One of the most important functions of the Securities
and Exchange Board of India (“SEBI”)
is to protect the interests of investors and promote the healthy development of
the securities market. It is crucial that SEBI tackles the issues that are
borne out of information asymmetry that is characteristic of any market bar the
theoretical perfect one. The disparity in information puts one trader at an
advantage to the detriment of the other. Therefore, SEBI promulgated the SEBI
(Prohibition of Insider Trading) Regulations, 1992 under Section 11 (2)(g) of
the SEBI Act, 1992 (“SEBI Act”).
By way of an amendment in 2002 in SEBI Act,
Chapter VA, which dealt with ‘Prohibition of Manipulative and Deceptive
Devices, Insider Trading and Substantial Acquisition of Securities or Control’,
was inserted in the SEBI Act. Section 12A(d) and 12A(e) deal with insider
trading under this chapter. Sub-section (d) prohibits insider trading while
sub-section (e) too, within its broad words includes the prohibition of insider
trading though it can be interpreted as including certain instances of
fraudulent and unfair trading such as ‘front running’ /’back running’ also.
Apart from these provisions, Section 15G of the SEBI Act provides for penalty
for insider trading as minimum 10 lakhs upto 25 Crores or 3 times of profits,
whichever is higher.
Insider trading erodes the integrity of the market
and therefore laws prohibiting insider trading seek to curb the disparity in
information, non-transparency in dealings, and erosion of investor confidence,
if not enhance market efficiency. So, it is up to the regulator to ensure that
the legal framework is capable of dealing with ever-changing market practices,
and that “fair market conduct” is upheld in the securities market.
Almost after two decades, the 1992 regulations
were replaced pursuant to recommendations by the Justice N.K. Sodhi
Committee with the SEBI (Prohibition of Insider Trading) Regulations, 2015
(“PIT Regulations”). Within a span
of three years SEBI on the last day of 2018 amended (“First Amendment”) the
PIT Regulations, which will come into force on April 1, 2019. Another amendment has been brought vide
notification dated January 21, 2019 (“Second Amendment”). Before deliberating
on the amendments, let us first see how the jurisprudence on insider trading
has evolved over the years.
As early as in 1948, P J Thomas, Economic Adviser,
Finance Ministry, Government of India in ‘Report on the Regulation of the
Stock Market in India’ narrated the menace of insider trading in the
following way:
‘63.
Unfair Use of Inside Information by Directors and other Officers of Companies –
Directors, agents, auditors and other officers of companies have been found to
use ‘inside’ information for profitably speculating in the securities of their
own companies. This has been possible because, these persons obtain information
before every body else regarding changes in the economic condition of
companies, and more particularly, regarding the size of dividends to be
declared or of the issue of bonus shares or the impending conclusion of a
favourable contract. With such knowledge in
their possession it becomes possible for them to speculate profitably in
the company’s shares.’
Later, Sachar Committee in 1979 recommended
amendments to the Companies Act, 1956 to restrict or prohibit the dealings of
employees/insiders as well as penalties to prevent insider trading. In 1986, Patel
Committee recommended that amendments in the Securities Contracts (Regulation)
Act, 1956 be made for exchanges to curb insider trading and unfair stock deals.
It was also suggested that heavy fines including imprisonment, apart from
refunding the profit made or the losses averted to the stock exchanges by
enforced against those found to have indulged in insider trading. In 1989, Abid
Hussain Committee suggested that insider trading activities be penalised
and recommended that SEBI should devise appropriate mechanism to prevent unfair
dealings.
Until late 1992, there existed no legal sanction
against insider trading. As 1992 ‘Joint Committee to Enquire into
Irregularities in Securities and Banking Transactions’ observed: It was a
result of the Joint Parliamentary Committee’s observations during
investigations that SEBI was empowered to take necessary action.” That
changed with the promulgation of the SEBI (Insider Trading) Regulations, 1992
on November 19, 1992. These regulations were further amended in 2002, 2003,
2007, 2008 and 2011 with the changes in 2002 and 2008 being substantial ones
tinkering with concepts of insider, connected person, unpublished price
sensitive information and codes of conduct to be followed to prevent insider
trading. The recommendations of the SEBI Insider Group headed by Mr.
