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Insider Trading

Introduction: Insider Trading, as may be familiar to lot of us, is principally the act of dealing in securities with the advantage of having asymmetrical access to unpublished information which when published would impact the price of securities in the market. India seems to be having a long standing tryst with the notion of Insider Trading, as over the ages, it has been rife with instances of conflict of individual and public interest and how the constant move towards a more stringent legislative setup plays catch up to the workarounds by those at the centre of the picture. The practice was first observed in the 1940’s and the first widespread mention of the practice in the Indian scenario was in the 1948 Thomas’s report that mentioned numerous cases of officers, directors, auditors etc using their possession of unique knowledge so as to leverage their position to seek unwarranted personal gain and bypass systems of price discovery. This practice resulted in the inclusion of necessary provisions into the Companies Act, 1956 which warrants for maintenance of a register that recorded the director shareholdings and made it the duty of the director to make such disclosures. As time passed, the global stance on Insider Trading only hardened and India followed suit. Efforts and recommendations of the Sachar, Patel and the Abed Hussian committee culminated in the formation of the SEBI (Insider Trading) Regulations, 1992 which after amendment in the year 2002, was then called the SEBI (Insider Trading) Regulations, 1992. Now, nearly two decades later though, the SEBI has acknowledged the changing scenario and has replaced the two decade old framework with a new set of rules that deal with prevention and penalising of Insider Trading. The SEBI instituted an 18 member committee, headed by Justice NK Sodhi to look into reforms that better suit the changing market dynamics. The resultant Securities and Exchanges Board of India (Prohibition of Insider Trading) Regulations, 2015 amend and provide clarity on various issues such as the validity of due diligence provisions, clarity on the definition of the term ‘trading’, the widening of the term ‘connected person’ etc. However, perhaps the best way to look what the new rules entail, i.e., the salient features, a comparison to the old framework is in order. Below follows a few new instances of the 2015 regulations and the intentions behind doing so.  
Area of divergence 1992 Rules 2015 Rules Potential Reasoning
Definition of an insider An “insider” means any person (i) is or was connected with the company or is deemed to have been connected with the company and is reasonably expected to have access to unpublished price sensitive information in respect of securities of a company, or (ii) has received or has had access to such unpublished price sensitive information. The definition of an “insider” has been simplified to mean any person who is a “connected person” and those in possession of “unpublished price sensitive information” (“UPSI”). To bring about a clarity to the existing definition so as to reduce ambiguity.
Definition of Connected Person The definition of a “connected person” under the Existing Regulations means (i) a director or any person deemed to be a director of a company, or (ii) officer, employee or any person who holds a position involving a professional or business relationship between himself and the company who may reasonably be expected to have an access to UPSI in relation to that company; six months prior to the act of insider trading. (i) any person who is or has during the six months prior to the concerned act been associated with a company, directly or indirectly, 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, that allows such person, directly or indirectly, access to unpublished price sensitive information or is reasonably expected to allow such access. (ii) Without prejudice to the generality of the foregoing, the persons falling within the following categories shall be deemed to be connected persons unless the contrary is established, - (a). an immediate relative of connected persons specified in clause (i); or (b). a holding company or associate company or subsidiary company; or (c). an intermediary as specified in section 12 of the Act or an employee or director thereof; or (d). an investment company, trustee company, asset management company or an employee or director thereof; or (e). an official of a stock exchange or of clearing house or corporation; or (f). 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 (g). a member of the board of directors or an employee, of a public financial institution as defined in section 2 (72) of the Companies Act, 2013; or (h). an official or an employee of a self-regulatory organization recognised or authorized by the Board; or (i). a banker of the company; or (j). 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 ten per cent. of the holding or interest; Increased scope; inclusion of relevant public servants who have access; test of reasonable expectation.
