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SEBI (Prohibition of Insider Trading) Regulations, 2015

Date posted: Saturday 24 January 2015
Laws:

Introduction:

In order to curb the illicit transactions in shares of listed firms by management personnel and connected persons, SEBI on 15th January, 2015, notified a stricter set of insider trading norms. The new norms will be called SEBI (Prohibition of Insider Trading) Regulations, 2015 (“New Regulations”)  and  will  replace  the  (Prohibition of  Insider  Trading)  Regulations,  1992  (“Old Regulations”) from 120th day of its publication. The Old Regulations were overhauled after a 20-year gap, following recommendations made by a committee led by N.K. Sodhi, former chief justice of the Karnataka and Kerala high courts and former presiding officer of the Securities Appellate Tribunal. There has been a major change in the norms for Insider Trading in the New Regulations as compared to the Old Regulations. This article will highlight the key provisions of these new guidelines.

Definitions added in New Regulations:

The following definitions which did not exist under the Old Regulations have been added in the New Regulations:

Compliance Officer, Generally available information, immediate relative, promoter, securities, specified, takeover regulations, trading, trading day, unpublished price sensitive information.

Definitions of Old Regulations deleted:

The  following  definitions  of  the  Old  Regulations  have  not  been  made  a  part  of  the  New Regulations:

Dealing in securities, investigating authority, officer of a company, price sensitive information, stock exchange, working day

Important Definitions:

  • Connected Persons:
    • The scope of “Connected Persons” has been substantially expanded in the New Regulations. It now includes any person who, during the 6 months prior to the concerned act, is or has been associated with a company, directly or indirectly, such that it that allows such a person access to Unpublished Price Sensitive Information (“UPSI”) or is reasonably expected to allow such access. The person may be associated with the company in any capacity including by reason of
      • frequent communication with its officers; or
      • by  being    in    any    contractual,    fiduciary    or    employment relationship; or
      • by being a director, officer or an employee of the company; or
      • holds  any   position   including   a   professional   or    business relationship between himself and the company whether temporary or permanent.
    • The following categories shall be deemed to be connected persons unless the contrary is established,
      • an immediate relative of connected persons specified above; or
      • a holding company or associate company or subsidiary company; or
      • an intermediary or an employee or director thereof; or
      • an investment company, trustee company, asset management company or an employee or director thereof; or
      • an official of a stock exchange or of clearing house or corporation; or
      • a member of board of trustees of a mutual fund or a member of the board of directors of the asset management company of a mutual fund or is an employee thereof; or
      • a member of the board of directors or an employee, of a public financial institution; or
      • an official or an employee of a self-regulatory organization recognised or authorized by the Board; or
      • a banker of the company; or
      • a concern, firm, trust, Hindu undivided family, company or association of persons wherein a director of a company or his immediate relative or banker of the company, has more than 10% of the holding or interest.
  • Generally available information:
    • Under the New Regulations, “generally available information” has been defined to make it easier to understand and appreciate what unpublished price sensitive information is.
    • “Generally  available  information”  has  been  defined  as  information  that  is accessible to the public on a non-discriminatory basis.
  • Insider: “Insider” means any person who is:
    • a connected person; or
    • in possession of or having access to unpublished price sensitive information.
  • Securities:
    • The term “Securities” shall have the meaning assigned to it under SCRA, 1956.
    • However the units of mutual fund have been specifically excluded from such definition.
  • Unpublished price sensitive information (“UPSI”):
    • The information relating to a company or securities, directly or indirectly, that is not generally available would be unpublished price sensitive information if it is likely to materially affect the price upon coming into the public domain.
    • The definition under the Old Regulations included only information relating to the company and not relating to the securities in the definition of price sensitive information.
    • UPSI  shall ordinarily be (including but not restricted to) information relating to the following –
      • financial results;
      • dividends;
      • change in capital structure;
      • mergers, de-mergers, acquisitions, delistings, disposals and expansion of business and such other transactions;
      • changes in key managerial personnel; and
      • material events in accordance with the listing agreement.

Communication/ Procurement of UPSI:

  • No Insider shall communicate or allow access to UPSI and no person shall procure from or cause the communication by any insider of UPSI, relating to a company or its securities, except where such communication is for legitimate purposes, performance of duties or discharge of legal obligations
  • UPSI may be communicated on the following cases:
    • With relation to a transaction that would entail an obligation to make an open offer under the takeover regulations. This exception is allowed since in an open offer under the takeover regulations, not  only  would  the same  price  be made available  to all shareholders  of the company but also all information necessary to enable an informed divestment or retention decision will be made available to all shareholders in the letter of offer under those regulations.
    • Where the proposed transaction would not attract the obligations to make an open offer under the takeover regulations, but
      • the board of directors of the company is of the informed opinion that the proposed transaction is in the best interests of the company, and
      • UPSI is disseminated to be made generally available atleast 2 trading days prior to the proposed transaction.
    • For the above two kind of transactions where the UPSI may be communicated, the board of directors shall require the parties to undertake confidentiality and non-disclosure obligations.

