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SEBI (Prohibition of Insider Trading) Regulations, 2015

SEBI (Prohibition of Insider Trading) Regulations, 2015

SEBI (Prohibition of Insider Trading) Regulations, 2015 (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    • Insider: Defined as any person who is a connected person or in possession of or having access to unpublished price sensitive information.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 designated to ensure compliance with the regulations, responsible for maintaining records, monitoring trades, and implementing codes of conduct.
    • Generally Available Information: Means information that is accessible to the public on a non-discriminatory basis, excluding unverified events or information reported in print or electronic media.
    • Unpublished Price Sensitive Information: Defined as any information relating to a company or its securities that is not generally available and is likely to materially affect the price of the securities.
  • Prohibited Activities:
    • Communication of Unpublished Price Sensitive Information: Insiders are prohibited from communicating or providing access to unpublished price sensitive information, except in furtherance of legitimate purposes or discharge of legal obligations.
    • Procurement of Unpublished Price Sensitive Information: No person shall procure or cause the communication of unpublished price sensitive information, except in furtherance of legitimate purposes or discharge of legal obligations.
  • Regulatory Requirements:
    • Code of Fair Disclosure and Conduct: Listed companies must establish a code of fair disclosure and conduct to determine legitimate purposes for communicating unpublished price sensitive information.
    • Compliance Policy: Companies must have a compliance policy in place to ensure adherence to the regulations and prevent insider trading.

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SEBI (Prohibition of Insider Trading) Regulations, 2015 (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 Definition: Any person in receipt of unpublished price sensitive information pursuant to a "legitimate purpose" shall be considered an "insider" for purposes of these regulations.
  • Confidentiality: Insiders shall maintain the confidentiality of unpublished price sensitive information and due notice shall be given to such persons to comply with these regulations.

Key Concepts

  • Regulation 3(2B): Any person in receipt of unpublished price sensitive information pursuant to a "legitimate purpose" shall be considered an "insider".
  • Regulation 3(3): Unpublished price sensitive information may be communicated in connection with transactions that entail an obligation to make an open offer or where the board of directors is of informed opinion that sharing of such information is in the best interests of the company.
  • Regulation 3(4): The board of directors shall require parties to execute agreements to contract confidentiality and non-disclosure obligations.
  • Regulation 3(5): A structured digital database shall be maintained containing the nature of unpublished price sensitive information and the names of persons who have shared the information.

Trading by Insiders

  • Regulation 4: No insider shall trade in securities when in possession of unpublished price sensitive information.
  • Exceptions: Insiders may prove their innocence by demonstrating circumstances such as off-market inter-se transfer, block deal window mechanism, or statutory/regulatory obligations.

Trading Plans

  • Regulation 5: Insiders can formulate a "Trading Plan" and present it to the compliance officer for approval and public disclosure.
  • Trading Plan Parameters: The plan shall set out parameters for each trade, including value, nature, date/time period, and price limit.

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Informants

  • Regulation 7A-7K: Deals with the aspect of informants, including submission of original information, eligibility for reward, and protection against retaliation.
  • Regulation 7I: Requires every person to have a Code of Conduct that provides suitable protection against discharge, termination, or discrimination against employees who file a Voluntary Information Disclosure Form.

SEBI (Prohibition of Insider Trading) Regulations, 2015 (Part 3)

  • Definition of Employee: For the purpose of this Chapter, an “employee” means any individual who during employment may become privy to information relating to violation of insider trading laws and files a Voluntary Information Disclosure Form under these regulations.
  • Protections for Informants: Nothing in these regulations shall prohibit any Informant who believes that he or she has been subject to retaliation or victimisation by his or her employer, from approaching the competent court or tribunal for appropriate relief.

Key Concepts

  • Void Agreements: Regulation 7J states that any term in an agreement (oral or written) or Code of Conduct, is void in so far as it purports to preclude any person, other than an advocate, from submitting to the Board information relating to the violation of the securities laws.
  • Code of Fair Disclosure: Regulation 8(1) specifies that 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 unpublished price sensitive information.
  • Code of Conduct: Regulation 9(1) states that the board of directors of every listed company and the board of directors or head(s) of the organisation of every intermediary shall ensure that the chief executive officer or managing director shall formulate a code of conduct to regulate, monitor and report trading by its designated persons and immediate relatives of designated persons.

