Insider Trading- An Overview

Insider Trading- An Overview
Blog   wpadmin   July 1, 2020

Executive Summary

  • Insider trading” is a malpractice of disclosing any unpublished price sensitive information relating to company or its securities that is generally not available to public, which is likely to affect the trading of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.
  • These regulations have features such as audit committee or any other authorised body to review compliance, to formulate written policies and procedures for violation of regulations, whistle blowing policy, etc.
  • Every company has some make specified initial and continuous disclosures to the stock exchange regarding the designated persons and their holding in the company.
  • 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an insider to trade when in possession of UPSI and entitles an insider who may be perpetually in possession of unpublished price sensitive information, to trade in securities in a compliant manner.
  • Every listed company to 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.
  • While persons other than listed companies & intermediaries to formulate a code of conduct by adopting standards set out in Schedule C.
  • Board of directors to ensure that a structured digital database is maintained containing the names of such persons or entities, with which information is shared under this regulation along with the Permanent Account Number as specified Annexure-IX.
  • 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.
  • These regulations have features such as audit committee or any other authorised body to review compliance, to formulate written policies and procedures for violation of regulations, whistle blowing policy, etc.

Introduction

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 & Unpublished Price Sensitive Information (UPSI)-Meaning:

“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.

Who are Designated Persons?

  • All the Directors of the Company & Immediate Relatives of Directors;
  • The Designated Employees of the Company and immediate Relatives of Designated Employees;
  • Connected persons;
  • All promoters of the Company and promoters who are individuals.

Regulation 5: An Exception to General Rule of Prohibition of Trading by Insiders

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.

Compliances under the Regulations:

1. Initial & Continuous disclosures:

  • Every person on appointment as a Key Managerial Personnel or a Director of the company or on becoming a Promoter or member of promoter group shall disclose his holding of securities in the company on the date of his appointment or on becoming a promoter, within 7 days of such appointment or becoming a promoter in Form B as specified.
  • Every promoter, director and any other designated person shall disclose to the company, the number of such securities acquired or disposed of within 2 trading days of such transaction in Form C, if the value of securities traded is ten lakh rupees and above or such other value as specified.
  • Every company must intimate the particulars of such trading to the concerned stock exchange within 2 trading days of receipt of disclosure or from becoming aware of such information in Form C as specified.

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:

  • All employees who have access to unpublished price sensitive information shall be identified as designated persons and list of their details shall be maintained. Confidentiality agreements shall be signed or notice to be served to all such employees and persons.
  • All the unpublished price sensitive information shall be identified and its Confidentiality shall be maintained as per the requirements of these regulations.
  • Periodic review to evaluate effectiveness of such internal controls to be done.

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.

Companies to Formulate of Codes of Fair Disclosure & Code of Conduct:

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.

Minimum Standards for Code of Conduct for Listed Companies under Schedule C of Regulation 9:

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:

  • Compliance officer shall provide report to the Chairman of the Board of Directors or Audit Committee at least once in a year.
  • No UPSI shall be communicated to any person except for legitimate purposes, performance of duties or discharge of legal obligations.
  • To permit a designated person to “cross the wall”, code of conduct shall contain norms for appropriate Chinese Walls procedures and processes.
  • Designated persons and their immediate relatives shall strictly adhere to internal code of conduct for dealing in securities. Trading restriction period shall be made applicable from the end of every quarter till 48 hours from the declaration of financial results i.e. 20 days prior to the last day of the financial year or the relevant quarter/half year till the 2nd trading day after the disclosure of financial results.
  • A notional trading window shall be executed to monitor trading by the designated persons. In case, the designated person(s) and their immediate relatives are in possession or suspected to be in possession of UPSI of any securities, such window shall be closed for a minimum period of 48 hours till the information becomes generally available.
  • The code of conduct to specify that the designated person shall execute the pre-cleared trades within 7 trading days, failure to which shall require fresh pre clearance for trades.
  • The code of conduct to specify that the Designated Persons and their Immediate Relatives shall not enter into a contra trade during the next six months following a trade except in case of trades pursuant to exercise of stock options.
  • The code of conduct shall specify disciplinary actions such as wage freeze, suspension, etc. that may be imposed by the listed company for contravention of code under Regulation 9(1). The listed company shall promptly intimate the violations of the regulations to the Board.
  • All designated persons shall disclose names, PAN, contact number, details of educational institution, names of their past employers, of them and their immediate relatives to the intermediary/ fiduciary annually and whenever there is a change.

Things to Know About Annexure-IX:

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.

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