THE SECURITIES AND EXCHANGE BOARD OF INDIA (PROHIBITION OF INSIDER TRADING) REGULATIOS, 2015 – AN OVERVIEW

[Mr. M. GOVINDARAJAN]

In exercise of the powers conferred under Section 30 read with Section 11 (2)(g) of SEBI Act, 1992, the Board make the ‘Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 (‘Regulations’ for short)-

• to put in place a framework for prohibition of insider trading in securities; and
•  to strengthen the legal framework.

The Regulations were notified by Notification No. LAD-NRO/GN/21/85, dated 15.01.2015 repealing the SEBI (Prohibition of Insider Trading) Regulations, 1992.

Who is an insider?

Regulation 2(g) defines the term ‘insider’ as any person who is-

• a connected person; or
• in possession of or having access to unpublished price sensitive information.

To have a full view for the meaning of the term ‘insider’ it is necessary to know the definition of ‘connected person’ and ‘unpublished price sensitive information’.

Connected person

Regulation 2(d)  defines the term ‘connected person’ as-

• any person who is or has during the six months prior to the concerned act been associated with a company, directly or indirectly, in any capacity including by reason of frequent communication with its officers or by being in any contractual fiduciary or employment relationship or by being a director, officer or an employee of the company or holds any position including a professional or business relationship between himself and the company whether temporary or permanent, that allows such person, directly or indirectly, access to unpublished price sensitive information or is reasonably expected to allow such access;
• the  following persons shall be deemed to be connected persons unless the contrary is established-

• an immediate relative ( a spouse of a person and includes parent, sibling and child of such person or of the spouse, any of whom is either dependent financially on such person or consults such person in taking decisions relating to trading activities) of connected persons as specified above; or
• a holding company or associate company or subsidiary company; or
• an intermediary  or an employee or director thereof; or
• an investment company, trustee company, asset management company, or an employee or director thereof; or
• an official of a stock exchange or of clearing house or corporation; or
• a member of board of trustees of a mutual fund  or a member of board of directors of asset management company of mutual funds or is an employee thereof; or
• a member of the board of director or an employee of a public financial institution;
• an official or an employee of a self regulatory organization recognized or authorized by the Board;
• a banker of the company; or
• a concern, firm, trust, HUF, company or association of person wherein a director of a company or his immediate relative or banker of the company, has more than 10% of the holding of interest.

Unpublished price sensitive information

Regulation 2(n) defines the expression ‘unpublished price sensitive information’ as 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 and shall, ordinarily including but not restricted to, information relating to the following:

• financial results;
• dividends;
• change in capital structure;
• mergers, de-mergers, acquisitions, delistings, disposals and expansion of business and such other transactions;
• changes in key managerial  personnel; and
• material events in accordance with the listing agreement.

Obligation on insider

Regulation 3(1) and (2) imposes some obligations on the insider as detailed below:

• An insider shall not 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;
• No person shall procure from or cause the communication by any insider of unpublished price sensitive information, relating to a company or securities listed or proposed to be listed, except in furtherance of legitimate purposes, performance of duties or discharge of legal obligations;

Communication of unpublished information

Regulation 3(3)  provides that an unpublished price sensitive information may be communicated, provided, allowed access to or procured, in connection with a transaction that would-

• entail an obligation to make an open offer under the takeover guidelines where the board of directors of the company is of informed opinion that the proposed transaction is the best interests of the company;
• not attract the obligation to make an open offer under the takeover regulations but where the board is of informed opinion that the proposed transaction is 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;

Agreements by Board of Directors

Regulation 3(4) provides that the board of directors for the purposes of Regulation 3(3) shall require the parties to execute agreements to contract confidentiality and non disclosure obligations on the part of such parties and such parties shall keep information so received confidential, except for the purpose of Regulation 3(3) and shall otherwise trade in securities of the company when in possession of unpublished price sensitive information

Trading on possession of unpublished price sensitive information

Regulation 4(1) provides that an insider shall not trade in securities that are listed or proposed to be listed on a stock exchange when in possession of unpublished price sensitive information.   The insider may prove his innocence by demonstrating the circumstances including the following:

• the transaction is an off-market inter-se transfer between promoters 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;
• in the case of non individual insiders-

• the individuals who were in possession of such unpublished price sensitive information were different from the individuals taking trading decisions and such persons were not in possession of such unpublished price sensitive information when they took the decision to trade; an
• appropriate and adequate arrangements were in place to ensure that these regulations are not violated and no un-published price sensitive information was communicated   by the individuals possessing the information to the individuals taking trade decisions and there is no evidence of such arrangements having been breached;

• the trades were pursuant to a trading plan.

Regulation 4(2) provides that in the case of connected persons, the onus of establishing that they were not in possession of unpublished price sensitive information, shall be on such connected persons and in other cases the onus is on the Board.

Regulation 4(3) provides that the Board may specify such standards and requirements from time to time as it may deem necessary for the purpose of these regulations.

Trading plans

Regulation 5(1) provides that an insider shall be entitled to formulate a trading plan and present it to the compliance office for approval and public disclosure pursuant to which trades may be carried out on his behalf in accordance with such plan.