Kumarmangalam Birla formed the basis for these amendments. The amended
regulations incorporated the chapter that specified the model code of conduct
for listed companies and other entities. Later on, the framework under the SEBI
(Prohibition of Insider Trading) Regulations, 1992 was replaced by the SEBI
(Prohibition of Insider Trading) Regulations, 2015.
Selected Insider Trading Cases over the years:
Hindustan Lever Ltd. v. SEBI (1998) 18 SCL 311
This was one of the first cases where action was taken by
SEBI on the grounds of insider trading. Hindustan Lever purchased 8 Lakh shares
of Brooke bond, about two weeks before the public announcement of their merger.
Upon investigation by SEBI, HLL was held as insider under Insider regulations
since HLL and BB were subsidiaries of the parent company and were under the
same management. SEBI also held that HLL was also in possession of UPSI as it
was information related to amalgamation, mergers and takeovers. An appeal was
filed by HLL against this SEBI Order before the Securities Appellate Authority,
which was the precursor to the Securities Appellate Tribunal (SAT). The Appellate Authority held HLL to be insider while
holding that the information was not Unpublished Price Sensitive Information
(UPSI) but just price sensitive, as the same was available in various news
articles covering the merger. This case led to the 2002 amendment to the
Insider Trading Regulations so that the speculative media reports were not
published information anymore.
Reliance Industries Limited v. SEBI (2004) 55
SCL 81 SAT
On 5th Nov 2001, Reliance Industries
Ltd’s stake in L&T stood at 5.32% which was eventually taken at 10.98% on
12th Nov 2001. This entire block of new shares was sold to Grasim on
16th Nov 2001 at price of Rs. 306 as compared to market price of Rs.
208. A complaint was made against RIL for insider trading by increasing its
holding to 10.05% prior to their deal with Grasim. It was alleged that
intention of Grasim to purchase shares of L&T is price sensitive which was
not available to other shareholders of L&T. SAT however differed from SEBI
on the position of role played by the two nominees of L&T, who were also
MDs of RIL as potential sellers. SAT also held that the information about impending
deal could not be considered under insider trading regulations in the given
facts.
Rakesh Agrawal v. SEBI (2004) 49 SCL 351
Rakesh Agrawal was the MD of ABS Industries
Ltd. who had decided to enter into joint venture with Bayer by giving 51%
controlling stake to Bayer. Rakesh Agrawal also wanted to make sure that his
personal shareholding does not go below 26% so he instructed Mr. I.P Kedia who
was his brother-in-law to purchase shares of ABS and also gave him loan of Rs.
1.5 Crore. Upon the investigation SEBI concluded that the purchase of shares
was made on basis of UPSI made available by Mr. Agrawal due to his position in
the company. This was however overruled by SAT which held that Mr. Agrawal had
no distinct advantage. The requirement of ‘motive’ for undertaking insider
trades was deliberated in detail. It was also observed by SAT that the object
of the transaction was not to gain any unfair advantage. The learned Presiding
Officer of SAT held:
“It is true
that the Regulation does not specifically bring in mens rea as an ingredient of insider
trading. But that does not mean that the motive need be ignored.”
SEBI appealed the matter to Supreme Court.
However, the matter was settled between SEBI and parties while pending
litigation at Supreme Court.
Samir Arora v. SEBI (2005) 59 SCL 96
Samir Arora was the head of Asian markets of
Allianz Capital Mutual fund who had its parent company registered in USA. In
2002 ACM decided to sell its Indian business which was opposed by Samir Arora.
It was alleged by SEBI that Samir Arora sold the shares of DGL out of funds
from ACMF as he had price sensitive information of merger ratio of DGL and HP.
