The Securities and Exchange Board of India (SEBI) had in order to put in place a framework for prohibition of insider trading in securities and to strengthen the legal framework, laid down SEBI (Prohibition of Insider Trading) Regulations, 2015 on 15th January, 2015. SEBI has time and again issued several circulars to streamline the existing ambiguities in interpretation of certain aspects of the insider trading regulations. These regulations require formulation of Code of Conduct to regulate, monitor and report trading by designated persons, with the approval of Board of directors of listed companies as set out in Schedule C of the regulations.
“Insider trading” is a malpractice of disclosing any unpublished price sensitive information relating to company or its securities that is generally not available to public, which is likely to affect the trading of securities. SEBI has time and again issued several circulars to streamline the existing ambiguities in interpretation of certain aspects of the insider trading regulations.
Unpublished Price Sensitive Information (UPSI) is any information which relates to a Company or its securities- listed or proposed to be listed, directly or indirectly, that is generally not available to public and is kept confidential, the disclosure of which materially affects the price of the securities. Such confidential information may comprise of financial results, dividends, mergers, acquisitions and such other transactions, change in capital structure and key managerial personnel.
Regulation 5 is an exception to the general rule of prohibiting an insider to trade when in possession of UPSI and entitles an insider who may be perpetually in possession of unpublished price sensitive information and enabling them to trade in securities in a compliant manner. An insider has to make a trade plan for executing trades in the future, with the approval of Compliance Officer. However, he is restricted from trading for a reasonable period specified under the regulations, as that would generate UPSI. If the value of the proposed trades is above the thresholds as the board of directors may stipulate, pre-clearance by the Compliance Officer is required.
1. Initial & Continuous disclosures:
2. Internal controls:
The company shall put in place adequate and effective system of internal controls to ensure compliance with the requirements given in these regulations to prevent insider trading. Such controls shall include:
3. Audit committee or any other authorised body to review compliance:
The Audit Committee of a listed company or other Authorised Body for intermediary or fiduciary shall review compliance with the provisions of these regulations at least once in a financial year and shall verify that the systems for internal control are adequate and are operating effectively.
4. To formulate written policies and procedures for violation of regulations:
Every listed company shall formulate written policies and procedures for inquiry in case of leak or suspected leak of unpublished price sensitive information, with the approval of Board of Directors and act upon it in case of any leak by initiating inquiries and accordingly intimate the Board of the same.
5. Whistle-blower Mechanism:
The listed company shall have a whistle-blower policy and make employees aware of such policy to enable employees to report instances of leak of unpublished price sensitive information.
Every company, whose securities are listed on a stock exchange, shall formulate and publish on its website a code of fair disclosures of UPSI and strictly adhere to the principles set out in Schedule A to these regulations.
Every listed company shall formulate a code of conduct to regulate, monitor and report trading by its designated persons & their immediate relatives, by adopting minimum standards set out in Schedule B and C of Regulation 9 for listed companies & intermediaries respectively.
Persons other than listed companies & intermediaries that handle UPSI shall formulate a code of conduct to regulate, monitor and report trading by its designated persons & their immediate relatives, by adopting minimum standards set out in Schedule C to these regulations.
In Schedule B as defined under Regulation 9(1), SEBI has specified the minimum standards for code of conduct for listed companies to regulate monitor and report trading by designated persons, which are as under:
Regulation 3(5) provides that the board of directors shall ensure that a structured digital database is maintained containing the names of such persons or entities as the case may be with which information is shared under this regulation along with the Permanent Account Number or any other identifier authorized by law where Permanent Account Number is not available. Such database is to be maintained in the format specified in Annexure-IX of the regulations.
Note that requirement to maintain structured digital database under Regulation 3(5), specified in Annexure-IX, is applicable to listed companies, and intermediaries and fiduciaries who handle UPSI of a listed company in the course of business operations.
The details recorded in the Structured Digital Database are recommended to be preserved permanently. However, such preservation may be in accordance with the Company’s policy.
When the designated person is a fiduciary or intermediary, the listed company should maintain the names of the fiduciary or intermediary with whom they have shared information along with the Permanent Account Number (PAN) or other unique identifier authorised by law, in case PAN is not available. The fiduciary / intermediary, shall at their end, be required to maintain details as required under Schedule C in respect of persons having access to UPSI.
In case any UPSI is shared with the statutory auditors during the closure of accounts for preparation of financial statements, in multiple phases, then one-time recording of such details in the Structured Digital Database would be sufficient with the period of sharing till the information becomes public e.g. from date of sharing till publication of results.