Institutional Mechanism for Prevention of Insider Trading

  • Internal Controls: Regulation 9A(1) states that the Chief Executive Officer, Managing Director or such other analogous person of a listed company, intermediary or fiduciary shall put in place an adequate and effective system of internal controls to ensure compliance with the requirements given in these regulations to prevent insider trading.
  • Designated Persons: Regulation 9(4) states that the board of directors or such other analogous authority shall in consultation with the compliance officer specify the designated persons to be covered by the code of conduct on the basis of their role and function in the organisation and the access that such role and function would provide to unpublished price sensitive information.
  • Compliance Officer: Regulation 9(3) specifies that every listed company, 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 these regulations.

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Schedules

  • Schedule A: Prescribes the Principles of Fair Disclosure for purposes of Code of Practices and Procedures for Fair Disclosure of Unpublished Price Sensitive Information.
  • Schedule B: Prescribes the minimum standards for the Code of Conduct for listed companies to regulate, monitor and report trading by designated persons.
  • Schedule C: Prescribes the minimum standards for the Code of Conduct for intermediaries to regulate, monitor and report trading by designated persons.

Principles of Fair Disclosure

  • Prompt Public Disclosure: Prompt public disclosure of unpublished price sensitive information that would impact price discovery no sooner than credible and concrete information comes into being.
  • Uniform Dissemination: Uniform and universal dissemination of unpublished price sensitive information to avoid selective disclosure.
  • Designation of Senior Officer: Designation of a senior officer as a chief investor relations officer to deal with dissemination of information and disclosure of unpublished price sensitive information.

SEBI (Prohibition of Insider Trading) Regulations, 2015 (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 restriction period shall be made applicable from the end of every quarter till 48 hours after the declaration of financial results.
  • 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 seek declarations to the effect that the applicant for pre-clearance is not in possession of any UPSI.
  • Contra Trade:
    • 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.
  • Disclosure:
    • 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.
    • The term “material financial relationship” shall mean a relationship in which one person is a recipient of any kind of payment such as by way of a loan or gift from a designated person during the immediately preceding twelve months, equivalent to at least 25% of the annual income of such designated person.
  • 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.

SEBI (Prohibition of Insider Trading) Regulations, 2015 (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 (PAN) 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 (one-time basis)
    • Past employers (one-time basis)
  • 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 the duties and responsibilities attached to the receipt of Inside Information.
  • 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.
  • Amendments and FAQs: The SEBI (Prohibition of Insider Trading) Regulations, 2015, have been amended from time to time, and SEBI has issued comprehensive Frequently Asked Questions (FAQs) to provide greater clarity on several concepts related to the regulations.
  • 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. The case involves allegations of insider trading by the company's Chairman and Managing Director, employees, and other entities, and the SEBI order imposes penalties on those found guilty of violating the regulations.

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SEBI (Prohibition of Insider Trading) Regulations, 2015 (Part 6)

