SEBI (Prohibition of Insider Trading) Regulations, 2019

SEBI (Prohibition of Insider Trading) Regulations, 2019 (Part 1)

• Introduction: The SEBI (Prohibition of Insider Trading) Regulations aim to prohibit insider trading in securities and strengthen the legal framework to protect market integrity.
• Key Concepts:
  • Insider: Defined as any person who is a connected person or in possession of or having access to unpublished price sensitive information.
  • Connected Person: Means any person who is or has been associated with a company, directly or indirectly, including by reason of frequent communication with its officers or by being in any contractual, fiduciary, or employment relationship.
  • Compliance Officer: Defined as a senior officer responsible for compliance of policies, procedures, maintenance of records, monitoring adherence to the rules for the preservation of unpublished price sensitive information, and implementation of the codes specified in these regulations.
  • Generally Available Information: Means information that is accessible to the public on a non-discriminatory basis and does not include unverified events or information reported in print or electronic media.
  • Immediate Relative: Defined as a spouse of a person and includes parent, sibling, and child of such person or of the spouse, any of whom is either dependent financially on such person or consults such person in taking decisions relating to trading in securities.
• Prohibited Activities:
  • Communication of Unpublished Price Sensitive Information: An insider shall not communicate, provide, or allow access to any unpublished price sensitive information to any person, including other insiders, except where such communication is in furtherance of legitimate purposes, the performance of duties, or discharge of legal obligations.
  • Procurement of Unpublished Price Sensitive Information: No person shall procure from or cause the communication by any insider of unpublished price sensitive information, except in furtherance of legitimate purposes, the performance of duties, or discharge of legal obligations.
• Unpublished Price Sensitive Information: Defined as any information relating to a company or its securities that is not generally available and, upon becoming generally available, is likely to materially affect the price of the securities. Examples include:
  • Financial results
  • Dividends
  • Change in capital structure
  • Mergers, de-mergers, acquisitions, delisting, disposals, and expansion of business
  • Changes in key managerial personnel
  • Change in rating(s)
  • Fund raising proposed to be undertaken
  • Agreements that may impact the management or control of the company
  • Fraud or defaults by the company, its promoter, director, key managerial personnel, or subsidiary
  • Resolution plan/restructuring or one-time settlement in relation to loans/borrowings from banks/financial institutions
  • Admission of winding-up petition filed by any party/creditors and admission of application by the Tribunal filed by the corporate applicant or financial creditors for initiation of corporate insolvency resolution process against the company as a corporate debtor.

SEBI (Prohibition of Insider Trading) Regulations, 2019 (Part 2)

• Legitimate Purpose: The term "legitimate purpose" includes sharing of unpublished price sensitive information in the ordinary course of business by an insider with partners, collaborators, lenders, customers, suppliers, merchant bankers, legal advisors, auditors, insolvency professionals or other advisors or consultants.
• Insider: Any person in receipt of unpublished price sensitive information pursuant to a "legitimate purpose" shall be considered an "insider" for purposes of these regulations.
• Communication of Unpublished Price Sensitive Information: Such information may be communicated, provided, allowed access to or procured, in connection with transactions that would entail an obligation to make an open offer under the takeover regulations or where the board of directors of the listed company is of informed opinion that the sharing of such information is in the best interests of the company.
• Confidentiality and Non-Disclosure Obligations: The board of directors shall require the parties to execute agreements to contract confidentiality and non-disclosure obligations on the part of such parties.
• Structured Digital Database: The board of directors or head(s) of the organization of every person required to handle unpublished price sensitive information shall ensure that a structured digital database is maintained containing the nature of unpublished price sensitive information and the names of such persons who have shared the information.
• Preservation of Database: The structured digital database shall be preserved for not less than 8 years after completion of the transaction and in the event of any investigation or enforcement proceedings, relevant information in the structured digital database shall be preserved till the completion of proceedings.

Prohibition on Insider Trading

• Regulation 4: 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.
• Presumption of Motivation: When a person who has traded in securities has been in possession of unpublished price sensitive information, his trades would be presumed to have been motivated by the knowledge and awareness of such information in his possession.
• Exceptions: The insider may prove his innocence by demonstrating the circumstances, including off-market inter-se transfer between insiders, block deal window mechanism, statutory or regulatory obligation, exercise of stock options, and trading plans.