Such parties shall keep information confidential, except for the purpose of the proposed transaction, and shall not otherwise trade in securities of the company when in possession of the UPSI.

Trading when in possession of UPSI:

  •  No insider shall trade in securities that are listed or proposed to be listed on a stock exchange when in possession of unpublished price sensitive information.
  • Various circumstances have been defined whereby the insider may prove his innocence. Eg: if the transaction is an off-market transfer between promoters who were in possession of the same UPSI, etc.
  • In  the  case  of  connected  persons  the  onus  of  establishing  that  they  were  not  in possession of such unpublished information will be on such entities and in other cases, the onus would be on SEBI.

Trading Plans:

  •  Insiders who are liable to possess UPSI all round the year would have the option to formulate pre-scheduled trading plans. This move will align the regulations to those practiced in developed markets like the US.
  • The trading under such trading plan, on behalf of the insider shall not commence before 6 months from the public disclosure of the plan. Such a period is considered reasonably long for unpublished price sensitive information that is in  possession of the insider when formulating the trading plan, to become generally available.
  • Under such  trading  plan,  the  insider  cannot  trade  for  the  period  between  the  20th trading day prior to the last day of any financial period for which results are required to be announced and the second trading day after the disclosure of such financial results.
  • The trading plan shall be for a minimum period of 12 months.
  • The period of one trading plan should overlap the period of another trading plan.
  • The details of the trading plan shall include
    • value of trades to be effected or the number of securities to be traded,
    • nature of the trade,
    • intervals at, or dates on which such trades shall be effected.
  • Such trading plan shall not entail trading in securities for market abuse.
  • The compliance officer shall review the trading plan to assess whether the plan would have any potential for violation of these regulations and shall be entitled to seek such express undertakings as may be necessary to enable such assessment and to approve and monitor the implementation of the plan.
  • Upon approval of the trading plan, the compliance officer shall notify the plan to the stock exchanges on which the securities are listed.
  • The trading  plan  once  approved  shall  be  irrevocable  and  the  insider  shall  have  to compulsorily implement the plan and will not be allowed to deviate from it or execute any trades outside the scope of the trading plan.
  • At the time of commencement of the trading plan, if the UPSI (which was in possession of the insider while formulating the trading plan), is still not made generally available, then the commencement of the trading plan shall be deferred until such UPSI becomes generally available information.

Disclosure of trading by Insiders:

  •  The disclosures to be made by any person under these guidelines shall include those relating to trading by such person’s immediate relatives, and by any other person for whom such person takes trading decisions.
  • The  disclosures  of  trading  in  securities  shall  also  include  trading  in  derivatives  of securities and the traded value of the derivatives shall be taken into account.
  • One time disclosures:
    • Within  30  days  of  the  New  Regulations  taking  effect,  every  director,  key managerial  personnel  (“KMP”)  and  director  of  the  listed  companies  shall disclose their holding of securities of such listed company as on the date of these regulations taking effect.
    • Within 7 days of appointment of a person as a director or KMP or his becoming a promoter, he shall disclose his holding of securities of the company as on the date of appointment or becoming a promoter.
  • Continual disclosures:
    • If the value of securities traded, in a transaction or a series of transaction, by a promoter, director or an employee of the company over a calendar quarter exceeds Rs 10 lakh, then such person shall disclose to the company the number of such securities acquired or disposed of within 2 trading days of such transaction.
    • Every company shall notify the particulars of such trading to the stock exchange on  which  the  securities  are  listed  within  2  trading  days  of  receipt  of  the disclosure or from becoming aware of such information.
  • Any company whose securities are listed on a stock exchange may, at its discretion require any other connected person or class of connected persons to make disclosures of holdings and trading in securities of the company in such form and at such frequency as may be determined by the company in order to monitor compliance with these regulations.
  • The disclosure made under these guidelines shall be maintained by the company for a minimum period of 5 years

Codes of Fair Disclosure and Conduct:

  • Code of Fair Disclosure: The board of directors of every company, whose securities are listed on a stock exchange, shall formulate and publish on its official website, a code of practices and procedures for fair disclosure of UPSI that it would follow. Such code should adhere to the principles set out in the Schedule A of the regulations. Every such code of practices and procedures for fair disclosure of UPSI and Any change thereto should be promptly intimated to the Stock exchange where the securities are listed.
  • Code of Conduct:
    • The board of directors of every listed company, market intermediary and every person who is required to handle UPSI (such as auditors, accountancy firms, law firms, analysts, consultants, etc.) shall formulate a code of conduct to regulate, monitor and report trading by its employees and other connected persons. Such code should adopt the minimum standards set out in Schedule B of the regulations.
    • Every listed company, market intermediary and other persons  formulating a code of conduct shall identify and designate a compliance officer to administer the code of conduct and other requirements under the New Regulations.

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