Grey areas in insider trading regulations needs clarity: Experts
Corporate compliance officials hold that the new regulations have imposed some additional risks on them as a large community of outsiders including journalists, vendors, bankers and others have been included under the definition of the term insider
 
The Indian securities market regulator has to clarify certain grey areas such as whether the employee stock options (ESOP) is also covered by its new insider trading regulations that came into force on May 15, say legal and industry experts.
 
Corporate compliance officials hold that the new regulations have imposed some additional risks on them as a large community of outsiders including journalists, vendors, bankers and others have been included under the definition of the term insider.
 
"The old insider trading regulations expressly kept out ESOPs whereas the new regulations do not as per interpretations. Normally ESOP schemes are well-defined and it is an option to buy," S.Swaminathan, chief financial officer, Intellect Design Arena Ltd, told IANS.
 
"It should also be said any step towards improvement of corporate governance is welcome," he added.
 
Pratibha Jain, partner and head, regulatory practice, Nishith Desai Associates, told IANS that the Securities and Exchange Board of India has overhauled the insider trading regulations "with a view to provide a level playing field in the securities market and also to safeguard investor interest".
 
She also agreed that the ESOP issue is a grey area that SEBI has to address. According to her colleague Tanya Pahwa, the 1992 insider trading regulations had kept out ESOPs.
 
"Under the new regulations, the scope of the term 'insider' or a 'connected person' has been widened.
 
"Therefore, any person, whether or not related to the company, may come within the purview of the regulations if he is expected to have access or possess unpublished price sensitive information. Applicability of the regulations shall extend to unpublished price sensitive information in relation to a company as well as securities listed or proposed to be listed on a stock exchange," Jain said.
 
The new regulations - Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 - define an insider as any connected person or any person in possession of or have access to unpublished price sensitive information.
 
A connected person includes any person who is or has during the six months prior to the concerned act been associated with the company, including through frequent communication with its officers or as a director, officer, vendor and others with an access to unpublished price sensitive information.
 
The term connected persons include immediate relatives; holding/subsidiary or associate company; mutual fund; stock exchange or clearing house official; banker and others.
 
According to Intellect Design Arena's Swaminathan, a large third-party community has been included as insider and it is a challenge for listed companies to get disclosure compliance from them.
 
"Perhaps a monetary threshold level of dealing in securities should be stipulated by SEBI," he said.
 
The regulations will also extend to unpublished price sensitive information in relation to a company as well as securities listed or proposed to be listed on a stock exchange, Jain said.
 
"For the purpose of legitimate business transactions, access to unpublished price sensitive information, for instance, of due diligence, with appropriate safeguards has been explicitly provided for which shall avert the risk of any regulatory scrutiny in relation to such transactions," she said.
 
The board of directors of every listed company and market intermediary have to draw up a code of conduct to regulate, monitor and report trading by its employees and other connected persons in accordance with the regulations, she added.
 
Jain said the regulations further provide every other person who is required to handle unpublished price sensitive information in the course of business operations such as auditors, accountancy firms, law firms, analysts, consultants, other capital market participants and others are also required to draw up such a code of conduct.
 
Therefore, even entities that normally operate outside the capital market may be required to formulate such a code depending on their exposure to unpublished price sensitive information.
 
Also, every such person formulating a code of conduct is required to identify and designate a compliance officer to administer the same, Jain remarked.
 
"Trading in the security of the company is not permitted when trading window is closed on account of a unpublished price sensitive information. Further, pre-clearance is required for a trade exceeding Rs.10 lakh, even if the trading window is not closed."
 
The trading window is supposed to close for a company upon certain events like declaration of financial results and opened upon cooling-off period of 48 hour of relevant information becoming generally available.
 
The management, in addition to the penalty by the regulator, can also initiate disciplinary action against violators with steps that can include wage freeze, suspension, ineligibility for future participation in stock options and withholding of promotions.
 
"While the new regulations widen the ambit, a lot more investment in monitoring and surveillance needs to be made. Even globally it is not easy to catch insider trading. And which is why exemplary punishment needs to be handed out which would act as a strong deterrent," Pranav Haldea, managing director, Prime Database, told IANS.
 
Jain however noted that SEBI has an investigation arm responsible for looking into any alleged wrongdoings.
 
"Based on recent amendments to the SEBI Act, they also have power of search and seizure. SEBI investigation for insider trading is typically based on a tip or one of exchanges reporting unusual activity in trading of a stock," she said.
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SC declines farmers plea seeking restoration of their lands
The Supreme Court Thursday declined a batch of petitions by farmers of villages located in Noida, Greater Noida and Noida Extension, neighbouring the national capital, seeking restoration of their lands which were held to be wrongly acquired by NOIDA authority by invoking the urgency clause.
 
A bench headed by Chief Justice H.L.Dattu declined the plea by the farmers who had challenged the Allahabad High Court's October 21, 2011 verdict, which, while quashing the acquisition of land by invoking the urgency clause, had instead of restoring it, enhanced compensation by 64.7 percent.
 
The high court had also directed that the farmers whose lands have been acquired would get 10 percent of developed land in proportion to their acquired land.
 
Since most of the farmers had accepted the compensation, the apex court questioned the farmers plea for the return of their acquired lands even after they had accepted compensation.
 
The court had earlier declined the Noida authority's plea challenging the Allahabad High Court's order enhancing the compensation and giving 10 percent of the acquired land to the farmers after development. 
 
Nearly 100 real estate projects by various developers are coming up on the acquired lands and nearly 1.5 lakh people have registered flats in these projects.

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The Onerous Rules of Insider Trading
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:
  1. Identify such Market Intermediary and every other person who is required to handle UPSI of the Company; 
  2. 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; 
  3. Allow such identified person time frame of 14 days from the date of mail  to confirm that they have formulated the CoC; 
  4. In case of no response, send a reminder mail after the expiry of 7 days from the date of original mail;
  5. 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)

 

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COMMENTS

manoharlalsharma

4 years ago

Rules r made for GENTLE MAN but not for CRINKLES the business to break the RULES.

R Balakrishnan

4 years ago

THe biggest insider traders are the promoters, merchant bankers, auditors and one or two key employees. Across companies. Most of them operate through perverse accounts. SEBI is perhaps the most pathetic 'regulator' India has ever had and UK SInha must rank amongst the worst in the world. Pathetic rent seekers who jump in to SEBI from government posts.

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