Trading Plans

• Regulation 5: An insider shall be entitled to formulate a "Trading Plan" and present it to the compliance officer for approval and public disclosure.
• Parameters for Trading Plan: The plan shall set out parameters for each trade to be executed, including the value of trade, nature of the trade, specific date or time period, and price limit.
• Implementation of Trading Plan: The plan once approved shall be irrevocable and the insider shall mandatorily have to implement the plan, without being entitled to either execute any trade in the securities outside the scope of the trading plan or to deviate from it.

Information to SEBI by Informants

• Regulation 7A to 7K: Deals with the aspect of Informant, who voluntarily submits to the SEBI a Voluntary Information Disclosure Form relating to an alleged violation of insider trading laws.
• Procedure for Submission of Original Information: The informant shall submit the original information to the SEBI, which shall examine the same and initiate necessary action.
• Eligibility for Reward: The informant may be eligible for a reward for such information, and the process for determination of the amount of reward shall be specified.
• Protection against Retaliation and Victimization: Every person required to have a Code of Conduct under these regulations shall ensure that such a Code of Conduct provides for suitable protection against any discharge, termination, demotion, suspension, threats, harassment, directly or indirectly or discrimination against any employee who files a Voluntary Information Disclosure Form.

SEBI (Prohibition of Insider Trading) Regulations, 2019 (Part 3)

• Definition of Employee: For the purpose of this Chapter, an “employee” refers to any individual who, during employment, may become privy to information relating to the violation of insider trading laws and files a Voluntary Information Disclosure Form under these regulations. This includes directors, partners, regular or contractual employees, but excludes advocates.
• Protection of Informants: The regulations protect informants who provide information about insider trading from retaliation or victimization by their employers. Informants can approach the competent court or tribunal for relief if they believe they have been subjected to such treatment.
• Void Agreements: Any term in an agreement (oral or written) or Code of Conduct that purports to preclude any person (other than an advocate) from submitting information to the Board about the violation of securities laws is considered void.
• Code of Fair Disclosure: The board of directors of every listed company must formulate and publish a code of practices and procedures for fair disclosure of unpublished price sensitive information. This code must adhere to the principles set out in Schedule A of the regulations.
• Code of Conduct: The board of directors of every listed company and intermediary must formulate a code of conduct to regulate, monitor, and report trading by designated persons and their immediate relatives. This code must adopt the minimum standards set out in Schedule B (for listed companies) and Schedule C (for intermediaries).
• Designated Persons: The code of conduct must cover designated persons, including employees with access to unpublished price sensitive information, promoters, and chief executive officers, as well as their immediate relatives.
• Internal Controls: The Chief Executive Officer or Managing Director of a listed company, intermediary, or fiduciary must put in place an adequate and effective system of internal controls to prevent insider trading. These controls must include identifying designated persons, maintaining confidentiality, and restricting communication of unpublished price sensitive information.
• Institutional Mechanism: The board of directors of every listed company, intermediary, and fiduciary must ensure that the Chief Executive Officer or Managing Director puts in place an institutional mechanism for the prevention of insider trading.
• Schedule A: Principles of Fair Disclosure: This schedule prescribes the principles for fair disclosure of unpublished price sensitive information, including prompt public disclosure, uniform dissemination, and designation of a senior officer to deal with dissemination of information.
• Schedule B: Minimum Standards for Code of Conduct: This schedule prescribes the minimum standards for the code of conduct for listed companies, including reporting requirements, handling of information on a need-to-know basis, and restrictions on communication of unpublished price sensitive information.

SEBI (Prohibition of Insider Trading) Regulations, 2019 (Part 4)