Regulation 5(2) provides that such trade plan shall-

• not entail commencement of trading on behalf of the insider earlier than six months from the public disclosures of the plan;
• not entail trading for the period between the 21th trading day prior to the last day of any financial period for which results are required to be announced by the issuer of the securities and the second trading day after the disclosure of such financial results;
• entail trading for a period of not less than 12 months;
• not entail overlap of any period for which another trading plan is already in existence;
• set out either the value of trades to be effected or the number of securities to be traded along with the nature of the trade and the intervals at, or dates on which such trades shall be effected; an
• not entail trading in securities for market abuse.

Regulation 5(3) provides that the compliance officer would have to review and approve the plan.  He may need the insider to declare that he is not in possession of unpublished price sensitive information or that he would ensure that any such information in his possession becomes generally available before he commences executing his trades.   If he is satisfied, he may approve the trading plan that is to be implemented in accordance with these regulations.

Regulation 5(4) provides that the trading plan once approved shall be irrevocable.  The insider shall mandatorily have to implement the plan without being entitled to either deviate from it or to execute any trade in the securities outside the scope of the trading plan.  Despite the 6 month gap between the formulation  of the trading plan and its commencement, the unpublished price sensitive information in possession of the insider is still not generally available.   In such a situation, commencement of the plan would conflict with the over-riding principle that trades should not be executed when in possession of such information.   If the same information is still in the insider’s possession, the commencement of execution of the trading plan ought to be deferred.

Regulation 5(5) provides that upon approval of the trading plan, the compliance officer shall notify the plan to the stock exchanges on which the securities are listed.

Disclosures of trading by insiders

Regulation 6(1) provides that every public disclosure shall be made as specified in Schedule A as detailed below:

• prompt public disclosures of unpublished price sensitive information that would impact price discovery  no sooner than credible and concrete information comes into being in order to make such information generally available;
• uniform and universal dissemination of unpublished price sensitive information to avoid selective disclosure;
• Designation of a senior officer as Chief investor relations officer  to deal with dissemination of information and disclosure of information;
• Prompt dissemination of information that gets disclosed selectively, inadvertently or otherwise to make such information generally available;
• Appropriate and fair response to queries on news reports and requests for verification of market rumors by regulatory authorities;
• Ensuring that information shared with analysis and research personnel is not unpublished price sensitive information;
• Developing best practices to make transcripts or records of proceedings of meetings with analysts and other investor relations conferences on the official website to ensure official confirmation and documentation of disclosures made;
• Handling of all unpublished price sensitive information on a need-to-know basis.

Regulation 6(2) that the disclosures to be made by any person shall include those relating to trading by such person’s immediate relatives, and by any other person for whom such person takes trading decisions.

Regulation 6 (3) provides  that the disclosures of trading in securities shall also include trading in derivatives of securities and the traded value of the derivatives shall be taken into account, provided the trading in derivatives of securities is permitted by any law for the time being in force.

Rule 6(4) provides that the disclosures made shall be maintained by the company for a minimum period of five years in such form as may be specified.

Disclosures by certain persons

Regulation 7 provides for initial disclosures, continual disclosures and disclosures by other connected persons.

Regulation 7(1) provides for initial disclosures.   It provides that every promoter, key managerial personnel and director of every company, whose securities are listed shall disclose his holding of securities of the company as on the date of these regulations taking effect to the company within 30 days of these regulations taking effect.  Every person on appointment as a key managerial personnel or a director of the company or upon becoming a promoter shall disclose his holding of securities of the company as on the date of appointment or becoming a promoter, to the company within 7 days of such appointment or becoming a promoter.

Regulation 7(2) provides for continual disclosures.  Every promoter, employee and director shall disclosure to the company the number of such securities acquired  or disposed of within 2 trading days of such transaction, if the values of the securities traded, in excess of ₹ 10 lakh or such other value as may be specified.  Every company shall notify the particulars of such trading to the stock exchanges within 2 trading days of receipt of the disclosure or from becoming aware of such information.

Regulation 7(3) provides for disclosures by other connected persons.   Any company whose securities are listed may at its discretion require any other connected person or class of persons to make disclosures of holdings and trading in securities of the company in such form and at such frequency as may be determined by the company in order to monitor compliance.

Code for disclosure

Regulation 8 provides for the code of fair disclosure.  The Board of Directors shall formulate and publish on its official website, a code of practices and procedures for fair disclosures of unpublished price sensitive information that it would follow in order to adhere to each of the principles set out in Schedule A without diluting the provisions in any manner.  Every such code of practices and procedures for fair disclosure  shall be promptly intimated to the stock exchange.

Code of conduct

Regulation 9 provides for the code of conduct.  The Board of Directors shall formulate a code of conduct to regulate, monitor and report trading by its employees and other connected persons towards achieving compliance with these regulations adopting minimum standards set out in Schedule B without diluting these regulations.

Every other person who is required to handle unpublished information in the course of business operations shall formulate a code of conduct to regulate, monitor and report trading by employees and other connected persons.  Every listed company, market intermediary and other persons formulating a code of conduct shall identify and designate a compliance officer to administer the code of conduct and other requirements.

 Action for violations

Regulation 10 provides that any contravention of these regulations shall  be dealt with by the Board in accordance with SEBI Act.