  • Insider Trading Cases: The section discusses several cases related to insider trading, including those of Pirani Aziz, Karna Reddy, Mohan Krishna Reddy, Prakash Lohia, Umashankar S., and Raja Lakshmi Srivaiguntam.
  • Key Findings:
    • Pirani Aziz: Cannot be held guilty of insider trading due to insufficient evidence.
    • Karna Reddy: Violated Section 12A(d) and 12A(e) of SEBI Act, 1992 and Regulation 3(i) of SEBI (PIT) Regulations, 1992.
    • Mohan Krishna Reddy: Cannot be held guilty of insider trading due to lack of awareness and knowledge about the exact payment of dividends.
    • Prakash Lohia, Umashankar S., and Raja Lakshmi Srivaiguntam: Did not violate Regulation 3(i) and 3(ii) of SEBI (Prohibition of Insider Trading) Regulations, 1992.
  • Orders and Penalties:
    • Restrained from accessing the securities market for a period of three years.
    • Prohibited from buying, selling, or dealing in securities directly or indirectly.
    • Disgorgement of amounts indicated in the order.
  • Case 7.2: SAT Order - Shruti Vora vs. SEBI:
    • Facts: Investigation into possible violation of PIT Regulations, 1992 and Clause 49 of the Listing Agreement.
    • Findings: No information recovered to prove that the impugned messages were unpublished price sensitive information.
    • Order: All appeals allowed, and impugned orders set aside.
  • Case 7.3: SAT Order - Piramal Enterprises Limited vs. SEBI:
    • Facts: Investigation into possible violation of PIT Regulations, 1992 and Clause 49 of the Listing Agreement.
    • Findings: Information relating to the sale of the healthcare division was given to Shri Anand Piramal and others on a ‘need to know’ basis.
    • Order: Penalty imposed for alleged violation of Clauses 3.2.1 and 3.2.3(f) of the Model Code of Conduct not sustainable.

SEBI (Prohibition of Insider Trading) Regulations, 2015 (Part 7)

  • Definition: The SEBI (Prohibition of Insider Trading) Regulations, 2015, aim to prevent insider trading and protect the interests of investors in the securities market.
  • Details: The regulations outline the responsibilities of listed companies, their directors, and employees to maintain confidentiality and prevent the misuse of unpublished price-sensitive information (UPSI).

Key Concepts

  • Model Code of Conduct: A set of rules that listed companies must follow to prevent insider trading, including the closure of trading windows and pre-clearance for trades.
  • Unpublished Price Sensitive Information (UPSI): Information that is not publicly available and can impact the price of a security if disclosed.
  • Compliance Officer: Responsible for administering the code of conduct, monitoring trades, and ensuring compliance with SEBI regulations.
  • Designated Persons: Individuals who have access to UPSI, including directors, employees, and promoters of a listed company.

Case Studies

  • Case 7.4: SEBI fined the Compliance Officer of Listed Company: The compliance officer of Kwality failed to monitor trades, comply with the code of conduct, and administer PIT regulations effectively, resulting in a fine.
  • Key Findings:
    • The compliance officer received information from the Registrar and Share Transfer Agent (RTA) but did not take action on violations.
    • The officer failed to report non-compliances to the company board, independent director, or SEBI.
    • The officer did not fulfill responsibilities crucial for safeguarding investor interests.

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Important Terms

  • SEBI Act: The primary legislation governing the securities market in India, aiming to protect investor interests and promote market development.
  • Insider Trading: The buying or selling of securities by individuals with access to UPSI, which can impact the price of the security.
  • PIT Regulations: The SEBI (Prohibition of Insider Trading) Regulations, 2015, which outline the rules and guidelines for preventing insider trading.

SEBI (Prohibition of Insider Trading) Regulations, 2015 (Part 8)

  • Introduction: The SEBI (Prohibition of Insider Trading) Regulations, 2015 aim to prevent insider trading and protect the interests of investors in the securities market.
  • Key Concepts:
    • Penalty: SEBI can impose penalties on individuals who violate the regulations, as seen in the case of Mr. Srivastava, who was fined Rs2 lakh for his actions.
    • Compliance Officer: The compliance officer plays a crucial role in ensuring that the regulations are followed, and their actions can have a significant impact on the protection of investors' interests.
    • Trading Window: The trading window is a period during which designated persons are allowed to trade in securities, subject to certain conditions and preclearance by the compliance officer.

Review Questions

  • Question 1: 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.
    • Answer: a. True
  • Question 2: The objective of the SEBI (Prohibition of Insider Trading) Regulations is to prohibit insiders from dealing on matters relating to insider trading.
    • Answer: a. Dealing
  • Question 3: Organisations are required to develop practices based on need to know basis.
    • Answer: a. Need to know
  • Question 4: Generally available information means information that is accessible to the public on a non-discriminatory basis.
    • Answer: a. Generally available information
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