SEBI has notified the substantially revamped Regulations on insider trading dated 15th January 2015. They replace the 1992 Regulations which had not just become dated but the multiple amendments over the years have resulted into a convoluted and complicated set of provisions. The new Regulations are not just re-written but they bring a fresh look based on extensive study and report by the Sodhi Committee. It may be noted that they are not yet effective and
will come into effect only on the 120th day of their notification (For example if 15th January 2015 is also the date of notification in the official gazette, then 15th May 2015 would be the date from which the new Regulations will come into effect). This is important because it is with reference to this date that certain disclosures and compliances would be made.
This article discusses some of the important features of the revamped Regulations. In particular, implications for Chartered Accountants are highlighted.
Broad overview and important conceptual changes
As stated, the Regulations are substantially revamped though the broad scheme remains the same. Insiders and unpublished price sensitive information (“UPSI”) remain core concepts albeit with some changes. Simply stated, insiders are prohibited from communicating UPSI and dealing in shares based on UPSI. A host of related provisions are there mainly to ensure that this does not happen.
There are certain important concepts that are new and discussed here:
a. ‘Trading Plans’ that are meant to allow Insiders to trade by intimating well in advance.
b. Secondly the exceptions to receiving UPSI under certain circumstances which otherwise would constitute a violation of the prohibition on communication/receipt of UPSI.
c. T he third and most innovative concept is the use of “Notes” to explain what the intention of each of the Regulation is. This gives a background of the provision and considering that it is part of the Regulations itself should have greater weight than other external aids to interpretation.
What are prohibitions/ restrictions/requirements?
The Regulations aim at prohibiting insider trading. However, this is achieved not just by making specific prohibitions but also by means of control over UPSI, disclosure of trades, etc. Thus, broadly, the following are the prohibitions/restrictions/requirements:-
1. An Insider shall not deal on the basis of UPSI. 2. A n Insider shall not communicate UPSI.
3. No one shall procure UPSI.
4. There shall be regular disclosures of holdings/dealings by certain persons (Promoters, specified employees, etc.)
5. Manner of communicating UPSI, restrictions over dealings by specified employees, etc.
6. Formulation of Code of Conduct for disclosure and for trading by insiders.
Basic concepts – Insider and UPSI
Insider
The Regulations focus mainly on Insiders. The term Insider is defined quite widely and, as in the 1992 Regulations, complex to some extent. The term “Insider” includes certain “connected persons”. The term “connected persons” in turn is defined by including certain specified persons who are close to the company and have or can be expected to have access to UPSI. By virtue of the new inclusion those persons who have had “frequent communications” with the officers of the company are “connected persons”.
Certain persons are deemed to be connected. If such persons deny that they are connected, then the onus is on them to prove how they are not so connected. Importantly, any person who possesses UPSI is also deemed to be an Insider. Thus, to summarise those close persons who have access or are expected to have access to UPSI and those who actually possess UPSI are insiders.
Unpublished price-sensitive information
“Unpublished price-sensitive information” is yet another important term, which is essentially the opposite of the other term – “generally available information”. Its definition remains broadly the same as in the earlier Regulations. All that is “information”, that is “price-sensitive” and that is not “published” in the prescribed manner is UPSI. There is prohibition on sharing of UPSI (except in specified ways) and dealing in securities on basis of UPSI. There are detailed provisions on how to ensure that UPSI is not disclosed accidentally as also the correct minimum way of sharing UPSI in such a manner that is widely shared or deemed to be so. Thus, for example, sharing (of information) with the stock exchanges who display it on their website is deemed to mean that it is no more UPSI.
Defenses to insider trading
The new Regulations provide for certain defenses/exceptions to acts or omissions that would otherwise be deemed to be insider trading or communication of UPSI. Communication of UPSI is permitted under certain circumstances to a potential acquirer who would be required to make an open offer. In other cases of proposed transactions, such disclosure is permitted provided, inter alia, the UPSI is disclosed to the public at least two days in advance.
There are other prescribed exceptions to what would otherwise constitute inside trading.
Trading Plan
A totally new concept has been introduced in these Regulations with reference to Trading plan. An Insider who deals in the shares of the company may have reason to worry that his trades would be scrutinised for trades based on UPSI. He is obviously close to the company and would be expected to know of developments. However, it is apparent that he often would also need to deal in shares. A Promoter may want to consolidate his holding. A senior executive may want to plan for an important event for which he may want to sell shares. The Regulations have provided for a way for planning for such events or needs. An “Insider” may disclose well in advance his desire to deal in the shares of the company. If such disclosure is made in the prescribed manner, he can deal in the shares without worrying for any inquiry or consequences. However, there are some conditions such as:
a. The sale should be after at least six months.
b. T he Trading Plan should also extend to at least twelve months.
c. T here should not be overlapping trading plans.
d. T he insider should not be in possession of UPSI at time of such disclosure which continues to remain UPSI at the time of sale/purchase.
e. T he insider should also not carry out any form of market abuse through the trades. The disclosure has to be specific and not generic.
f. A bove all, the insider should actually implement the Plan.
