not confer complete immunity.
19. Disclosure of trade in securities has to be made not only by the person executing it but also by his immediate relatives and other persons for whom the concerned person takes trading decisions.
20. Obligation of initial disclosure of holding of securities in a company is on the promoters, directors and key managerial personnel. Every promoter, employee and director of a company is required to make certain continuing disclosures to a company if the value of securities traded over a calendar quarter breaches the specified threshold. Disclosures by other connected persons have also been provided at the discretion of the company.
21. However there is no requirement of disclosures by public shareholders.
22. Every company shall have a code of practices and procedures for fair disclosure of ‘unpublished price sensitive information’ and a code of conduct to regulate, monitor and report trading by its employees and other connected persons. Principle based Code of Fair Disclosure and Code of Conduct has been prescribed.
23. Strict implementation of the need-to-know principle has been provided.
24. The concept of trading window norms has been provided in the code during which employees and connected persons {designated persons} in the organisation may execute trades subject to preclearance by compliance officer.
25. The trading window shall be required to be closed when designated persons can reasonably be expected to possess UPSI. No trading is permitted by such persons or their immediate relatives during closure period.
AMITAV GANGULY
CAclubindia