This was further substantiated by his own statement to a business magazine
where he said that scrips were promising. The merger ratio was announced on
June 6, 2003 and the shares of DGL suffered due to adverse ratio. This was however
overruled by SAT as it was announced that merger ratio was not announced on 12
May as was expected but was announced on 6th June. It was also
observed that Samir Arora disposed off holdings of many other companies apart
from DGL.
Insider Trading Cases under
the SEBI (Prohibition of Insider Trading) Regulations, 2015
Order
in the matter of Deep Industries Limited dated 16.04.2018
The company, Deep Industries Limited (DIL) was awarded three contracts
in 2015 for drilling rigs. These contracts constituted a significant portion of
DIL’s revenue and this information was considered price sensitive information
and therefore the company officials were not permitted to trade in the
company’s shares until announcements regarding the contracts were made.
However, investigation revealed that the Managing Director, Rupesh
Kantilal Savla acquired shares before the information was public along with one
Sujay Ajitkumar Hamlai both of whom sold their shares subsequent to the
announcement. WTM observed that both these individuals were ‘friends’ on
Facebook and had ‘liked’ pictures posted on each other’s time lines along with
their respective wives’. The Order noted that this established a connection
between the individuals and there is a presumption that UPSI was shared.
The order noted that “an insider can be by way of their association in
any capacity or it can be by way of frequent communication with its officers,
which can also be in their social capacity as evident in this case by frequent
interactions, including on social media.” A penalty of Rs. 1.7 crores and Rs 18
lacs was imposed on Mr. Savla and Mr. Hamlai respectively.
Order
in the matter of ADF Foods Limited dated 22.02.2019
The company tabled a discussion for buy back or payment of dividend on
21.05.2016 and subsequently announced the Board approval for buy back of equity
shares to BSE and NSE on 27.07.2016 and this period was considered to be the
UPSI period. During this period, the promoter and executive director Mr.
Bhavesh Thakkar was prima facie found
to have communicated UPSI to some entities. His wife, Ms. Priyanka Thakkar was
also a promoter and was found to be involved in fund transfer with her husband
and four entities who traded in the shares of ADF Foods. In his order, the WTM
impounded the alleged unlawful gains of Rs. 1.02 crores from six entities.
Order
in respect of Kisan Mouldings Limited dated 28.08.2018
Kisan Mouldings made a preferential allotment of 11.17 lakh shares to
one of its promoters, Polsons Traders LLP on 16.04.2016. However, Kisan
Mouldings failed to make relevant disclosures to BSE under PIT Regulations.
Kisan contended that there was no intention to conceal this allotment from
anyone and the details of its shareholding post the issue was in public domain.
The AO relied on various SAT orders and Supreme Court decisions to
conclude that making relevant disclosures is a mandatory obligation and a
penalty is imposed for non-compliance and whatever mitigating factors may be,
they do not obliterate the obligation to make disclosures and a penalty is
attracted as soon as contravention of a statutory obligation is established. A
penalty of Rs. 4 lakhs was imposed on Kisan Mouldings in light of factors under
Section 15-J of SEBI Act and in light of the fact that the exact monetary loss
could not be ascertained.
Order
in respect of Sandeep Bhatnagar in the matter of Wipro Limited dated 29.07.2017
Mr. Sandeep Bhatnagar is an employee of Wipro Limited and he had sought
pre-clearance from the company to sell 2300 shares which was approved on
27.07.2015 following which he sold 2237 shares of the company on 03.08.2015.