The “Trading Plan” also serves the public so that they can anticipate the trades and decide accordingly. Hence, it is made imperative that the plan is actually implemented.
“Notes” to Regulations
The revamped Regulation has created a precedent in securities laws by providing for inbuilt “Notes” that explain the intent of the Regulations. They help in understanding the Regulations and their intent better. Most of the important Regulations contain such a Note. This is following the suggestions of the Supreme Court in M/s. Daiichi Sankyo Company Ltd., Appellant vs. Jayaram Chigurupati & Ors ((2010) 7 SCC 449). The Court there acknowledged the expert committee reports on the SEBI Takeover Regulations which helped it interpret the Regulations. Noting that such background was absent in other Regulations, it suggested:-
“Now that we have more and more of the regulatory regime where highly important and complex and specialised spheres of human activity are governed by regulatory mechanisms framed under delegated legislation it is high time to change the old practice and to add at the beginning the “object and purpose” clause to the delegated legislations as in the case of the primary legislations.”.
The Sodhi Committee which wrote the report on which the new Regulations are based specifically adopted this suggestion and we can thus see the notes in the Regulations as notified. However, it will have to be seen the level of prominence that is given to the notes in interpretation of the regulations. Concerns may also arise if the Notes conflict with the principal part of the regulations.
Relevance For Chartered Accountants
Chartered Accountants (CAs) have direct and serious concern with insider trading regulations for several reasons. They are experts in finance and can be expected to understand the potential implications of price-sensitive information over market prices. Even more importantly, the role they perform in relation to a company brings them very close to price-sensitive information. They may be auditors who have close access to records of accounts and operations. They maybe CFOs who compile the information on accounts and financial plans which are again by definition price-sensitive. They may be directors, advisors, etc. which again put them in similar positions.
The Regulations thus rightly provide specifically for such positions. as auditors, CFos, directors, etc. they are almost always deemed insiders. They would also find it difficult to rebut the allegation that, if there was UPSI, they did not have access to it. Thus, they would have to be very careful in their dealing in the shares of the company with which they are associated. Perhaps a good thumb rule for Cas is not to deal at all in the shares of the company they are associated with!
Auditors, advisers, etc. are also required to frame such a Code of Conduct under specified circumstances.
Code of Conduct
The Regulations provide for a detailed set of requirements. however, as in the earlier regulations, some matters are sought to be self-regulated to the Company or other entities to which the Regulations apply. The object is that the company/entity itself should also have some self- regulation whereby insider trading is prevented and if it still happens it is punished. The entity is thus required to set up a Code of Conduct containing at least the minimum set of prescribed provisions.
The Code should, thus, ensure that uPSi is handled on a need to know basis and there are adequate mechanisms to prevent its leaking. Importantly, designated employees would be required to make disclosure of their holdings and of changes therein as specified to the company. There will have to be periods during which dealing in the shares of the company would be prohibited (e.g., just before and after the declaration of trading results). Further, in case the designated employees propose to deal in the shares of the company when the trading window is not closed, they would still have to obtain clearance in advance and then carry out the transaction within the prescribed time.
Disclosure requirements
The 1992 regulations and the present regulations too provide for disclosure of holdings by specified persons (e.g., Promoters, persons holding significant holdings, etc.). The disclosure is required initially at the time when the regulations come into force, at the time when such persons become the specified persons and at the time when certain persons have significant dealings as prescribed in the securities of the company. This will help monitor the movement in the holdings of such persons. Needless to emphasise, such movements may often indicate the faith (or lack thereof) in the performance and future of the company.
Consequences of violations there are numerous consequences of violations of the regulations. Generally, under Section 15G of the SEBI act, the penalty for certain violations relating to insider trading is Rs. 25 crore or three times the profits made, whichever is higher and with or without prosecution. In case of violation of Code of Conduct, the company can take disciplinary action, in addition to the penal consequences that SEBI may initiate.
Non-disclosure or delayed disclosure of information can result in stiff penalties.
Summary
the new regulations have seen a substantial rewriting. the original structure has been retained too but several new concepts and provisions have been introduced. The requirements of compliance on the Company/entity, insiders, etc. have also increased. Concerns have been raised as to whether the requirements are too detailed and cumbersome.
It is often said that insider trading is rampant in indian markets. more than having strict provisions there is a need to detect actual cases of insider trading. The regulations do not take a big leap in this regard. However, additional powers of investigation provided in the SEBI act and more vigorous mechanism to monitor trades and investigation by SEBI may result in such cases of insider trading being detected. The future will reveal how effective this mechanism works.