• Code of Conduct: The code of conduct shall contain norms for appropriate Chinese Walls procedures and processes for permitting any designated person to “cross the wall”.
• Designated Persons: Designated persons and immediate relatives of designated persons in the organisation shall be governed by an internal code of conduct governing dealing in securities.
• Trading Window:
  • A notional trading window shall be used as an instrument of monitoring the trading by the designated persons.
  • The trading window shall be closed when the compliance officer determines that a designated person or class of designated persons can reasonably be expected to have possession of Unpublished Price Sensitive Information (UPSI).
• Trading Restrictions:
  • Trading restriction period shall be made applicable from the end of every quarter till 48 hours after the declaration of financial results.
  • The gap between clearance of accounts by the audit committee and board meeting should be as narrow as possible and preferably on the same day to avoid leakage of material information.
• Pre-Clearance:
  • Trading by designated persons shall be subject to pre-clearance by the compliance officer, if the value of the proposed trades is above such thresholds as the board of directors may stipulate.
  • Prior to approving any trades, the compliance officer shall be entitled to seek declarations to the effect that the applicant for pre-clearance is not in possession of any unpublished price sensitive information.
• Contra Trades:
  • The code of conduct shall specify the period, which in any event shall not be less than six months, within which a designated person who is permitted to trade shall not execute a contra trade.
  • The compliance officer may be empowered to grant relaxation from strict application of such restriction for reasons to be recorded in writing provided that such relaxation does not violate these regulations.
• Sanctions and Disciplinary Actions:
  • The code of conduct shall stipulate the sanctions and disciplinary actions, including a wage freeze, suspension, recovery, clawback etc., that may be imposed, by the listed company required to formulate a code of conduct under sub-regulation (1) of regulation 9, for the contravention of the code of conduct.
  • Any amount collected under this clause shall be remitted to the Board for credit to the Investor Protection and Education Fund administered by the Board under the Act.
• Disclosure Requirements:
  • Designated persons shall be required to disclose names and Permanent Account Number (PAN) or any other identifier authorized by law of the following persons to the company on an annual basis and as and when the information changes:
    • Immediate relatives
    • Persons with whom such designated person(s) shares a material financial relationship
    • Phone, mobile and cell numbers which are used by them
  • In addition, the names of educational institutions from which designated persons have graduated and the names of their past employers shall also be disclosed on a one-time basis.

SEBI (Prohibition of Insider Trading) Regulations, 2019 (Part 5)

• Code of Conduct: The code of conduct shall specify that in case of a violation of these regulations, the intermediary or fiduciary shall promptly inform the stock exchange(s) where the concerned securities are traded.
• Dealing in Mutual Funds: In case of dealing in the units of mutual funds, the code of conduct shall specify that in case of a violation, the intermediary or fiduciary shall promptly inform the stock exchange(s).
• Disclosure Requirements: All designated persons shall disclose the name and Permanent Account Number or any other identifier authorized by law of their:
  • Immediate relatives
  • Persons with whom they share a material financial relationship
  • Phone, mobile, and cell numbers
  • Educational institutions from which they have graduated
  • Past employers
• Material Financial Relationship: A relationship in which one person is a recipient of any kind of payment such as a loan or gift from a designated person, equivalent to at least 25% of the annual income of such designated person.
• Process for Bringing People 'Inside': Intermediaries and fiduciaries shall have a process for how and when people are brought 'inside' on sensitive transactions, and individuals shall be made aware of their duties and responsibilities.
• Role of Compliance Officer: The Compliance Officer is required to maintain all documents, frame a code of fair disclosure and conduct, and administer the code of conduct and other requirements under these regulations.
• SEBI FAQs: SEBI has issued comprehensive Frequently Asked Questions (FAQs) to provide greater clarity on concepts related to the SEBI (Prohibition of Insider Trading) Regulations, 2015.
• Case Study: The case of Palred Technologies Limited highlights the importance of adhering to the SEBI (Prohibition of Insider Trading) Regulations, 2015, and the consequences of violating these regulations.

SEBI (Prohibition of Insider Trading) Regulations, 2019 (Part 6)