Pursuant to this, he was required to make continual disclosures under PIT
Regulations within two days of the transactions and there was a delay of 5 days
in the same. Mr. Bhatnagar contended that he obtained pre-clearance, he was
unaware of the deadline and his transaction was small and the threshold till
May of that year for making disclosures was 25 lakhs and that he possessed no
UPSI in that period and assured strict compliance in the future. Relying on
SEBI v. Shriram MF and Gaylord Commercial Company v SEBI, the AO noted that the
fact that there was no mala fide intention
or no loss has occurred to investors or gain to the individual is not a ground
for escaping penalty and imposed a penalty of Rs. 2 lakhs.
Order
in the matter of Amtek Auto Limited dated 30.10.2018
The Company, Amtek Auto Limited (AAL) made a preferential allotment of
44.37 lakh shares to its Promoter Group companies by way of a preferential
allotment on 10.09.2015. Pursuant to this allotment, two of the Promoter
entities, Aisa International Private Limited and Amtek Laboratories Limited
were allotted shares in excess of 10 lakhs in value due to which they made the
relevant disclosures to the AAL under Regulation 7(2)(a) of the PIT
Regulations.
Following this, AAL failed to make a disclosure under 7(2)(b) with BSE
and NSE thereby violating PIT Regulations. AAL contended that it had made
disclosures to NSE and produced a copy of courier receipt of the dispatch of
said disclosures. However, the AO found it insufficient to establish that the
Continual Disclosure was indeed made and further, disclosure has not been made
with NSE. With regard to AAL’s contention that it was undergoing Corporate
Insolvency Resolution Process, the AO observed that the moratorium period has
ended and the Adjudication Proceedings can be carried on. Taking into account
the fact that the change in shareholding of Promoter Group had become available
in public domain on 14.10.2015, a penalty of Rs. 2 lakhs was imposed on AAL.
Order
in respect of 6 entities in the matter of Marksans Pharma Limited dated
31.10.2018
In this order along with another order against
another entity in the same matter, certain employees of Marksans
Pharma Limited (MPL) who were ‘designated persons’ of the company had traded in
the scrips of MPL during a period when its trading window was closed. A SCN was
issued to these individuals for violation of Minimum Standards for Code of
Conduct under Schedule B of PIT Regulations.
The entities inter alia
submitted that they had no access to UPSI, their trades were of a miniscule
quantity, and the violations were technical in nature and unintentional.
Further, the AO noted that MPL has issued a warning to these employees, decided
to withhold their bonus and promotion for a year and also recovered any profits
made and subsequently deposited the same in the Investor Protection and
Education Fund. In light of these and the fact that there has been no market
manipulation or wrongful loss caused to investors or wrongful gain to these
individuals, the AO disposed of the SCN without imposing a penalty.
Order
in respect of 5 entities in the matter of Ritesh International Limited dated
31.10.2018
There were two off-market transactions with a value exceeding Rs. 10
lakhs between certain promoters on 27.04.2016 and 07.06.2016. These
transactions changed the shareholding pattern of the promoters and triggered
requirement of continual disclosure however, the promoters had failed to make
disclosures with BSE.
A SCN was issued to
these entities who submitted that these transactions were gift of shares
without consideration, pursuant to a partition deed dissolving HUF, and nobody
gained any undue advantage from these transactions and there was no intention
to deceive investors or the market. Further, because it was a family
settlement, the ‘value’ of securities cannot be fixed for these transactions.
The AO noted that the ambit of definition of transfer was wide enough to cover
off-market transactions and timely disclosures of change in shareholding is of
significant importance as it helps regulators monitor such acquisitions. A
penalty of Rs. 1 lakh was then imposed on Ritesh International Limited.
Committee on Fair Market Conduct
In the wake of instances of insider trading and
other financial frauds increasing at an alarming rate, SEBI in August 2017
constituted the Committee on Fair Market
Conduct (“Committee”) under the chairmanship of Dr TK Vishwanathan.
The Committee was tasked with reviewing the existing legal framework that dealt
with market abuse, and the surveillance, investigation and enforcement
mechanisms used by SEBI to protect the interest of investors.