UPSI and Available Information Under the Existing Regulations, information which is not published by the company or its agents and is not specific in nature is considered “unpublished”. Also, the definition of “price sensitive information” contains an explanation which provides that the (i) periodical financial results of the company (ii) intended declaration of dividends (both interim and final) (iii) issue of securities or buy-back of securities (iv) any major expansion plans or execution of new projects (v) amalgamations, mergers or takeovers (vi) disposal of the whole or substantial part of the undertaking; (vii) and significant changes in policies, plans or operations of the company shall necessarily be deemed to be considered “price sensitive information”. The Proposed Regulations have done away with this deeming fiction. Under the Proposed Regulations the definition of UPSI has been substantially modified. UPSI has been defined to mean any information that is not generally available which upon becoming generally available, is likely to materially affect the price of the securities to which it relates and will ordinarily include information relating to the following – (i) financial results (ii) dividends (iii) change in capital structure (iv) mergers, demergers, acquisitions, delisting, disposals and expansion of business and such other transactions; and (v) changes in key management personnel. Generally Available information not a part of UPSI; logical disassociation.
Trading with possession of Information The charging provision, Regulation 3 of the Existing Regulations prohibits dealing in securities of a company listed on any stock exchange when in possession of UPSI. ‘Dealing in securities’ typically means an act of subscribing, buying, selling or agreeing to subscribe, buy, sell or deal in any securities by any person either as principal or agent. The term ‘dealing’ has been replaced with ‘trading’ for the purposes of the charging provision i.e., Regulation 4 of the Proposed Regulations. Under the Proposed Regulations, no insider shall trade in securities that are listed on a stock exchange when in possession of UPSI. Trading’ under the Proposed Regulations has been defined as transacting in securities whether by way of acquisition or disposal. -
Disclosure Obligations The Existing Regulations stipulate initial and continual disclosure requirements by any person holding more than 5 % shares/ voting rights in any listed company and by a director or an officer of a listed company to be made to the company. A director or an officer is obligation to additionally disclose the particulars of his trades in case there has been a change in his shareholding/voting rights exceeding Rs. 5.00 lakhs in value or 25,000 shares or 1% of the total shareholding/voting rights of the company as the case may be, to the stock exchange where the securities are listed. Every listed company is required to notify all such initial and continual disclosures to the stock exchange in a particular format in any case. The disclosure requirements have sought to be made applicable to promoters, employees and directors under the Proposed Regulations. Under Regulation 7 (3), every such person would have to necessarily disclose the number of such securities acquired or disposed of within two transaction days of such transaction if the value of the securities traded, whether in one transaction or a series of transactions over any quarter aggregates to a traded value in excess of Rs. 10.00 lakhs. The reference to voting rights as a threshold for disclosures as under the Existing Regulations has been removed under the Proposed Regulations. -
  Trading Plan: The provision for the introduction of a trading plan is a novel addition in the 2015 regulations.  The trading plan is a formulation that is done by the insider and presented to the Compliance Officer of the company for his approval. The Compliance Officer (`CO’) within the meaning of Cl 47(a) of the Listing Agreement shall on receiving permission can make the trade plan public by public disclosure and trades as per the trade plans may be carried out. This provision intends to give an option to persons who may be perpetually in possession of unpublished price sensitive information and enabling them to trade in securities in a compliant manner. This provision would enable the formulation of a trading plan by an insider to enable him to plan for trades to be executed in future. By doing so, the possession of unpublished price sensitive information when a trade under a trading plan is actually executed would not prohibit the execution of such trades that he had pre-decided even before the unpublished price sensitive information came into being. Conclusion: While these regulations have gone a long way in changing and ensuring that regulatory frameworks are better equipped, as well as providing leeway for insiders by means of trading plans, there are still some shortcomings. Issues such as ‘legitimate purposes’ while dealing with communication and procuring of UPSI are not given clarity. With the added necessities for companies to create codes for regulation, monitoring and reporting, compliance becomes a more cumbersome issue. In the end, the full effect and its nature shall only be realised as time passes and the judiciary interprets the provisions and provides further clarity.  
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