Among other proposals, whether an insider who has traded in securities is a connected person, the onus of establishing that he was not in breach of the prohibition will be on him
A high level committee appointed by market regulator Securities and Exchange Board of India (SEBI) has proposed bringing in public servants handling share price-sensitive information under its purview and put the onus on the insiders to prove they have not breached any law.
The new norms, which would also apply to mutual funds and trusts issuing securities or schemes that get listed on stock exchanges, would also require companies to seek entire holdings of all employees and third-party connected persons.
Besides, all trades by promoters, employees, directors and their immediate relatives (which would cover close relatives who are either financially dependent or consult the insider in connection with their trading) would be required to be disclosed to the company.
Besides, definition of the term 'connected person' has been changed to "explicitly include public servants who handle UPSI relating to listed companies".
Among other proposals, whether an insider who has traded in securities is a connected person, the onus of establishing that he was not in breach of the prohibition will be on him.
The Committee headed by Justice NK Sodhi, in its 74-page report said, "Simply put, the Proposed Regulations entail a prohibition on trading by insiders in securities when in possession of UPSI (Unpublished Price Sensitive Information), thus obtaining an unfair advantage".
Here are the salient features of the report…
1. While enlarging the definition of "insider", the term “connected person” has been defined more clearly and immediate relatives are presumed to be connected persons, with a right to rebut the presumption. The term “immediate relative” would cover close relatives who are either financially dependent or consult an insider in connection with trading in securities.
2. Insiders would be prohibited from communicating, providing or allowing access to UPSI unless required for discharge of duties or for compliance with law.
3. The regulations would bring greater clarity on what constitutes “unpublished price sensitive information” (UPSI) by defining what constitutes “generally available information” (essentially, information to which non-discriminatory public access would be available). A list of types of information that may ordinarily be regarded as price sensitive information has also been provided.
4. Trading in listed securities when in possession of UPSI would be prohibited except in certain situations provided in the regulations.
5. Insiders who are liable to possess UPSI all round the year would have the option to formulate pre-scheduled trading plans. In such cases, the new UPSI that may come into their possession without having been with them when formulating the plan would not impede their ability to trade. Trading plans would, however, be required to be disclosed to the stock exchanges and have to be strictly adhered to.
6. Conducting due diligence on listed companies would be permissible for purposes of transactions entailing an obligation to make an open offer under the Takeover Regulations. In all other cases, due diligence would be permissible subject to making the diligence findings that constitute UPSI generally available prior to the proposed trading. In all cases, the board of directors would need to opine that permitting the conduct of due diligence is in the best interests of the company, and would also have to ensure execution of non-disclosure and non-dealing agreements.
7. Trades by promoters, employees, directors and their immediate relatives would need to be disclosed internally to the company. Trades within a calendar quarter of a value beyond Rs10 lakh or such other amount as SEBI may specify, would be required to be disclosed to the stock exchanges.
8. Every entity that has issued securities which are listed on a stock exchange or which are intended to be so listed would be required to formulate and publish a Code of Fair Disclosure governing disclosure of events and circumstances that would impact price discovery of its securities.
9. Every listed company and market intermediary is required to formulate a Code of Conduct to regulate, monitor and report trading in securities by its employees and other connected persons. All other persons such as auditors, law firms, accountancy firms, analysts, consultants etc. who handle UPSI in the course of business operations may formulate a code of conduct and the existence of such a code would evidence the seriousness with which the organization treats compliance requirements.
10. Companies would be entitled to require third-party connected persons who are not employees to disclose their trading and holdings in securities of the company.