The Committee submitted the report on ‘Fair Market
Conduct’ (“FMC Report”) on August 8,
2018 with recommendations to amend PIT Regulations, SEBI (Prohibition of
Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations,
2003, and others. Soon after, the report was put up on the SEBI website for
seeking public comments. Based on this 2019 amendments have come.
PART II: THE 2019 AMENDMENT
Definitions
Certain terms have been defined or re-defined in
an attempt to bring greater clarity; terms like “financially literate”,
“proposed to be listed” and “unpublished price sensitive information (or UPSI)”.
Earlier the meanings and interpretations of these terms had to be understood
contextually, which would not be in the specific context of insider trading.
i) “financial literate” – Financial
literacy is an important eligibility criteria for compliance officers and has
been specifically defined by way of an insertion of an Explanation to
Regulation 2(c) to mean ‘the ability to
read and understand basic financial statements, i.e. balance sheet, profit and
loss account, and statement of cash flows’. This definition has been
adopted from SEBI Listing Obligations and Disclosure Requirements (LODR) Regulations,
2015.
ii) “proposed to be listed” – Without
the newly inserted definition under Regulation 2(hb) (inserted as 2(ha) by the
First Amendment, re-numbered to 2(hb) by the Second Amendment), there was no
clarity on what it meant – it could mean securities of the company from the
date of the Board resolution approving the IPO or the date of appointment of
Merchant Banker or at the time of filing of the Draft Red Herring
Prospectus/Red Herring Prospectus. Moreover since the definition of UPSI is
linked to information which upon being generally available, would influence the
market price of securities, made it all the more necessary to determine the point in time when
information relating to a company, which proposes to achieve listing, will be
regarded as UPSI. Accordingly, it was noted by the Committee that prior to
filing of the draft red herring prospectus with SEBI, it is difficult to state
with certainty that there is any concrete intention for a company to get listed
on the stock exchange(s). Thus, clarity
on what exactly “proposed to be listed” was to cover was gravely needed. Now,
with this amendment, ‘proposed to be listed’ includes the securities of the
unlisted company:
(a) If
the unlisted company has filed offer documents or other documents with SEBI,
the Exchanges or the Registrar of Companies in connection with the listing.
(b) If
the unlisted company gets listed pursuant to a merger or an amalgamation and
files a copy of the scheme under the Companies Act, 2013.
iii) “unpublished price sensitive information”
(“UPSI”) – Before the amendment,
Regulation 2(n) defines UPSI as any information, relating to a company or its
securities that is not generally available and if it becomes generally
available, it might affect the price of the securities. Such UPSI included (but
was not restricted to) information relating to financial results, dividends,
change in capital structure, mergers, acquisitions, delisting, expansions,
etc., changes in the key managerial personnel or any material events in
accordance with the listing agreement.
The new amendment left out material events in accordance with the
listing agreement from the definition of UPSI in acknowledgment of the FMC
Report that noted that the material events as per Regulation 30 of SEBI LODR
Regulations could include information that might not be price sensitive under
the PIT Regulations.
Communication or Procurement of UPSI
For Legitimate
Purposes
Under Regulation 3, communication or procurement
of UPSI was not permitted unless it was for legitimate purposes, performance of
duties or for the discharge of legal obligations. Since ‘legitimate purposes’ was not defined, it was subjective and could
only be determined after examining the facts and circumstances on a case to case
basis. Therefore, regulation 3(2A) has been inserted by the amendment, whereby
it has been left to the Board of Directors to make a policy for determination
of ‘legitimate purposes’ as a part of the ‘Codes of Fair Disclosure and
Conduct’. This amendment allows the
management of companies the liberty to develop their own practice on how to
legitimately and responsibly conduct their business with minimal interference
by authorities, while also holding them accountable.