• Insider Trading Cases: The section discusses several cases of alleged insider trading, including those of Pirani Aziz, Karna Reddy, Mohan Krishna Reddy, Prakash Lohia, Umashankar S., and Raja Lakshmi Srivaiguntam.
• Key Findings:
  • Pirani Aziz: Not guilty of insider trading due to insufficient evidence.
  • Karna Reddy: Guilty of insider trading as he traded on the basis of unpublished price-sensitive information (UPSI).
  • Mohan Krishna Reddy: Not guilty of insider trading as there was no evidence of his awareness of UPSI.
  • Prakash Lohia, Umashankar S., and Raja Lakshmi Srivaiguntam: Not guilty of insider trading due to lack of evidence.
• Order:
  • Certain individuals are restrained from accessing the securities market and prohibited from buying, selling, or dealing in securities for a period of three years.
  • These individuals are also prohibited from associating with any listed company as a director or otherwise for three years.
  • Some individuals are required to disgorge amounts as indicated in the order.
• Case 7.2: SAT Order - Shruti Vora vs. SEBI:
  • Facts: SEBI investigated possible insider trading related to quarterly financial results of several companies being shared on WhatsApp groups before official disclosure.
  • Findings: The adjudicating officer failed to appreciate that WhatsApp messages may have originated from public domain sources, and there was no evidence to prove that the impugned messages were UPSI.
  • Order: All appeals are allowed, and the impugned orders are set aside.
• Case 7.3: SAT Order - Piramal Enterprises Limited vs. SEBI:
  • Facts: SEBI investigated possible violations of insider trading regulations by Piramal Enterprises Limited and its directors related to the sale of its domestic healthcare business to Abbott.
  • Findings: The information was shared with certain individuals on a "need to know" basis, and there was no evidence of insider trading.
  • Order: The penalty imposed for alleged violations is not sustainable, and the appeal is allowed.
• Regulations:
  • Model Code of Conduct: Listed companies must have a code of conduct to regulate, monitor, and report trading by insiders.
  • Trading Window: The trading window must be closed when UPSI is disclosed to the stock exchange, and it must remain closed for 24 hours thereafter.
  • Compliance Officer: The compliance officer is responsible for ensuring that the trading window is closed, but the board of directors has overall responsibility for deciding the trigger point for closing the trading window.

SEBI (Prohibition of Insider Trading) Regulations, 2019 (Part 7)

• Introduction: The SEBI (Prohibition of Insider Trading) Regulations, 2019, aim to prevent insider trading and promote fair market practices.
• Key Concepts:
  • Unpublished Price Sensitive Information (UPSI): Information that is not publicly available and can impact the price of a security.
  • Model Code of Conduct: A set of rules that listed companies must follow to prevent insider trading.
  • Compliance Officer: Responsible for ensuring that the company adheres to the Model Code of Conduct and SEBI regulations.
• Case 7.4: SEBI Fines the Compliance Officer of a Listed Company:
  • Facts: SEBI investigated Kwality for alleged insider trading and found that the company's promoters and directors had traded in the scrip without making necessary disclosures.
  • Findings: The compliance officer, Mr. Srivastava, failed to monitor trades, comply with the code of conduct, and administer the PIT Regulations effectively.
  • Order: The Adjudicating Officer (AO) of SEBI fined Mr. Srivastava for failing to report non-compliances by 11 erring entities.
• Important Points:
  • Role of Compliance Officer: The compliance officer is responsible for ensuring that the company adheres to the Model Code of Conduct and SEBI regulations.
  • Consequences of Non-Compliance: Failure to comply with SEBI regulations can result in penalties and fines.
  • Importance of Disclosure: Timely and accurate disclosure of information is crucial to prevent insider trading and maintain fair market practices.

SEBI (Prohibition of Insider Trading) Regulations, 2019 (Part 8)

• Introduction: The SEBI (Prohibition of Insider Trading) Regulations, 2019 aim to prevent insider trading and protect the interests of investors in the securities market.
• Penalty Imposition: The SEBI Adjudicating Officer (AO) can impose penalties on individuals who violate these regulations, as seen in the case of Mr. Srivastava, the then compliance officer of Kwality, who was fined Rs2 lakh.

Key Concepts

• Trading Window: When the trading window is open, trading by designated persons may be subject to preclearance by the compliance officer if the value of the proposed trades exceeds certain thresholds set by the board of directors.
• Objective of SEBI Regulations: The primary objective of the SEBI (Prohibition of Insider Trading) Regulations is to prohibit insiders from dealing, communicating, or counselling on matters related to insider trading.
• Organisational Practices: Organisations are required to develop practices based on a need-to-know basis to prevent insider trading.
• Generally Available Information: Generally available information refers to information that is accessible to the public on a non-discriminatory basis.

Review Questions

• Question 1: The statement "When the trading window is open, trading by designated persons shall be subject to preclearance by the compliance officer, if the value of the proposed trades is above such thresholds as the board of directors may stipulate" is:
  • a. True
  • b. False
• Question 2: The objective of the SEBI (Prohibition of Insider Trading) Regulations is to prohibit insiders from:
  • a. Dealing
  • b. Communicating
  • c. Counselling
  • d. All of the above
• Question 3: Organisations are required to develop practices based on:
  • a. Need to know
  • b. Ought to know
  • c. Need not know
  • d. May know
• Question 4: Generally available information means:
  • a. Generally available information
  • b. Price sensitive information
  • c. Unpublished price sensitive information
  • d. Non-price sensitive information