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Insight on Code of Conduct for Prevention of Insider Trading

May 8, 2013
INTRODUCTION Emergence for the need of Code of Conduct for prevention of Insider Trading

SEBI in the year 1992 has framed (Prohibition on Insider Trading) Regulations 1992. This regulation provides that, no insider shall deal in securities on his own behalf, or on behalf of someone else, while in possession of unpublished price sensitive information nor he shall deal, communicate, counsel or procure directly or indirectly any unpublished price sensitive information to any person while in possession of such unpublished price sensitive information not done in the ordinary course of business, profession or employment.

Further to curb insider trading SEBI has amended the Regulations in 2002, by insertion of Policy on Disclosures and Internal Procedure for Prevention of Insider Trading (Model Code of Conduct).

In simple terms, "insider trading" denotes buying/selling the shares of a company by persons connected with the company, while they are in possession of or having access to unpublished price sensitive information.

Important Definitions
  • “Insider” - Insider means any person who is or was connected with the company or is deemed to have been connected with the company and who is reasonably expected to have access to unpublished price sensitive information in respect of securities of a Company or has received or has had access to such unpublished price sensitive information. Persons connected with the company include Directors, Officers, Employees and consultants, advisers who may reasonably be expected to have an access to unpublished price sensitive information,

    Connected person shall mean any person who is a connected person six months prior to an act of insider trading.

  • Dealing in Securities”– 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.

  • Person deemed to be connected” - Includes Company under same management, Subsidiary, Registrar & Share Transfer Agents, Merchant Bankers, Banker to the issue, members of Board of Public Financial Institutions includes relatives of the above persons and relatives of connected persons etc.

  • Designated employee” shall include :—
    1. officers comprising the top three tiers of the company management.

    2. the employees designated by the company to whom these trading restrictions shall be applicable, keeping in mind the objectives of this code of conduct

What is Un-Published Price Sensitive Information?

Unpublished price sensitive information can be defined as information relating to a company, which has not yet been made available publicly, but which information when made available publicly, can materially impact the price of the company's securities.

Price sensitive information includes:-
  • Declaration of financial results (quarterly, half-yearly and annually).

  • Declaration of dividends (interim and final).

  • Issue of securities by way of public/rights/bonus etc.

  • Any major expansion plans or execution of new projects.

  • Amalgamation, mergers, takeovers and buy-back.

  • Disposal of whole or substantially whole of the undertaking.

  • Any changes in policies, plans or operations of the company

Price sensitive information as per Listing Agreement (clause 36)
  • Change in the general character or nature of business.

  • Disruption of operations due to natural calamity.

  • Commencement of Commercial Production/Commercial Operations.

  • Developments with respect to pricing/realisation arising out of change in the regulatory framework.

  • Litigation/dispute with a material impact.

  • Revision in Ratings.

  • Any other information having bearing on the operation/performance of the company as well as price sensitive information

How can it effect any one?

Insider trading can result in certain persons gaining at the expense of others, by virtue of their possession of unpublished price sensitive information. This may result in undermining investor confidence and may adversely impact the development of capital markets.

  • Making of Profit at the expense of other ;

  • Leads to loss of confidence of investor in stock market;

  • It is easier to identify the beneficiaries of insider dealing. But the extent of losses occurred is impossible to calculate;

Applicability and requirement: All listed companies and organizations associated with securities markets including :
  • The intermediaries as mentioned in section 12 of the Act, asset management company and trustees of mutual funds ;

  • The self-regulatory organisations recognised or authorised by the Board;

  • The recognised stock exchanges and clearing house or corporations;

  • The public financial institutions as defined in section 4A of the Companies Act, 1956; and

  • The professional firms such as Auditors, accountancy firms, law firms, analysts, consultants, etc, assisting or advising listed companies,

  • shall frame a code of conduct without diluting the model code specified and ensure compliance of the same.