Furthermore, the explanation to this new
regulation specifies that the term ‘legitimate purpose’ includes sharing of
UPSI in the ordinary course of business by an insider with partners,
collaborators, lenders, customers, legal advisors, auditors, other consultants,
etc. if such sharing is done without the intention to evade or circumvent the
prohibitions of the PIT Regulations. While interpreting the list of persons
with whom UPSI may be shared, it is relevant to note here that the explanation
nowhere explicitly state ‘promoters’ or ‘significant shareholders’.
The Kotak Committee on Corporate Governance in its
report dated October 05, 2017 had observed that the legal structure as well
recognises the significant role played by the promoters, which extends and is
not limited to meeting the fund requirements of the listed company as and when
required, by virtue of which they are in constant receipt of UPSI, which many a
times is not through the green formal channels. It was further noted that it is
a common practice amongst Private Equity investors as well as financial
institutions as shareholders of listed companies, to nominate their
representatives on the board of directors of the listed company. By virtue of
such appointment and in order to protect their own interest, flow of
information occurs through un-regularised channels.
Accordingly, the Committee
on Corporate Governance proposed amendments to the listing regulations to enable
sharing of information with promoters and shareholders with nominee directors,
including execution of an “access to information agreement” setting out
confidentiality obligations and undertakings by the recipient and the rights of
the company to withhold access to material information under specified
circumstances.
SEBI, however, rejected
it stating, “giving any shareholder preferential treatment compared to other
shareholders for getting access to information has far reaching implications
and therefore may not be desirable”. Accordingly, any UPSI shared with a
shareholder may attract a regulatory scrutiny any may be tested to check if the
same constituted ‘legitimate purpose’.
To stem the tide of unnecessary sharing of UPSI
further, the Board of Directors have also been given the task to ensure that a
digital database of names of entities with whom information under the
regulation is shared, is maintained. This is especially important as even if
UPSI is shared for legitimate purposes, the company loses further control over
further use of that information, thereby making it difficult to establish the
connection between the company and recipient of such information. This step
will ensure that a digital trail of the information flow is maintained. However,
such mandate on part of small listed companies also shall add up to their
costs, making compliances costly.
To hold entities with whom UPSI has been shared
for legitimate purposes accountable, Regulation 3(2B) has been inserted which
makes every such entity an ‘insider’ for the purposes of PIT Regulations. Due
notice has to be given or a Non-Disclosure Agreement as well as a Stand Still
Agreement may be entered into with such ‘insiders’ to maintain confidentiality
of the UPSI shared with them and not make use of the same for dealing in
securities of the subject company.
Sharing of
information ‘in the best interest’ Regulation
3(3) has been amended to allow the sharing of UPSI if it is in connection with
a transaction that obligates the making of an open offer under the SEBI
(Substantial Acquisition of Shares and Takeovers) Regulations, 2011 where the board
of directors are convinced that the sharing of such information is in the best
interests of the company. Before the amendment, sharing of UPSI was allowed if
the board of directors were of the opinion that the proposed transaction that
required the making of the open offer was in the best interests of the company.
In other words, in circumstances that obligate an
open offer, the amendment has allowed sharing of UPSI if the board of directors
think sharing the information itself is in the best interests of the company
whereas before the amendment, directors had to have such an opinion for the
proposed transaction.
The rationale of this change is that since these
due diligence exercises are conducted at a very nascent stage of a transaction,
it is onerous for the board of directors to assess whether such proposed
transaction is in the best interests of the company then. Therefore, now the board
of directors just need to assess whether the sharing of UPSI is beneficial for
the company.
Defences
Regulation 4 of the PIT Regulations prohibits
trading by insiders while in possession of UPSI. However, certain limited defences
are provided for an insider to prove his innocence by demonstrating certain
circumstances. It is often believed that once charged with insider trading, it
is almost impossible to establish innocence due to the wide interpretation of
the PIT Regulations. Thus, it is important to have current, clear and rational
defences to avoid tarnishing an innocent person’s life and reputation. It is
with this view that the Committee expressed a need to account some of the
defences adopted by overseas jurisdictions, and recommended certain new
defences, that have now found the force of law.
