Every listed company and market intermediary must have a code of conduct to regulate, monitor and report trading by its employees and connected persons. Every other person who may handle unpublished price sensitive information are also required to frame a Code of Conduct
Market regulator Securities and Exchange Board of India (SEBI) intends to cover any person in possession or reasonably expected to be in possession of Unpublished Price Sensitive Information (UPSI) to formulate a Code of Conduct (CoC) to ensure that there is no price discovery of securities and trading before an UPSI is made generally available. The Compliance Officer as well as market intermediaries and other persons, who regularly participate in the affairs of the Company, have to ensure that the CoC is in place and is duly implemented.
The market regulator rolled out SEBI (Prohibition of Insider Trading) Regulations, 2015
(Regulations, 2015) on 15 January 2015 which will come into force on 120th date of its publication in Official Gazette i.e. 15 May 2015. Regulations 2015 are based on the submission of report of High Level Committee set up under the Chairmanship of NK Sodhi, former Chief Justice of High Courts of Kerala and Karnataka and former Presiding Officer of the Securities Appellate Tribunal
on 7 December 2013.
Insider trading means trading in securities of a company by its directors, employees or other insiders based on UPSI. Such dealings by insiders erode the investors' confidence in the integrity of the management and are unhealthy for the capital markets. Regulations 2015 inter-alia mandates every listed company and every market intermediary registered with SEBI to formulate a CoC [Regulation 9] to regulate, monitor and report trading by its employees and other connected persons. Additionally, every other person who is required to handle UPSI in the course of business operations is also required to frame a Code of Conduct.
Regulations 2015 also casts responsibility on the Board of listed companies to ensure timely, uniform and adequate disclosure of UPSI to the investor community by the Company to enable them to take informed investment decisions with regard to the Company's Securities. In view of the same, every company, whose securities are listed on a stock exchange, are required to formulate a Code of Practices and Procedures for Fair Disclosure (CoFD) [Regulation 8] for fair disclosure of events and occurrences that could impact price discovery in the market for its securities.
The present Circular:
SEBI vide CIR/ISD/01/2015 dated 11 May 2015 issued a circular
(Circular) thereby specifying the formats in which the initial and continuous disclosures, as stipulated under Regulation 7 of Regulations, 2015 shall be made. In addition to requiring the Stock Exchanges to have systems in place for ensuring implementation of the Circular, the Circular requires the listed companies to confirm following to the Stock Exchanges:
a) The Company has formulated CoFD and published the same on its official website. Regulation 8 (2) of Regulations, 2015 mandates prompt intimation to the Stock Exchange of every amendment made in CoFD
b) The Company has formulated CoC.
c) The Company is dealing with only such market intermediary / every other person, who is required to handle UPSI, who have formulated a code of conduct as per the requirements of the Regulations.
Meaning of Market Intermediary and Other Person:
The definition of insider under Regulations 2015 includes a connected person, which inter alia includes a market intermediary, and any person who is possession or having access to UPSI.
As per Regulation 2(g) of SEBI (Intermediaries) Regulations, 2008
, “intermediary” means a person mentioned in clauses (b) and (ba) of sub-section (2) of section 11 and sub-section (1) and (1A) of section 12 of the Act and includes an asset management company in relation to the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996, a clearing member of a clearing corporation or clearing house and a trading member of a derivative segment of a stock exchange but does not include foreign institutional investor, foreign venture capital investor, mutual fund, collective investment scheme and venture capital fund.
As per Section 11(2) (b) and 11(2)(ba) of the SEBI Act, 1992
, intermediary includes stock brokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers, depositories, participants, custodians of securities, foreign institutional investors, credit rating agencies and such other intermediaries who may be associated with securities markets in any manner;
However, there is no readymade definition of other persons, which the Company could refer to ascertain whether the requirement of the Circular is being met. They are to be identified by the Company considering the extent of dealings with them by the Company and their ability to access UPSI. These may include:
a) Employees of holding company (whether immediate or ultimate) who by virtue of his or her position approves key decision, functions of the Company, or has an access to UPSI relating to the Company;
b) Any strategic shareholder whose affirmative vote or sanction is pre-requisite for key actions of the Company;
c) Professionals, consultants, advocates, auditors whom the Company may consult prior to deciding the corporate action or occurrence or who play an active role in formulating systems or processes.
Suggestive Action points to comply with aforesaid requirement
The Compliance Officer shall ensure the following:
Identify such Market Intermediary and every other person who is required to handle UPSI of the Company;
Send a mail to each of such identified person enclosing a suggested format of confirmation that such identified person has formulated CoC as per the Regulation 2015;
Allow such identified person time frame of 14 days from the date of mail to confirm that they have formulated the CoC;
In case of no response, send a reminder mail after the expiry of 7 days from the date of original mail;
If no confirmation is received after the expiry of 21 days from the date of original mail, the Company shall stop sharing UPSI with such identified person.
(Both Vinita Nair and Aman Nijhawan are practising Company Secretaries at Vinod Kothari & Co