Code of Conduct for Listed Companies:The following are some of the points that needs to be considered for framing a of Conduct. Designating a compliance officer and setting his roles and Accountabilities:
  • He shall be responsible for setting forth policies, procedures, monitoring aherence to the rules for the preservation of “Price Sensitive Information”.

  • He should pre-clear all Directors or Officers or Designated employees’ and their dependents’ trades (directly or through respective department heads as decided by the company), monitor of trades and implement of the code of conduct under the overall supervision of the Board of the listed company.

  • The Compliance officer shall maintain a record of the designated employees and any changes made in the list of designated employees.

  • The compliance officer shall assist all the employees in addressing any clarifications regarding the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992 and the company’s code of conduct.

Preservation of Price Sensitive Information and Chinese Wall:
  • All the Directors and Employees shall maintain confidentiality and Preserve the “Price Sensitive Information”. A declaration may be taken to ensure that confidentiality is being maintained.

  • Price Sensitive Information”- should be handled on need to know basis and all the files containing confidential information shall be kept secured.

  • An organization may have a policy to separate areas within the organization who will have access to price sensitive information in routine with other departments/ areas.

Trading Window:
  • Preventing of misuse of Price Sensitive Information by specifying trading period i,e. “Trading Window”, which shall be closed on the certain events as stated above and shall be opened after 24 hours of the information is made public. All the Directors, Officers Designated Employees shall conduct their dealings in company's securities in a valid trading window only.

  • In case of ESOPs, exercise of option may be allowed in the period when the trading window is closed. However, sale of shares allotted on exercise of ESOPs shall not be allowed when trading window is closed.

  • The details of the trades by all the directors, employees etc shall be made obligatory to report to the Compliance Officer as may be required.

Penalty for prevention of Code of Conduct by the Company
  • Any of the Directors, Officers Designated Employees who trades in contravention of the code of conduct shall be liable penalisation with appropriate action by the Organisation which may also include wage freeze, suspension and ineligible for future participation in Employee stock options plans.

  • Action taken by company shall not preclude SEBI from taking any action in case of the said violation.

  • If the organization observes any of the violations relating to SEBI(Prohibition of Insider Trading) Regulations 1992, the same needs to be intimated to SEBI.

Investigation By SEBI
  • If SEBI suspects any person for violation of SEBI (Prohibition of Insider Trading) Regulations 1992 may make enquiries, either prima facie or basing on the complaints received by intermediaries or investors.

  • Investigate on Suo – motu to protect the interest of the investors.

  • Serve of reasonable notice to proceed with the Investigation.

  • An Order of Investigation may be given if the Board satisfies that it is in the interest of Investors or public interest.

  • An Insider, who on being Investigated shall make available and provide assistance to access related to premises, books of accounts and all the other relevant documents in his custody or control or others control to the investigating authority and also examine or record statements of all the members who were connected for the said violation.

  • The Investigating Authority shall submit its report within a reasonable time to SEBI, upon findings same has to be communicated to the insider and he shall reply to the same within 21 days of serving the report.

  • SEBI may appoint an Independent Auditor entrusting with same powers as an Investigating Authority for investigating the Books of Accounts.

  • SEBI may Initiate criminal prosecution under section 24 (Offences) or chapter VIA (Penalties & Adjudication) of the act.

Penalty for prevention of Code of Conduct by SEBI
  • Initiate Actions U/s. 11 & Issue Directions U/s. 11B.

  • Impose Penalty of Rs.25 Crore or Imprisonment for 10 years or with the both (U/s.24)

  • Impose Penalty of Rs.25 Crore or Three times of the amount of profits made out of insider trading, whichever is higher (U/s. 15G).

Note: SEBI has instituted a High Level Committee to review the (Prohibition of Insider Trading) Regulations, 1992 and seeks inputs and suggestions from the public and the same may be sent in the format (as prescribed at SEBI portal) as a word attachment to by May 16, 2013.
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