By way of an explanation it has also been
clarified that somebody trading in securities while being in possession of UPSI
will be presumed to have been motivated by the knowledge and awareness of such
information which is in his possession.
The defence available for off-market inter-se transfers between promoters,
who were in possession of the same UPSI, now extends to non-promoter insiders
too provided that the possession of UPSI is not as a result of information
shared for the purpose of conducting due diligence exercises under Regulation
3(3). Newly introduced defences now available are as under:
(i)
for transactions carried out through the block deal window mechanism among
persons possessing the same UPSI;
(ii)
for transactions carried out in a bona fide manner pursuant to a statutory or
regulatory obligation; and
(iii)
for transactions undertaken pursuant to the exercise of stock options.
Trading Plan
Regulation 5 of the PIT Regulations allows an
insider to formulate a trading plan, according to which trades may be carried
out by such insider. This provision is designed to give an option to persons
who are perpetually in possession of UPSI to trade in the securities of the
subject company. The trading plan:
(i)
is required to cover a period of at least 12 months;
(ii)
is required to be disclosed to the stock exchanges prior to the actual trading;
(iii)
can be executed only after 6 months from its public disclosure;
(iv)
is irrevocable and cannot be modified;
The Committee acknowledged the unpopularity of the
trading plan on account of how the restrictions could invariably be detrimental
and economically disadvantageous to an insider. Trading Plans were introduced
on an experimental basis post the Justice Sodhi Committee Report, subject to
amendment after feedback and evidence collection. The Committee was however
unable to come to a conclusion on any changes to the provisions, but offered a
few clarifications which have been incorporated in the PIT Regulations.
With effect from April 1, 2019, pre-clearance of
trade shall not be required in case the trading plan has been filed and
approved and additionally, adherence to trading window norms and restrictions
on contra trade shall not be applicable for trading done in accordance with the
approved trading plan.
Inclusion of Promoter Group
The Second Amendment dated January 21, 2019,
included members of “promoter group” in the disclosure requirements as under
Regulation 7, which pertains to disclosures by certain persons. Also, “Promoter
group” has been defined as given in the SEBI (Issue of Capital and Disclosure
Requirements) Regulations, 2018.
Code of Conduct
Separate Code of Conduct for listed companies, market intermediaries and fiduciaries
The Regulations prior to the amendment specified a
common Code of Conduct applicable to listed companies, intermediaries and other
persons who are required to handle UPSI during the course of their business
operations. However, all provisions of the Code of Conduct were not applicable equally
to listed companies, intermediaries and other entities like auditors, law firms,
etc. For example, the requirement of trading window in which employees can
trade in the company stock was applicable only to listed companies and not to
intermediaries which could have access to UPSI related to multiple companies
with which they had business dealings.
In this regard, in order to bring clarity on the
requirements applicable to listed companies and others, the Committee
recommended that the PIT Regulations be amended to prescribe two separate Codes
of Conduct prescribing minimum standards for (1) Listed companies and (2)
Market Intermediaries and fiduciaries (lawyers, analysts, advisors, accountants,
etc.) who are required to handle UPSI. In the case of intermediaries, the duty
for formulating the Code of Conduct has been specifically cast on the CEO or
MD, as set out in Schedule C of the PIT Regulations, whereas a listed company
is has to adopt the minimum standard set out in Schedule B.
It has also been clarified that a listed
intermediary had to formulate a code of conduct by adopting the minimum
standards set out in Schedule B with respect to trading in their own securities
while with respect to trading in securities of other companies, they have to
follow the standards as given in schedule C.
Furthermore, professional firms like auditors,
accountancy firms, law firms, analysts, insolvency professional entities,
consultants, banks, etc., will be collectively referred to as fiduciaries. Such
fiduciaries have been required to have a code of conduct in place since they
handle UPSI in the course of their business.
Definition of designated person(s)
As per Regulation 9, the board of directors of
every listed company, market intermediaries and entities required to handle
UPSI in the course of their business had to formulate a Code of Conduct to regulate,
monitor, and report trades by employees and other connected persons.
With the insertion of sub-regulation (4) in
regulation 9, the ‘designated persons(s)’ who will be covered by the code of
conduct on the basis of their role and function and the access to UPSI that
such role and function would bring, will inter-
alia include the following:
i. Employees,
intermediaries or fiduciaries on the basis of their functional role and access to UPSI;
ii. Employees of
material subsidiaries;
iii. Promoters of
listed companies and investment companies for intermediaries/fiduciaries.
iv. CEOs and
employees upto two levels below CEOs of the listed company, intermediary, fiduciary
and their material subsidiaries.
v. Support staff
of the listed company, intermediary or fiduciary.
Inquiries by listed company for leak of UPSI
Companies are now also required to formulate
board-approved policies and procedures for the purposes of an inquiry in case
of any leak of UPSI. This comes with implementation and prompt intimation of
the same has to be done to SEBI. Additionally, there must be whistle-blower
policies that make it conducive for employees to report instances of leak of
UPSI. Employees must be sensitised with
respect to the same.
Aiding investigations on insider trading
Investigation of insider trading is an extremely
challenging task as it is not always possible to establish the link between the
insiders who had access to UPSI and the persons who traded making use of such
UPSI. It is quite likely that the trader is a front entity with no obvious
connection to the insider. In order to facilitate investigation, the Regulations
now mandate disclosures by designated persons of names of immediate relatives,
persons with whom such designated person(s) share a material financial
relationship, and phone, mobile and cell numbers which are used by them. Such
information must be maintained by the company in a searchable electronic format
and may be shared with SEBI when sought on case to case basis.
Institutional Responsibility
In order to have better implementation of
preventive measures prescribed under the Regulations, the committee recommended
a mechanism for institutional responsibility to prevent insider trading, by
creating a framework to ensure that a Code of Conduct is formulated and an
effective system of internal controls is in place to ensure compliance with the
PIT Regulations. Further, the role and responsibility of the board of directors,
CEO/MD, Audit Committee and Compliance officers have been clarified in this context.
This mechanism under the new Regulation 9A essentially imposes responsibilities
on the CEO or MD or such other analogous person of a listed company/market
intermediary/fiduciary to implement the provisions of the Regulations. Further,
the board of directors too, are required to ensure that the person responsible
to comply with these requirements formulates the code of conduct and puts in
place an effective system of control.
A review of the system has to be undertaken by the
Audit Committee in case of listed entity and other analogous body for
intermediary or fiduciary, verifying whether the systems for internal control
are adequate and are operating effectively at least once a year. The terms of reference
of the Audit Committee (other analogous body for intermediary or fiduciary)
must be amended accordingly.
Conclusion
The amendments have been
a long time coming ever since the constitution of the Uday Kotak Committee on
Corporate Governance in October 2017 and then the T.K. Vishwanathan Committee
last year.
Although the amendments have
done well to counter the ever-changing market practices by providing
definitions of undefined terms and also providing clarifications with regards
to Trading Plans. It has also done well to make it mandatory for companies to
have whistle-blower policies and put in place internal checks for insider
trading matters.
Having said that, the law
also leaves behind many questions unanswered, for example, whether the scope of
legitimate purpose as decided by the Board of Directors through the Code of
Conduct – whether it will open to scrutiny from SEBI or whether there will be a
decided basis for them to define something as a legitimate purpose.
Therefore, the robustness
of these Regulations is yet to be tested and the pathway to bring India’s
insider trading regime at par with that of developed markets globally seems
blurred, if not dark.
No comments:
Post a Comment